Diverse Disclosure

In Alliance for Fair Board Recruitment v. SEC, the en banc Fifth Circuit held that the SEC should not have approved Nasdaq’s “Board Diversity Proposal.”

The Court reminded that the Act is focused on protecting investors from speculative, manipulative, and fraudulent practices, and promoting competition in the securities market; therefore: “SEC may not approve even an a disclosure rule unless it can establish the rule has some connection to an actual, enumerated purpose of the Act.” It rejected the SEC’s argument that the proposal would satisfy investor demand for diversity information, holding: “The purpose of satisfying investor demand for any and every kind of information about exchange-listed companies is not remotely similar to any of those stated purposes.” 

Cf. McCullough v. Maryland,17 U.S. 316 (1819) (“Among the enumerated powers, we do not find that of establishing a bank or creating a corporation. But there is no phrase in the instrument which, like the articles of confederation, excludes incidental or implied powers; and which requires that everything granted shall be expressly and minutely described.”).

The Court also found support for its holding in the major questions doctrine, given the expansive regulatory authority that it concluded would be needed for the SEC to implement the proposal. A dissent argued that the SEC had received substantial evidence that investors sought standardized information on board diversity, and noted the SEC’s limited statutory authority to review the rules of Nasdaq, a distinct and private entity (albeit one that is heavily regulated). No. 21-60626, Dec. 11, 2024 (9-8 vote).