Bartlett Quoted by Bloomberg Law® on Fifth Circuit Review of Nasdaq Board Diversity Rules, Provides Post-Argument Analysis

Tad Bartlett, Fishman Haygood special counsel and head of the firm’s Appellate Section, was quoted in the Bloomberg Law® article “Nasdaq Board Diversity Rules Face Test Before Full Fifth Circuit,” which was published on May 13, 2024. With the U.S. Court of Appeals for the Fifth Circuit set to hear oral arguments the following day, Bartlett offered his insight on the Court’s en banc review of a lawsuit that challenged the SEC’s approval of a Nasdaq rule requiring disclosure of racial, gender, and sexual orientation diversity on the boards of companies that choose to be listed with Nasdaq, and requiring  explanation for the lack of certain metrics of diversity. Click here for the full article, and read Bartlett’s post-argument analysis below.

Nasdaq Board Diversity Rules

Under the Nasdaq rule at issue, thousands of publicly listed companies are required to report on the diversity of their boards and include diverse directors. If a company does not report the inclusion of diverse directors on its board, the company must explain why. Nasdaq is a “self-regulated organization,” and the Securities and Exchange Commission (SEC) must review and approve that Nasdaq’s proposed rules are authorized under the Exchange Act. The SEC approved the Nasdaq rule in 2021. A panel of the Fifth Circuit consisting of Judge James Dennis, Judge Carl Stewart, and Judge Stephen Higginson unanimously upheld the SEC’s approval in an October 2023 opinion. The panel rejected arguments that the approved rule constituted prohibited compelled speech under the First Amendment and would result in a violation of the Fourteenth Amendment, holding that Nasdaq is not a state actor; and the panel rejected arguments that the SEC’s approval of the rule exceeded its authority under the Exchange Act.

Fifth Circuit Argument

The en banc Fifth Circuit subsequently voted for the full court to rehear the case. Both in a direction issued by the Court prior to the en banc argument, and in its questioning during the argument on May 14, 2024, it seems clear that the Court is intent on bypassing the constitutional arguments and instead focusing on whether Nasdaq’s DEI-related disclosure requirements—and the SEC’s approval of those requirements—are consistent with the investor-protection rules of the Exchange Act. The full Court was very active in questioning counsel on both sides of the issue, with Judges Higginson, Jennifer Elrod, Cory Wilson, and Andrew Oldham leading much of the questioning. Also active in the argument was Judge Edith Jones; consistent with remarks she has made at a Federal Bar Association luncheon, during argument she was overtly incredulous that diversity could be shown to have any positive impact on corporate governance and decision making or investor protection.

The judges threw a number of hypothetical disclosure requirements at counsel to understand where the line should be drawn between disclosure rules that are consistent with information about corporate governance, corporate performance, and investor protection, and those that are not, including hypothetical disclosures about board members’ position on Israel’s involvement in Gaza, board members’ fidelity to their spouses, board members’ position in the Drake vs. Kendrick Lamar dis battle, board members’ affinity for Taylor Swift, board members’ use of Tik Tok, board members’ views on abortion, whether board members are Jewish or Episcopalian, and whether corporate boards are evenly comprised of Trump and Biden supporters. Nasdaq’s counsel noted that the SEC approval of various private exchanges’ rules allows a “free-market form of regulation that has served free enterprise well” for more than a century; and she proposed a “three-legged stool” to dispose of any of the hypothetical disclosure requirements: (1) that investors demonstrate demand for the information subject to the disclosure rule; (2) that there is a credible link between the demanded information and corporate performance, corporate governance, or investor protections; and (3) an evidentiary record supporting that link.

Potential Implications

The dynamics of the en banc oral argument reveal the majority branch of the Fifth Circuit’s recent activism in reining in what they see as administrative-state overreach, while also allowing certain members of the Court to target what they see as questionable focus on diversity. Several members of the Court, for example, pointedly asked Nasdaq’s and the SEC’s counsel what the record evidence was that “board members’ sexual orientation” and “sexual preference” had to do with investor protection, and how to treat a disclosure requirement for “people who aren’t women but self-identify as a woman.”

While there is also a strong cross-current within the Court against treating private action as state action, which might drift in favor of treating the Nasdaq rule as a private, free-enterprise rule, that may not be strong enough to push against the majority of the Court’s antipathy toward government involvement in diversity-promoting issues. The tension between those two issues will be what animates the opinions that will come out of this en banc argument.

Tad Bartlett served as a judicial clerk to Judge James Dennis at the Fifth Circuit Court of Appeals following his graduation from law school. He currently runs the Take the Fifth blog, which digests all opinions released by the Court, summarizes all opinions designated for publication, and tracks statistics on opinions released from the Circuit on a monthly and an annual basis. Read more about his practice here.