Nasdaq to End Diversity Rule for Company Boards

Critics of the rule argue that the diversity requirement violates the Constitution’s Fifth Amendment.

The Nasdaq digital billboard in Times Square, New York, on Dec. 10, 2020. Kena Betancur/AFP via Getty Images

The Nasdaq stock exchange is moving to formally withdraw its rule mandating diversity quotas at companies after a federal appeals court recently struck it down.

The Nasdaq rule had required companies listed on the exchange to have at least two “diverse” board members, including “at least one director who self-identifies as a female” and one who “self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+.”

The measure was approved by the Securities and Exchange Commission (SEC) in August 2021. On Dec. 11, 2024, the Fifth U.S. Circuit Court of Appeals found the SEC acted unlawfully in approving it.

Following the court decision, Nasdaq filed a request with the SEC on Jan. 16, seeking to withdraw the rule.

“The proposed rule change will clarify Nasdaq’s rules by aligning them with the court’s decision, but will not impose any burden on any listed company or on inter-market competition with any other exchange,” it said in the filing.

The lawsuit challenging the rule was filed by the National Center for Public Policy Research and the Alliance for Fair Board Recruitment in August 2021. Plaintiffs argued that the rule forced companies to take action that violates the Constitution while offering no actual benefit.

The rule “is unlawful because it fails to advance any legitimate exchange purpose” such as preventing fraud, the lawsuit states.

“Even if Nasdaq’s diversity rule were legally permissible and supported by substantial evidence (and it is not), it is not permissible under the U.S. Constitution,” it states.

Plaintiffs said the Fifth Amendment prohibits federal discrimination on the basis of race or sex.

The appeals court voted 9–8 to strike down the diversity rule, saying the SEC “intruded into territory far outside its ordinary domain.”

In a Jan. 6 post on its website, law firm Kramer Levin said that although the court ruling “eliminates Nasdaq’s requirements for listed companies to disclose board diversity information,” the firm anticipates that many public companies will voluntarily share such data.

Listed companies “can choose when, how, and what information to disclose to meet proxy voting and stewardship guidelines, state regulations, and investor expectations.”

Countering DEI

Efforts to impose diversity measures in employment have met with strong public opposition.

In March, a 24-state coalition led by Tennessee wrote a letter to the U.S. Department of Labor, saying the states opposed an agency proposal aimed at integrating diversity, equity, and inclusion (DEI) principles into the National Apprenticeship System.

The National Apprenticeship System provides taxpayer funds to employers and other entities to make it easier for Americans to take advantage of apprenticeships.

“The proposed rule deviates from the statutory purpose of safeguarding the welfare of apprentices and builds on existing regulations to further entrench an apprenticeship regime dedicated to picking winners and losers based on the color of apprentices’ skin,” the letter reads.

The taxpayer funds assigned under the National Apprenticeship System are “not to be used for racial discrimination.”

In West Virginia, Gov. Patrick Morrisey recently issued an executive order banning DEI initiatives across state public institutions.

The order prohibits institutions from using public funds to back DEI-related programs, staff positions, or initiatives. Entities are banned from requiring people to undergo DEI training or pledge their support to such causes.

“Theories of DEI are contrary to equal protection guarantees of the West Virginia and United States Constitution,” the executive order said.

“It is in the interest of the citizens of West Virginia that the State government treat them as equals under the law instead of preferentially or discriminatorily based on race, color, sex, ethnicity, or national origin.”

A 2024 study found that DEI training initiatives increased prejudice among participants, particularly against white men. Social scientist David Haskell, who conducted the study, said such programs create more harm than good.

“A growing number of high-profile cases suggest that diversity workshops and their supporting materials regularly promote questionable claims—particularly about the overarching, malicious character of the majority population,“ he wrote. ”Similarly, hostility toward those who challenge DEI claims is part of the pattern.”

Many institutions are backtracking on their progressive agendas as President-elect Donald Trump is set to take office on Jan. 20.

On Jan. 17, the U.S. Federal Reserve exited a 143-member global climate change coalition, citing that many issues covered by the climate group were “outside of the Board’s statutory mandate.”