By Jody Godoy
(Reuters) – A challenge by conservative groups to a Nasdaq rule requiring companies to disclose board diversity or lack thereof will be reconsidered by a federal appeals court in New Orleans after an earlier panel of the court upheld the requirement.
The conservative-leaning 5th U.S. Circuit Court of Appeals on Monday voted in favor of the full court reconsidering the case. It vacated the earlier decision by a three-judge panel in October and tentatively scheduled arguments for mid-May.
More than two thirds of the 17 active judges on the 5th Circuit were appointed by Republican presidents, making it a favorite venue for conservative and industry groups challenging rules passed under the Biden administration.
The rule approved by the U.S. Securities and Exchange Commission (SEC) in August 2021 requires companies listed on the exchange to have one director who identifies as female, a member of an underrepresented racial or ethnic minority, or LGBTQ+, or explain why they do not.
Companies would generally need two diverse directors to satisfy the rule by 2026.
The rule drew lawsuits from conservative legal activists including Alliance for Fair Board Recruitment, a group founded by affirmative action opponent Edward Blum.
A different organization Blum founded was behind the lawsuits that led to the Supreme Court’s June ruling declaring unlawful the race-conscious student admissions policies used by Harvard University and the University of North Carolina.
“It is our hope that the Fifth Circuit will end these intrusive and illegal race, sex, and sexual identity quotas for all Nasdaq listed companies,” Blum said in a statement.
A spokesperson for Nasdaq declined to comment on Tuesday.
The conservative groups claim the rule violates the U.S. Constitution’s prohibition of discriminatory laws and restraints on free speech. They argued that those restrictions on government extend to Nasdaq because the SEC could penalize the exchange if it does not enforce the rule.
A three-judge panel for the 5th Circuit rejected those arguments in October, saying constitutional claims do not apply to Nasdaq, which is a private entity.
The judges on the panel were appointed by Democratic presidents. Appeals court judges are typically assigned cases at random.
(Reporting by Jody Godoy in New York; Additional reporting by Nate Raymond in Boston; Editing by Peter Graff)
