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US Securities and Exchange Commission

States Back Challenge to SEC’s Approval of Nasdaq Board Diversity Standards

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

A coalition of 17 states in a December 27, 2021, amicus filing backed a challenge to the SEC’s approval of Nasdaq Stock Market LLC’s board diversity standards, casting the changes as unconstitutional and overstepping both the commission’s and exchange’s statutory authority.

Arizona, Alabama, Alaska, Arkansas, Florida, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Oklahoma, South Carolina, Texas, and Utah filed the brief in support of the National Center for Public Policy Research, which is suing the SEC over its August 2021 order in Release No. 34-92590Order Approving Proposed Rule Changes, as Modified by Amendments No. 1, to Adopt Listing Rules Related to Board Diversity and to Offer Certain Listed Companies Access to a Complimentary Board Recruiting Service. The center, a conservative communications and research group, is suing the SEC at the Fifth Circuit alongside the Alliance for Fair Board Recruitment, a nonprofit group headed by a conservative anti-affirmative-action activist Edward Blum.

The Nasdaq listing standards require companies to have at least one director who identifies as female, and at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+,” or to explain why it doesn’t meet those minimums. (See SEC Approves Nasdaq’s Board Diversity Proposal in the August 10, 2021, edition of Accounting & Compliance Alert.)

The SEC, the Republican-led states argued, “lacked statutory authority to embark upon its social justice-fixated frolic into the compositions of corporate boards generally—even if it had managed to stay within constitutional bounds in the course of that trek.”

“That its crusade culminated in the form of adopting explicit race- and sex-based quotas makes this case an exceptionally easy one: the Quota Rule violates both the Constitution and exceeds the SEC and Nasdaq’s statutory authority,” the states wrote. “Its manifest illegality warrants forceful rejection by this Court.”

The states claimed to have a unique interest in the case as “traditionally the primary regulator of corporate structure and organization,” and grounded part of their argument for throwing out the SEC order in the notion that it would upset the balance between federal and state corporate regulations. They pointed in particular to anti-discrimination provisions in Arizona’s civil rights law.

“There is no question that corporate board composition is a traditional state concern,” the states argued. “Board composition might even be called the quintessential example of the ‘internal affairs of the corporation’ that are outside federal reach without express Congressional authorization.”

The state amicus brief comes amid a broader debate over whether exchanges, the SEC, or Congress, should implement new requirements around corporate board diversity and its disclosure. House Democrats last month revived H.R. 1277, the Improving Corporate Governance Through Diversity Act, a bill that would establish new diversity disclosures for public company boards and executive officers and set up a new SEC Diversity Advisory Group.

The measure, sponsored by Reps. Gregory Meeks and Carolyn Maloney of New York, stalled last year despite support from the U.S. Chamber of Commerce. The measure would amend the Securities Exchange Act of 1934 requiring public companies to disclose, in proxy statements and any information statement relating to the election of directors, data based on “voluntary self-identification” on the racial, ethnic, and gender composition of the board of directors, board nominees, and executive officers, among other information, including veteran status.

Also under the bill, the SEC would be required to establish a Diversity Advisory Group tasked with conducting a study on strategies to increase “gender, racial, and ethnic diversity” among boards. The group, within 270 days of its creation, would issue recommendations to the SEC and Congress.

The states, in their amicus brief, cited the August 2021 Supreme Court decision related to the federal eviction moratorium in Alabama Association of Realtors et al., v. Department of Health and Human Services et al., in which the High Court concluded Congress must enact “exceedingly clear language” to significantly change the balance between federal and state power over private property.

With the Improving Corporate Governance Through Diversity Act, the states argued that Congress has “repeatedly considered legislation which would provide such exceedingly clear language and expressly require companies to disclose or engage in active board diversity measures.”


This article originally appeared in the January 4, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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