On Tuesday, the 5th U.S. Circuit Court of Appeals—recognized as one of the most conservative appeals courts in the country—heard arguments questioning the legality of Nasdaq’s board diversity rule.

The mandate requires the disclosure of women and minorities on boards of companies listed on the stock exchange and the provision of either a minimum number of women and minorities on their boards or an explanation of their absence. 

The SEC approved the rule in 2021 and was swiftly sued by two conservative groups who claimed that the Nasdaq rules violate civil rights laws and encourage racial and gender discrimination.

One interesting question floated was why the EEOC, a federal agency, can require companies to disclose similar race and gender demographics, yet the SEC cannot.

Tracey Hardin, an assistant general counsel at the SEC, also noted that most institutional investors and asset managers who commented on the Nasdaq proposal agree that board diversity is a strong indicator of good corporate governance and leads to improved financial outcomes.

In April court filings, lawyers representing the SEC and Nasdaq argued that the rules are in line with the Securities Exchange Act’s requirements. Their stance was that the rules necessitate disclosures, not diverse boards.

“The commission here is not disputing that there must be relevance to investors’ decisions to buy, hold, sell, or vote their securities,” Hardin said on Tuesday. “What we’re pushing back on is the petitioner’s notion that that’s limited to specific financial or economic metrics. And that disclosure information like this that investors use and reasonably consider as a marker of value is certainly related to the [Exchange] Act’s core disclosure purposes.”

Still, the right-leaning court pressed the SEC on the agency’s government overreach. “What does a person’s sexual orientation have to do with the prevention of speculation or manipulation of securities markets?” remarked Judge Kurt Engelhardt. 

Judge Edith Jones expressed concern that the Nasdaq rule could allow the SEC to demand diversity requirements from all U.S. companies, not just those that are Nasdaq-listed. SEC lawyers refuted this assertion.

The entire court heard Tuesday’s arguments, which came after a three-judge court ruled in October that the SEC did not violate the Securities Exchange Act or the Administrative Procedure Act when it approved Nasdaq’s rule.

Ruth Umoh
@ruthumohnews
ruth.umoh@fortune.com

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