On December 11, 2024, the Fifth Circuit Court of Appeals, in a 9-8 decision, invalidated Nasdaq Stock Market (Nasdaq) rules that required a company listed on the exchange to (i) have, or explain why it does not have, at least two members of its board of directors who are diverse[1], and (ii) annually disclose each director’s voluntary self-identified diversity characteristics in a tabular format known as the “Board Diversity Matrix.”
The Court found that the SEC failed to adequately explain how the diversity rules advanced the purposes of the Securities Exchange Act of 1934 (Exchange Act) to protect investors from speculative, manipulative, and fraudulent practices and to promote competition in the market for securities transactions. Per the Court, the SEC may not approve a disclosure rule unless the rule has some connection to the stated purposes of the Exchange Act (i.e., Congress did not authorize the SEC to mandate disclosure of any information whatsoever). The Court stated in part that, while disclosure of diversity characteristics of directors may be important to certain large institutional investors and investment managers, satisfying investor demand for any and every kind of information is not connected to the stated purposes of the Exchange Act, and that the stated purposes of the Exchange Act “bear no relationship to the disclosure of information about the racial, gender, and sexual characteristics of the directors of public companies.”
The next day, Nasdaq notified companies listed on the exchange that it respected the Court’s decision and did not intend to seek further review. As a result of the Court’s decision and Nasdaq’s decision not to seek further review, Nasdaq-listed companies are no longer required to include such diversity-related disclosures or the Board Diversity Matrix in their annual proxy statements or on their websites. While voluntary disclosure is still permitted, Nasdaq-listed companies may consider removing questions from their D&O questionnaires that were designed to capture information for purposes of compliance with the now-invalidated Nasdaq rules.
Relatedly, on February 11, 2025, proxy advisory firm Institutional Shareholder Services announced that it will suspend consideration of certain diversity factors in making recommendations on the election of directors at U.S. companies. Fellow proxy advisory firm Glass Lewis did not go as far, announcing on March 4, 2025, that it will implement a bifurcated approach such that it will maintain its current voting guidelines on diversity, but that if it recommends voting against a director on the basis of diversity, it will include a supporting rationale for a vote in favor of such director for clients that choose to vote differently from the Glass Lewis recommendation.
[1] “Diverse” was defined by Nasdaq Rule 5605(f) as an individual who self-identifies in one or more of the following categories: female, underrepresented minority or LGBTQ+. An underrepresented minority, under the Nasdaq rule, included an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities. LGBTQ+, under the Nasdaq Rule, included any individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender or as a member of the queer community.
