Nasdaq Board Diversity Rules 2025: Fifth Circuit Decision Impact Guide

On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit invalidated Nasdaq's board diversity rules, which had been approved by the Securities and Exchange Commission (SEC).

Background

Nasdaq's rules, established in 2021, aimed to enhance board diversity among listed companies. The key components included:

• Diversity Rule (Rule 5605(f)): Mandated companies to have, or explain why they do not have, at least two diverse directors, including one who identifies as female and another from an underrepresented minority or the LGBTQ+ community.
• Disclosure Rule (Rule 5606): Required annual disclosure of directors' self-identified diversity characteristics in a standardized matrix format.
• Recruiting Rule (Rule IM-5900-9): Provided eligible companies with complimentary access to services assisting in identifying and recruiting diverse board candidates.

Court's Decision

In a 9-8 vote, the en banc Fifth Circuit concluded that the SEC exceeded its authority under the Securities Exchange Act of 1934 by approving these rules. The court deemed the SEC's approval "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," violating the Administrative Procedure Act. Additionally, the court found that the SEC failed to demonstrate how the rules were related to the Exchange Act's purposes, which focus on preventing market manipulation and fraud.

Implications

As a result of this ruling, Nasdaq-listed companies are no longer obligated to:

• Meet specific board diversity objectives or provide explanations for non-compliance
• Disclose board diversity statistics in the prescribed matrix format

Nasdaq has indicated it will not appeal the decision, and the SEC has not announced any plans to challenge the ruling.

Considerations for Companies

Despite the court's decision, many institutional investors and proxy advisory firms continue to prioritize board diversity. Companies should remain attentive to stakeholder expectations and may choose to voluntarily disclose board diversity information to demonstrate commitment to inclusive governance practices.

Nabu's Role in Navigating Board Diversity

In this evolving regulatory landscape, Nabu's AI-driven compliance solutions can assist companies in managing board diversity initiatives. Nabu automates the collection and reporting of diversity data, ensuring that disclosures are accurate and align with best practices. By streamlining these processes, Nabu enables companies to maintain transparency and uphold their commitment to diversity, even in the absence of formal regulatory requirements.