“The evidence presented by Nasdaq in its rule proposal, contrary to its claims, does not show that board diversity provides better returns for shareholders.”

~Excerpt from a Manhattan Institute led amicus curiae brief in the case of Alliance for Fair Board Recruitment vs. SEC.

“We will terminate every diversity, equity, and inclusion program across the entire federal government.”

~President Donald Trump

Martin Luther King Jr. once famously said, “judge a man not by the color of their skin, but by the content of their character.” Nasdaq took the opposite approach: judge a person by their skin, gender and sexual preferences as the basis for corporate board selections. This approach didn’t go so well in the courts.

After years of litigation, the full Fifth Circuit Court of Appeals struck down a corrosive Diversity, Equity and Inclusion (DEI) rule pushed by the Nasdaq stock exchange. The 9-8 en banc ruling declared that the Nasdaq rule lacked any basis in the 1934 Securities and Exchange Act. The Fifth Circuit also invoked the major questions doctrine against the SEC, declaring that Congress did not provide the agency statutory authorization to uphold DEI reporting or diversity quotas. The doctrine allows courts to strike down administrative rulemakings carrying major political or economic ramifications that were enacted without statutory permission.

This represents a significant judicial reversal, as a Fifth Circuit panel had previously sustained the rule in October 2023.

The Nasdaq’s rule made waves in 2021, when Securities and Exchange Commission (SEC) commissioners upheld the proposal by a 3-2 decision. Despite widespread controversy and corporate backlash, the SEC and Nasdaq fought vigorously in court to force thousands of public companies to embrace discriminatory board selection criteria.

Deceptively called the “Nasdaq Board Diversity Rule,” the mandate would have required publicly listed companies on Nasdaq exchanges to discriminate against White board candidates. The rule confers special selection preference to female and minority board candidates. As consequence, companies would deemphasize or reduce their consideration for White male board candidates to satisfy director quotas.

Nasdaq demanded its listed companies to appoint at least two directors who were from a marginalized race or gender. If a company refused to adhere to the quota, they would be required to justify the composition of their board in a disclosed statement to Nasdaq and the SEC. The quotas were even extended to small reporting companies and foreign issuers of securities, with mandatory compliance beginning by December 2025.

The Fifth Circuit majority took issue with the Nasdaq’s misbranding of its invasive policy, which would have forced companies to sham themselves. According to the court’s decision:

“Nasdaq described the Board Diversity Proposal to impose ‘aspirational diversity objectives.’ And corporations that do not meet those objectives must explain why they failed. That is not a disclosure requirement. That is a public-shaming penalty for a corporation’s failure to abide by the Government’s diversity requirements.”

As with academic affirmative action, Nasdaq’s cardinal sin was to replace merit-based hiring criteria with race and gender-based qualities. Corporate boards would have been forced to pass up many superior director candidates to pacify a discriminatory mandate. A candidate’s relevant board experiences, leadership background, and industry knowledge would play second fiddle to their race or gender.

The rule emphasized corporate inclusivity over ingenuity, while paving an artificial path for LGBTQ+ representation in businesses. While it is well within a company’s right to select whomever they please, the same cannot be said for regulators. Nasdaq nearly destroyed corporate autonomy in board selection just to streamline DEI conformity.

In fact, Nasdaq’s rule would have detonated privacy in public corporate governance. This was due to its “Board Diversity Matrix,” requiring companies to publicly disclose each director’s voluntary self-identified racial and gender-based characteristics. The Matrix would absorb data on a company’s diverse candidates year after year, providing a public exposé of how “diverse” each firm is relative to their peers. The Matrix also fostered a competitive incentive for firms to appoint more DEI-focused directors in order to outrank their peers.

As the nation’s second largest stock exchange, the Nasdaq’s diversity mandate would have undermined board governance across 3,300+ companies. As one of the largest self-regulatory organizations (SRO), Nasdaq’s board diversity rule would have enforced DEI policy for every firm doing and seeking to do business across its markets.

The mandate also represented an alternative approach to politicized regulation for the SEC. While the SEC under Chair Gary Gensler has actively pursued DEI-similar rules, the Nasdaq diversity rule would have provided a widescale regulatory test-run for corporate diversity quotas.

Had the Nasdaq rule survived judicial review, the SEC may likely have adopted its own variation of DEI quotas and disclosure to bind additional exchanges. Such an approach is grounded in the false assumption that there is a “business case for diversity,” spurred by a recent McKinsey study suggesting that more racially diverse corporate boards see greater financial returns than nondiverse boards. This study was debunked by a follow-up research paper for its lack of generalizability and mistaken reverse causation.

