The en banc Fifth Circuit released some zingers ahead of the holiday season.  In Environment Texas Citizen Lobby, Inc. v. ExxonMobil Corp., the court of appeals issued a one-paragraph per curiam opinion—accompanied by 166 pages of concurrences and dissents—blessing a $14.25 million civil penalty against ExxonMobil.  The showdown largely focused on standing.  Appellate geeks may also be intrigued by Judge Ho’s statement in support of dismissing rehearing en banc as improvidently granted.  While that tea was still piping, the en banc Fifth Circuit released Alliance for Fair Board Recruitment v. SEC.  There, the court of appeals held that two Nasdaq-proposed and SEC-approved diversity rules “cannot be squared with the Securities Exchange Act of 1934.”  The latter opinion will be the focus of today’s review.  

2020 brought sickness, lockdowns, loneliness—and increased attention to racial issues.  Nasdaq responded by proposing three rules designed “to advance board diversity among its listed companies.”  Those rules included the “Disclosure Rule” and the “Diversity Rule,” which, respectively, required Nasdaq-listed companies to submit data regarding the diversity of their boards of directors and to have at least two diverse board members.  If a company could not meet the latter requirement, it had to explain why it “does not have at least two directors on its board who self-identify [as diverse].”  Finally, the “Recruiting Rule” allowed Nasdaq to provide free assistance to companies that did not meet the Diversity Rule’s objectives. 

Procedure first.  As Judge Oldham’s majority opinion recognized, “[a]n SEC-registered stock exchange like Nasdaq is a self-regulatory organization” that “may not change [its] rules without SEC approval.”  The SEC must approve proposed rules if it determines that they are consistent with the requirements of the Exchange Act.  See 15 U.S.C. § 78s(b)(2)(C)(i).  One such requirement is that an exchange cannot “regulate by virtue of any authority conferred by this chapter matters not related to the purposes of [the Exchange Act] or the administration of the exchange.”  15 U.S.C. § 78f(b).  Here, the SEC approved all three of Nasdaq’s proposed diversity rules.

A unanimous Fifth Circuit panel had initially rejected the challenges brought by the Alliance for Fair Board Recruitment and the National Center for Public Policy Research, but the en banc court of appeals reversed.  The en banc majority deemed any challenge to the Recruiting Rule moot, so its merits discussion honed in on the first two rules—together, the “Board Diversity Proposal.”  Judge Oldham’s majority opinion relied heavily on history, which revealed that the Exchange Act “is primarily about limiting speculation, manipulation, and fraud, and removing barriers to exchange competition.”  While there were “other, ancillary purposes,” those purposes did not include “disclosure of any and all information.”  In the majority’s view, the Board Diversity Proposal was not related to any of the statutorily-enumerated purposes identified by SEC.  The Fifth Circuit “confirm[ed]” its reading of the Exchange Act by applying the major questions doctrine.    

Judge Higginson dissented.  He was joined by Judges Stewart, Dennis, Southwick, Haynes, Graves, Douglas, and Ramirez.  In his view, the SEC had appropriately “relied on its finding that substantial evidence supported the conclusion that investors sought [diversity] information in the face of inaccuracies, inefficiencies, and asymmetries.”