National Center for Public Policy Research v. SEC

Washington, DC (March 22, 2024) – The New Civil Liberties Alliance has filed an opening brief in National Center for Public Policy Research v. SEC urging the en banc U.S. Court of Appeals for the Fifth Circuit to set aside Nasdaq’s unconstitutional “Board Diversity Rules,” which SEC promulgated without statutory authority. These Rules impose gender, race and sexual orientation quotas on corporate board membership for Nasdaq-listed companies. Further, the Rules compel companies that fail to meet their board seat quotas to explain why or face involuntary delisting from the stock exchange. Under a related rule, SEC will furnish lists of quota-satisfying names to companies unable to meet such quotas on their own. A Fifth Circuit panel had upheld the Board Diversity Rules, but the en banc court granted NCLA’s request to rehear the case. The 1934 Securities and Exchange Act limits SEC’s regulatory role to ensuring fair and honest markets, investor protection, orderly and efficient markets, and facilitating capital formation. SEC cannot venture outside of those statutory guardrails as it did here.

Nasdaq reported investor interest in discriminating against some companies and in favor of others based on the gender, race, and sexual orientation of those companies’ directors. Nasdaq responded by proposing rules to SEC that would help investors discriminate with respect to these identities. One Rule forces every Nasdaq-listed company to either include on its board minimum quotas of individuals of a certain gender, race, and sexual orientation, or else to explain why the board does not meet such quotas. The Rules also require the companies to publicly disclose information about their directors’ self-identified gender, race, and sexual orientation. SEC accepted Nasdaq’s assertion that the Diversity Rule serves investor interests without any independent analysis.

The Exchange Act 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 because SEC itself determined these demographic characteristics have no rational relationship to corporate performance and investor returns. Nevertheless, SEC approved these Rules by concluding that compelled explanations and disclosures regarding gender, race, and sexual orientation promote “fair and orderly markets” by giving investors the information they need to engage in discrimination based on such characteristics. The Fifth Circuit panel in this case deferred to that flawed reasoning without addressing the statutory prohibitions that should invalidate the Rules. These measures also compel speech in derogation of the First Amendment.

Nasdaq also offered companies whose boards fail to meet the Rules’ diversity quotas access to a list of “board-ready” director candidates, but SEC failed to analyze how Nasdaq (or the company it hired to provide recruiting services) determines when a candidate is “board-ready.” By failing to thoroughly and independently investigate these issues before approving the Rules, SEC acted arbitrarily and capriciously, violating the Administrative Procedure Act. NCLA looks forward to the en banc Fifth Circuit’s addressing each of these problems in turn.

NCLA released the following statements:

“Executive agencies only have the powers that Congress statutorily assigns to them. By approving the Nasdaq Board Diversity Rules, SEC has arrogated power to itself that is not only obviously beyond its statutory mandate, but expressly forbidden by the very terms of that same statute.”
— Peggy Little, Senior Litigation Counsel, NCLA

“Pressuring companies to hire directors based on their race and gender falls far outside of the regulatory authority conferred by the Exchange Act. The en banc Fifth Circuit should halt SEC and Nasdaq’s attempt to abuse their statutory authority to encourage illegal and un-American discrimination.”
— Sheng Li, Litigation Counsel, NCLA

“SEC’s power grab is unprecedented. Not only is it trying to seize power from the states—the traditional regulators of boards of directors—but it is purporting to exert power Congress never bestowed. Congress set up the SEC to ensure ‘fair and orderly markets,’ not to authorize Gary Gensler’s social engineering experiments.”
— Mark Chenoweth, President, NCLA

For more information visit the case page here and watch the case video 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

Washington, DC (February 20, 2024) – The U.S. Court of Appeals for the Fifth Circuit has agreed to an en banc rehearing of the New Civil Liberties Alliance’s National Center for Public Policy Research v. SEC lawsuit challenging “Board Diversity Rules” that SEC promulgated without statutory authority. These rules impose race, gender, and sexual orientation quotas on corporate board membership for companies listed on the Nasdaq stock exchange, along with compelling corporate speech to explain any quota missed. SEC also furnishes lists of quota-satisfying names to companies unable to meet such quotas on their own. NCLA welcomes the opportunity to argue this case before the full Fifth Circuit, where we will urge the Court to set these unlawful rules aside. The Court also granted the petition for rehearing en banc filed in the case by the Alliance for Fair Board Recruitment.

