Appeals court trashes SEC’s demands for board diversity

A federal appeals court has trashed the rules imposed by the Securities and Exchange Commission that required companies to have quotas from various population groups.

The decision found the SEC had no authority to impose its demands.

“We are grateful the court reached the right conclusion in this case,” Stefan Padfield, of the Free Enterprise Project, told USA Today. “The SEC was reaching beyond its statutory authority to try and engage in progressive social engineering. The court’s decision here is not only correct on the law, but also consistent with the will of the American people, who are sick and tired of seeing their government engage in divisive identity politics.”

The New Civil Liberties Alliance had fought the case on behalf of the National Center for Public Policy Research’s FEP and the Alliance for Fair Board Recruitment.

The ruling from the 5th U.S. Circuit Court of Appeals vacated the SEC’s adoption of quotas for boards.

That agenda was to impose race, sex and orientation quotas on corporate boards across the U.S.

But the SEC Act of 1934, “required companies listed on a registered stock exchange to comply with SEC disclosure regulations. … SEC may not approve even a disclosure rule unless it can establish the rule has some connection to an actual, enumerated purpose of the Act.’

The decision was written by Judge Andrew S. Oldham in National Center for Public Policy Research v. Securities and Exchange Commission.

The ruling determined the race, sex and orientation of board members had “no connection” to the purposes of the law.

“SEC has intruded into territory far outside its ordinary domain,” the judge said. And he said Nasdaq “offered little support for its claim that there is an empirically established – even logical – link between the racial, gender, and sexual composition of a company’s board and the quality of its governance.”

In fact, the law “explicitly forbids SEC from approving Nasdaq rules that regulate matters unrelated to the Act’s purposes. Gender, race, and sexual orientation fall outside the Act’s purposes. Even SEC itself determined these demographic characteristics have no rational relationship to corporate performance and investor returns,” the legal team said.

Peggy Little, NCLA counsel, said, “The en banc majority hewed closely to the plain text of the Exchange Act and its 1975 Amendments. It adopted NCLA’s statutory construction analysis that not only did Congress fail to confer such extraordinary power on this financial regulator, but SEC is statutorily forbidden to approve rules unless they further the ‘purposes’ of the Act to ensure fair and open markets.”

And NCLA chief Mark Chenoweth explained, “The en banc Fifth Circuit has now agreed with NCLA for the third time in the last three years. This time, the Court held that Congress did not authorize SEC to adopt disclosure rules willy-nilly. Today’s decision should chasten SEC to stick to its knitting and stop trying to abuse its market-regulating power.”

The ruling noted, “Nasdaq proposed rules that compel the companies listed on its exchange to disclose information about the racial, gender, and sexual characteristics of their directors, and to have (or explain why they do not have) at least two directors who meet Nasdaq’s definition of ‘diverse,’ SEC approved those rules. We hold, however, that the diversity rules cannot be squared with the Securities Exchange Act of 1934.”

It continued, “It is obviously unethical to violate the law or to disregard a contractual promise. It is not unethical for a company to decline to disclose information about the racial, gender, and LGTBQ+ characteristics of its directors. We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender, or sexual orientation diversity as Nasdaq would prefer.”

As part of President-elect Donald Trump’s pledge to uproot “woke” ideology in the U.S. government, he’s already nominated former SEC Commissioner Paul Atkins to be the next SEC chairman. Current SEC Chair Gary Gensler said last month he’ll quit when Trump takes office in a few weeks.