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Fifth Circuit Hears Argument On Nasdaq Board Diversity Rule – Diversity, Equity & Inclusion



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On Monday, August 29, the U.S. Court of Appeals for the Fifth
Circuit heard oral argument on a challenge to the Nasdaq Board
Diversity Rule (the “Rule”). The Rule requires
Nasdaq-listed companies to publicly disclose Board demographics,
including information on how many of the company’s Board
members self-identify as women, minorities, and/or LGBTQ+, and, if
applicable, explain why the company does not have at least two
diverse directors. The Rule has generally been heralded by the
Securities Exchange Commission (SEC), which approved the rule last
fall, as a “step forward for investors on board
diversity.”

The Rule is being challenged by two conservative
organizations—the Alliance for Fair Board Recruitment, led by
Ed Blum, and the National Center for Public Policy Research
(NCPPR). Blum, known for his efforts to attack precedent in the
areas of affirmative action and voting rights, is the founder of
Students for Fair Admissions, an organization that has filed
lawsuits challenging the consideration of race as one of many
factors in college admissions, including against Harvard in a case
that is currently before the Supreme Court of the United States.
NCPPR is a conservative think tank founded in 1982 whose Free
Enterprise Project annually files more than 90 percent of all
right-of-center shareholder resolutions. The NCPPR describes the Free Enterprise Project as the
“leading voice for conservative-minded investors” as well
as for “confronting liberal shareholder activism.”

Pursuant to Section 25(a) of the Securities Exchange Act, the
plaintiffs sought direct review by the Fifth Circuit of the
SEC’s final order approving the Rule. The plaintiffs claim that
that the Rule’s required disclosures are immaterial to
investors’ decision-making and that the Rule violates the equal
protection rights of non-diverse potential board members and
diverse board members alike. The SEC argues that the Government has
no role in enforcing the Rule, and thus that there is no issue as
to the Rule’s constitutionality. Instead, the SEC argues, its
role in approving the Rule was limited to ensuring that
Nasdaq—a private entity—did not violate federal
securities laws through the Rule. The SEC contends the Rule was
lawful and endorsed by various stakeholders who commented on the
importance of the information to their investment and voting
choices.

The WilmerHale team monitors trends in this area and regularly
advises companies on navigating developments.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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