Nasdaq reported a wave of alleged investor interest in discriminating against some companies and in favor of others based on the gender, race, and sexual orientation of those companies’ directors. Nasdaq responded by proposing a set of rules to SEC that would help investors discriminate with respect to these identities. One Rule forces every Nasdaq-listed company to either include on its board minimum quotas of individuals of a certain gender, race, and sexual orientation, or else to explain why the board does not meet such quotas. The Rules also require the companies to publicly disclose information about their directors’ self-identified gender, race, and sexuality. These measures compel speech in derogation of the First Amendment, and they further violate Americans’ rights to due process of law and equal protection under the law.

The 1934 Securities Exchange Act 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 because SEC itself determined these demographic characteristics have no rational relationship to corporate performance and investor returns. Nevertheless, SEC approved these rules by concluding that compelled explanations and disclosures regarding gender, race, and sexual orientation promote “fair and orderly markets” by giving investors the information they need to engage in discrimination based on such characteristics. The Fifth Circuit panel in this case deferred to that flawed reasoning and upheld these rules without addressing the statutory prohibitions.

That reasoning wrongly treats irrational, invidious discrimination based on gender, race, and sexual orientation as regulatory objectives of the Exchange Act. The panel decision’s reasoning lacks any limiting principle, allowing SEC to approve the mandatory explanation and disclosure of any matter that some investors claim to want, even if the information is extremely private (such as sexual orientation) or has nothing to do with keeping markets fair and orderly. Under this standardless approach, nothing would be off the table, including how companies’ officers vote, their religious faiths, or any other data irrelevant to the Exchange Act’s actual purpose of investor protection. The panel also declined to decide the merits of NCLA’s compelled speech argument, erroneously deciding that the rules and SEC’s approval of them did not involve state action subject to constitutional scrutiny. NCLA looks forward to the en banc Fifth Circuit correcting these glaring errors very soon.

NCLA released the following statements:

“We are rejoicing over the Court’s vote to rehear the panel decision, as the Constitution, state and federal laws, and Supreme Court precedents all forbid such invidious discrimination. The Rules shock the conscience in even being proposed, much less in being approved as law. NCLA looks forward to ending this arrogation of unlawful power over internal corporate governance.”
— Peggy Little, Senior Litigation Counsel, NCLA

— Mark Chenoweth, President, NCLA

For more information visit the case page here and watch the case video 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

Washington, DC (November 27, 2023) – The Securities and Exchange Commission-approved “Board Diversity Rules” impose race, gender and sexual orientation-based quotas on the corporate boards of companies listed on the Nasdaq stock exchange. Today, the New Civil Liberties Alliance petitioned the U.S. Court of Appeals for the Fifth Circuit for en banc rehearing of its National Center for Public Policy Research v. SEC lawsuit against these rules including one in which SEC furnishes lists of quota-satisfying names to companies unable to meet such quotas on their own. These rules must be set aside, as SEC has no statutory authority to promulgate them.

Nasdaq reported a wave of investor interest in discriminating against some companies and in favor of others based on the gender, race, and sexual orientation of those companies’ directors. It responded by proposing a set of rules to SEC that would help investors discriminate in this way. One Rule forces every Nasdaq-listed company to either include on its board minimum quotas of individuals of a certain gender, race, and sexual orientation, or else to explain why the board does not meet such quotas. The Rules also require the companies to publicly disclose information about their directors’ self-identified gender, race, and sexuality. These measures compel speech in defiance of the First Amendment and further violate Americans’ rights to due process and equal protection under the law.

The 1934 Exchange Act 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 because SEC itself determined these demographic characteristics have no rational relationship to corporate performance and investor returns. SEC nonetheless approved these rules by concluding that compelled explanations and disclosures regarding gender, race, and sexual orientation promote “fair and orderly markets” by giving certain investors the information they need to engage in discrimination based on those characteristics. The Fifth Circuit panel in this case deferred to that flawed reasoning and upheld these rules without addressing the statutory prohibitions.

