Alliance for Fair Board Recruitment v. Securities and Exchange Commission

Riots in 2020 brought renewed vigor to the social-justice movement, prompting increased investor and legislative interest in diversity in public corporations. In response, Nasdaq, the world’s second-largest stock exchange, proposed to adopt a diversity rule that required Nasdaq-listed companies to have at least one female director and at least one director who was from a racial or ethnic minority or identified as LGBTQ+. If a company’s board did not have such directors, then the company was required to provide an explanation for its lack of diversity. Nasdaq presented its diversity rule to the Securities and Exchange Commission (SEC) (defendant) for approval. Nasdaq told the SEC that there was a correlation between a board’s racial, gender, and sexual diversity and the quality of its financial reporting, internal controls, management oversight, and public disclosures. Nasdaq did not offer any meaningful evidence to support its assertion. Nevertheless, the SEC approved the diversity rule, concluding that the public-interest provision of the Securities Exchange Act of 1934 (Exchange Act) allowed exchanges to adopt rules generally intended to protect investors and the public interest and that Nasdaq’s rule served such a purpose. Alliance for Fair Board Recruitment (plaintiff) immediately petitioned for judicial review of the rule, arguing that the SEC’s approval was based on an improperly broad reading of the public-interest provision.