A group of Republican-led states slammed Nasdaq’s implementation of a diversity disclosure rule for corporate boards this week, arguing in a court filing that the requirement is illegal and unconstitutional.
The states outlined their position in a legal brief supporting a lawsuit in the Fifth Circuit Court of Appeals, which seeks to block the rule. In the filing, the GOP administrations argued that Nasdaq rule “violates both the Constitution and exceeds the SEC and Nasdaq’s statutory authority.”
“It is unconscionable to see discrimination so blatantly put on display by requiring these companies to hire employees based solely on race, sex, and sexuality,” Texas Attorney General Ken Paxton said in a statement.
“The SEC’s quotas violate the Constitution and federal civil rights laws by requiring that companies overlook a person’s relevant qualifications under the guise of promoting diversity,” he added.
The rule requires companies listed on the exchange to publicly disclose diversity statistics for their boards of directors in a standardized format.
The companies are urged to have at least two diverse directors, including one who self-identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+ — and if not, they must explain why they did not meet the recommended standard.
They will not face financial penalties if they do not comply with the diversity recommendation.
The SEC approved Nasdaq’s “Board Diversity Rule” in August.
“These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders,” SEC Chair Gary Gensler said in a statement at the time.
Nasdaq said the rule would promote board diversity and improve transparency about corporate governance.
The filing from GOP states argued that the rule signaled “race- and sex-based preferences” which are “particularly crude and odious.
“SEC’s Quota Rule is one of the most blatant and sweeping violations of the Equal Protection Clause in decades,” the brief said.
Nasdaq and the SEC did not immediately return requests for comment.
The brief was filed in support of ongoing legal challenges by the National Center for Public Policy Research, a conservative group, and the Alliance for Fair Board Recruitment.
Nasdaq implemented the rule amid a growing nationwide push for diversity in corporate governance. In California, state law requires public companies located within the state to have at least one female director and a specific number of directors from underrepresented communities.
Republicans have widely opposed the Nasdaq initiative. In February, Republican members of the Senate Banking Committee urged the SEC to reject the proposal.
“While we think America’s corporations benefit from boards that avoid groupthink and offer a diversity of perspectives and commend firms that look to increase diversity among their boards, we do not think NASDAQ should be using its quasi-regulatory authority to impose social policies,” the lawmakers said at the time.