National Center for Public Policy Research v. SEC

CASE SUMMARY

The U.S. Securities and Exchange Commission (SEC) is receiving pushback over its recent approval of Nasdaq’s Board Diversity Rules, which require all companies listed on the exchange to not only publicly disclose board diversity statistics but also explain failures to meet new diversity requirements. NCLA filed a Petition for Review in the U.S. Court of Appeals for the Third Circuit on behalf of the National Center for Public Policy Research. NCLA’s client, which owns shares in many Nasdaq companies, argues that SEC has no power to regulate in this field because the rules have nothing to do with fraud or honest markets.

The diversity rules fall outside of SEC’s regulatory authority under the 1934 Securities and Exchange Act, which empowered SEC to regulate securities to ensure honest markets and enforce federal laws that punish fraud. These longstanding laws are being misinterpreted today by SEC to allow the agency, working with Nasdaq, to impose a “meet quota, explain why, or get delisted” regime.

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CASE STATUS: Active

CASE START DATE: October 5, 2021

DECIDING COURT: U.S. Court of Appeals for the Third Circuit

ORIGINAL COURT: U.S. Court of Appeals for the Third Circuit

CASE DOCUMENTS

April 1, 2022 | Declaration of Scott Shepard in Support of Petitioner National Center for Public Policy Research’s Petition for Review
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April 1, 2022 | Reply Brief with Supporting Declaration for Petitioner National Center for Public Policy Research
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December 20, 2021 | Opening Brief for Petitioner National Center for Public Policy Research
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October 5, 2021 | Petition for Review and Motion for Transfer
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PRESS RELEASES

December 21, 2021 | NCLA and NCPPR Team up to Sue SEC over Unauthorized and Unlawful Nasdaq Board Diversity Rules

Washington, DC (December 21, 2021) – The Securities and Exchange Commission (SEC) lacks the authority to approve Nasdaq Stock Market LLC’s new Board Diversity Rules concerning the race, gender, and sexual preference of members of corporate boards of directors. An opening brief filed Monday in the U.S. Court of Appeals for the Fifth Circuit by the New Civil Liberties Alliance in National Center for Public Policy Research v. Securities and Exchange Commission says SEC’s “comply or report” Rules are unlawful and unconstitutional.

On August 6, 2021, SEC narrowly approved a Rule requiring disclosure of the aggregate race, gender, and sexual preference of Nasdaq-listed companies, with two of five Commissioners dissenting. The Board Diversity Rule subjects Nasdaq-listed companies to the following requirements: (a) they must disclose information about their board’s self-identified gender, race, and sexual preference; and (b) either (i) meet minimum quotas of individuals of a certain gender, racial, and sexual preference, or (ii) publicly explain why the board does not meet such quotas.

SEC approved Nasdaq’s proposed quota and disclosure requirements even though it rejected Nasdaq’s claim, for insufficient evidence, that diversity along race, gender, and sexuality somehow improves corporate governance. Under a second rule, Nasdaq will provide listed companies that do not comply with the quota requirements “access to a network of board-ready diverse candidates.” SEC approved this Board Recruiting Service without providing any information regarding which candidates will be selected for inclusion in such a network, who at Nasdaq will select them, or how Nasdaq plans to determine whether they are “board ready.”

The 1934 Securities Exchange Act specifies that Nasdaq’s rules must be designed “to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and … in general, to protect investors and the public interest.” In approving the Board Diversity Rules, SEC did not identify any provision of the ’34 Act that would override this prohibition or otherwise authorize SEC to regulate the race, gender, or sexual preference of corporate directors.  Indeed, the ’34 Act explicitly forbids entities like Nasdaq from adopting rules that “regulate by virtue of any authority conferred by [the Act] matters not related to the purposes of [the Act].” SEC nonetheless somehow concluded the Board Diversity Rules are “consistent with the requirements of the [Exchange] Act.”

The Rules further impermissibly require companies to call into question their own integrity by requiring them, at the risk of being delisted by Nasdaq, to publicly admit to their perceived shortcomings in failing to fill board seats with people whose immutable characteristics are irrelevant to board service.