We saw a similar approach used in ESG policy, with the New York Stock Exchange’s (NYSE) highly controversial attempt to introduce a new corporate form: Natural Asset Companies (NAC). The widespread industry and political pushback to this rule was so severe, it forced the NYSE to withdraw its proposal just days before SEC commissioners voted on it. Like Nasdaq, the NYSE is a massive SRO, and its NAC proposal would have introduced politicized market-altering standards simply to pacify environmentalists.

The Fifth Circuit’s ruling should serve as a major wakeup call for regulators pursuing DEI policies. SROs like Nasdaq cannot abuse its limited quasi-legislative authority to “diversify” listed companies. It is not for an SRO or the SEC to enforce discriminatory listing standards to incentivize board diversity. We are seeing many public companies increasingly roll back their DEI policies in the face of widespread backlash.

Much of this trend is spurred by the Trump administration’s crackdown against corporate and university DEI programs. On Inauguration Day 2025, President Trump enacted an Executive order entitled, “Ending Radical And Wasteful Government DEI Programs And Preferencing” that repealed Biden’s government-wide racial equity EO.

As part of this, President Trump signaled to Attorney General Pam Bondi that the Department of Justice may consider prosecuting firms and universities for pursuing “reverse-discrimination” in denying more qualified job candidates and applicants based on racial factors alone. Such an EO carries notable implications for pending cases like Ames v. Ohio Department of Youth Services.

Courts have tended to strike down these forms of affirmative action as unacceptable across multiple arenas following the Supreme Court’s landmark Students for Fair Admissions decision in 2023. As a result, companies and universities may find themselves liable of violating the Civil Rights Act of 1964 and the False Claims Act under the grounds of perpetuating fraud across candidate selections.

Nasdaq’s diversity rule not only sought to discriminate against qualified White male candidates, but it also crowded out other categories of diversity, such as religious and ideological. Similarly, the mandate would have disparaged a company’s focus on meritocracy by replacing merit-based hiring criteria with superficial concerns over race and gender representation. Such personnel appointing decisions are best left to the company’s board, not woke, political opportunists seeking to drive an agenda out of sync with company interests.

Following the Fifth Circuit’s en banc ruling against the Board Diversity mandate, Nasdaq formally discarded its rule. This ended the nearly five-year legal saga over the exchange’s discriminatory mandate and the SEC’s bid to remodel corporate board hiring. In revoking its Diversity rule, Nasdaq adopted a new rule using its quasi-governmental authority to repeal its corporate DEI listing requirements. The SEC subsequently approved the Nasdaq’s rule repeal on February 4 2025, affirming that companies no longer need to appoint two “diverse” members of their board or in the alternative disclose a report justifying their decisions not to.

Moving forward, the Trump SEC should better police radical securities exchange policies to prevent a repeat of the Nasdaq Diversity Rule. With Paul Atkins recently confirmed by the Senate as the Chair of the SEC, his Commission has the opportunity to axe any similar DEI-focused policy at the agency. Doing so can send a signal to other SROs considering future DEI mandates.

They can start by rescinding its excessive Human Capital Disclosure Rule, which seeks to compel costly disclosures of how companies manage their workforce beyond traditional factors of headcount and executive compensation. Such a rule is DEI focused and is a vestige of the former chair, Gary Gensler’s, Environmental, Social and Governance (ESG) agenda.

The Human Capital disclosure rule grew from a 2020 update by the SEC to its annual Regulation S-K requirements. As ESG was seeing a meteoric rise in popularity during that year, so too did some agencies take renewed interest in DEI policies, including enhanced human capital requirements. Atkins should seriously consider raising a vote to amend or revoke the rule entirely so as not motivate SROs to consider similar policies.

On President Trump’s first day in office under his Executive Order—Ending Radical And Wasteful Government DEI Programs and Preferencing [EO #13985](Jan. 20, 2025), DEI is officially dead. Corporate DEI received a massive blow with the full Fifth Circuit’s ruling against the Nasdaq Board Diversity Rule. The SEC and SROs lacks the legal authority to enforce discriminatory racial quotas, nor compel disclosures of private board selection processes. The demise of the Nasdaq’s insidious rule should be hailed as a victory in corporate America and preservation of equal treatment under the rule of law.