A federal appeals court has struck down a Nasdaq rule that required companies to have diverse boards.
The Fifth Circuit Court of Appeals ruled that the Securities and Exchange Commission (SEC) overstepped its authority in approving the rule. The court argued that the SEC’s mandate is to prevent fraud and manipulation in the securities market, not to enforce social policies like board diversity.
“The history makes clear the Act is primarily about limiting speculation, manipulation, and fraud, and removing barriers to exchange competition,” wrote Judge Andrew Oldham for the nine-judge majority. “There are other, ancillary purposes, but disclosure of any and all information is not among them.”
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The Nasdaq rule, which was approved in 2020, required listed companies to have at least one female director and one director from an underrepresented minority group. Companies that failed to meet these requirements were required to explain their reasons.
The court’s decision has sparked debate about the role of government in corporate governance and the appropriate scope of the SEC’s authority.
“SEC’s efforts `raise an eyebrow’ by stepping outside its ordinary regulatory domain of market manipulation and proxy voting and intruding into the province of other agencies,” the majority wrote.
While some argue that board diversity is important for good corporate governance, others contend that it is a matter for individual companies to decide.
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