That reasoning is nonsensical. It treats irrational, invidious discrimination based on gender, race, and sexual orientation as regulatory objectives of the Exchange Act. The panel decision’s reasoning lacks any limiting principle, allowing SEC to approve the mandatory explanation and disclosure of any matter that some investors claim to want, even if the information is extremely private (such as sexual orientation) and has nothing to do with fair and orderly markets. Under this non-standard, nothing would be off the table, including how companies’ officers vote, their religious faiths, or any other data irrelevant to the Exchange Act’s actual purpose of investor protection. The panel also declined to decide the merits of NCLA’s compelled speech argument, erroneously deciding that the rules and SEC’s approval of them were not state actions subject to constitutional scrutiny. NCLA urges the en banc Fifth Circuit to correct all of these errors and set the rules aside.

NCLA released the following statements:

 “The SEC’s approval of Nasdaq’s rules requiring companies listed on the exchange to disclose the race, gender or sexual orientation of company board members violates specific laws enacted by Congress that expressly prohibit SEC from approving rules ‘not designed’ to further fair and open markets or that impose burdens not necessary or appropriate to the 1934 Exchange Act. The panel decision fails to address this flat prohibition and if not reheard, leaves the agency free to regulate what it will with no limiting principle. The full Fifth Circuit should move quickly to correct this violation of law and return SEC to its regulatory lane.”
— Peggy Little, Senior Litigation Counsel, NCLA

“Some activist investors apparently want to make their investment decisions based on the gender, race, and sexual orientation of companies’ directors, even though such characteristics are not rationally related to corporate performance and investor returns. The panel decision deferred to SEC’s conclusion that helping these investors engage in irrational, invidious discrimination somehow serves the Exchange Act’s limited purpose of maintaining ‘fair and orderly markets.’ The en banc Court should correct this grievous error and confirm that facilitating discrimination falls outside the Exchange Act’s statutory purposes.”
— Sheng Li, Litigation Counsel, NCLA

For more information visit the case page here and watch the case video 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

Washington, DC (October 5, 2022) – The U.S. Securities and Exchange Commission (SEC) approved Nasdaq Stock Market LLC’s listing rules requiring most companies in the stock exchange to meet quotas for race, gender, and sexual preference in corporate board membership. A new video released by the New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, explains why these Board Diversity Rules fall outside of the agency’s regulatory authority. The Securities and Exchange Act does not empower SEC to supervise the demographic composition of corporate boards. NCLA represents the National Center for Public Policy Research, based in Washington, DC, in its case against SEC’s unconstitutional and unlawful actions.

Approved by SEC on August 6, 2021, the Board Diversity Rules require most Nasdaq listed companies to comply or explain why they failed to satisfy the requirement that corporate boards include at least one director who self-identifies as a woman and at least one director who self-identifies as “Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities,” or as LGBTQ+. The companies must also publicly disclose diversity statistics about their boards annually or face severe penalties including delisting.

In approving the Board Diversity Rules, SEC did not identify any provision of the Exchange Act that authorizes SEC to regulate the composition of corporate boards according to race, gender, or sexual orientation. The Exchange Act empowers SEC to regulate securities to ensure honest markets and enforce federal laws that punish fraud. Congress has not and cannot divest its lawmaking power to an administrative agency working with a quasi-public exchange to exercise such power. 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 persons whose immutable characteristics are irrelevant to board service—a subtle form of state-compelled self-condemnation. This compelled speech is a violation of the First and Fifth Amendments of the U.S. Constitution.

NCLA presented oral argument before the U.S. Court of Appeals for the Fifth Circuit on June 7, 2022.

Excerpts from the video:

“Diversity quotas are unquestionably illegal. Establishing quotas for the minimum number of employees on the basis of race, sex, orientation— that’s all, super illegal. … We all have not only civil rights, but the same civil rights, and that means no discrimination. Full stop.”
— Scott Shepard, Director, Free Enterprise Project at the National Center for Public Policy Research

“NCPPR is challenging the SEC board diversity rules because there is no law or statute that gives the SEC authority to tell American companies who should be on their boards of directors. … SEC cannot evade these constitutional constraints by arrogating power to itself or by delegating power to Nasdaq to accomplish indirectly what Congress itself cannot do directly.”
— Peggy Little, Senior Litigation Counsel, NCLA

“SEC is essentially admitting to social engineering, which falls outside of the scope of its enabling statute. … Enforcing diversity through top-down regulation is a sure recipe for conformity.”
— 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

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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.

Download the full document

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