The Exchange Act empowers SEC to regulate securities to ensure honest markets and enforce federal laws that punish fraud. The Board Diversity Rules fall outside of the agency’s regulatory authority. Congress has not and cannot divest its lawmaking power to an administrative agency working with a quasi-public exchange to exercise such power. The Fifth Circuit should hold that SEC’s Order and Nasdaq’s Rules are unconstitutional and were issued without statutory authority.

NCLA released the following statements:

“The separation of powers in the Constitution vests all legislative power in Congress and further guarantees the Equal Protection of law to all. These provisions protect the civil liberties of all Americans. SEC, a mere administrative agency of the Executive Branch which has no lawmaking power, cannot evade these constitutional constraints by arrogating power to itself or delegating power to Nasdaq to accomplish indirectly what Congress itself cannot do directly.”
Peggy Little, Senior Litigation Counsel, NCLA

“SEC approved quotas and mandatory disclosure requirements regarding race, gender, and sexuality even after it explicitly acknowledged that evidence does not show any connection between such surface-level diversity and investor interests. In doing so, SEC essentially admits to performing social engineering that falls far outside of the bounds of its enabling statute.”
Sheng Li, Litigation Counsel, NCLA

“The new SEC commissioners, like Chairman Gary Gensler, have shown every intention of overstepping their regulatory authority to politicize the SEC and corporate America. This is illegal and deeply irresponsible behavior. A clear ruling now that keeps the SEC to its statutory tasks will preserve business as a neutral—and productive and profitable—sector.”
Scott Shepard, Free Enterprise Project Director, National Center for Public Policy Research

For more information visit the case page here.

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

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October 5, 2021 | NCLA Challenges SEC’s Power to Authorize Nasdaq’s Board of Directors Diversity Rules

Washington, DC (October 5, 2021) – The U.S. Securities and Exchange Commission (SEC) is receiving pushback over its recent approval of Nasdaq’s Board Diversity Rules, which require all companies listed on the exchange to not only publicly disclose board diversity statistics but also explain failures to meet new diversity requirements. Today, the New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, filed a Petition for Review in the U.S. Court of Appeals for the Third Circuit on behalf of the National Center for Public Policy Research. NCLA’s client, which owns shares in many Nasdaq companies, argues that SEC has no power to regulate in this field because the rules have nothing to do with fraud or honest markets.

The diversity rules fall outside of SEC’s regulatory authority under the 1934 Securities and Exchange Act, which empowered SEC to regulate securities to ensure honest markets and enforce federal laws that punish fraud. These longstanding laws are being misinterpreted today by SEC to allow the agency, working with Nasdaq, to impose a “meet quota, explain why, or get delisted” regime.

On August 6, 2021, SEC approved Nasdaq Stock Market LLC Rules 5605(f) and 5606. The rules require that listed companies (a) must disclose information about their board’s self-identified gender, race, and sexuality; and (b) either (i) include on their board minimum quotas of individuals of a certain gender, racial, and sexual identity or (ii) publicly explain why the board does not meet such quotas. Nasdaq offers companies access to a list of “board-ready diverse candidates” who could meet the quotas. The ultimate enforcement mechanism for failing to adhere to the rules is delisting the company from Nasdaq.

Congress has not and cannot divest its lawmaking power to an administrative agency working with a quasi-public exchange to govern how boards of directors are constituted. These rules plainly violate the due process and equal protection rights of Americans. The rules further compel speech, in violation of the First Amendment, give SEC suspending and dispensing powers, and constitute prerogative warrants and orders in violation of the U.S. Constitution. Additionally, SEC should not be given Chevron or any other kind of deference in interpreting its own regulatory authority.

NCLA released the following statements:

“SEC does not have the power to dictate board diversity requirements on Nasdaq-listed companies. Congress could not constitutionally confer this power on any administrative agency. And the government may not collaborate with Nasdaq to effectuate something it is prohibited by the Constitution to do itself. Threatening to delist companies whose boards fail to conform with the government’s notion of diversity is downright dangerous.”
Peggy Little, Senior Litigation Counsel, NCLA

“Enforcing diversity through top-down regulation is a sure recipe for conformity. SEC’s misguided attempt to impose its narrow conception of diversity on Nasdaq companies merely betrays the Commission’s profound ignorance about the meaning of that term.”
Sheng Li, Litigation Counsel, NCLA

For more information visit the case page here.

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

Download the full document

OPINION

MEDIA MENTIONS