& Securities

The U.S. Court of Appeals for the Fifth Circuit, on December 11, 2024, vacated the prior approval by the Securities and Exchange Commission (SEC) of Nasdaq’s board diversity-related requirements of Nasdaq Listing Rules 5605(f) and 5606. This means that Nasdaq-listed companies are no longer required to have (or explain why they do not have) at least one director who self-identifies as female and at least one director from an underrepresented minority, or LGBTQ+, or to disclose a board-diversity matrix.

In Alliance for Fair Board Recruitment v. SEC, the en banc Fifth Circuit concluded that the SEC lacked the statutory authority under the Securities Exchange Act of 1934 to authorize Nasdaq’s board diversity rule. The majority opinion stated, among other things, that the SEC’s authority under the Exchange Act to compel disclosure must be “related” to the purposes of the Exchange Act, which the Fifth Circuit identified primarily as “limiting speculation, manipulation, and fraud, and removing barriers to exchange competition.” The decision effectively invalidates Nasdaq’s “comply-or-explain” board diversity framework. No appeal has been filed to date, nor is one expected. The New York Stock Exchange does not have a comparable rule.

Notwithstanding the Fifth Circuit’s decision, board diversity remains an essential consideration for board composition, and we expect to continue to see companies disclose information about board diversity as institutional investors, proxy advisory firms and other stakeholders remain focused on board composition.

We discuss the diversity policies of BlackRock, State Street and Vanguard in our “The Big 3 and ESG” guide available here. 

Proxy advisory firms ISS and Glass Lewis will generally recommend against the chair of the nominating/governance committee (or other directors on a case-by-case basis), in certain circumstances, where the board’s diversity does not comport with their policies and definitions of diversity. ISS expects at least one woman on all boards and at least one racially or ethnically diverse director at Russell 3000 or S&P 1500 companies (see policy here). At Russell 3000 companies, Glass Lewis expects at least 30% gender diversity on the board, and at a Russell 1000 companies at least one director from an underrepresented community (see policy here).

As a result of the invalidation of the Nasdaq diversity rules, we have updated our chart of “Requirements for Public Company Boards Including IPO Transition Requirements”, which is available here and through our “Resources” tab on governance.weil.com.