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When a 5th Circuit panel upheld Nasdaq’s “comply or disclose” board diversity rule last fall, John wrote at the time:

While the decision is a resounding win for Nasdaq and the SEC, it’s unlikely that this will be the last word on the case. As this Reuters article points out, the defendants drew a very favorable panel comprised entirely of Democratic appointed judges. If the plaintiffs appeal to the full 5th Circuit, the SEC & Nasdaq may well face a more hostile reception, because 12 of the 16 judges there were appointed by Republican presidents.

That appeal happened, and the petition for rehearing en banc was granted last week – with oral argument tentatively scheduled for mid-May. The October decision that had upheld the Nasdaq rule has been vacated. Here’s more from Cooley’s Cydney Posner:

The two questions identified in the petition for the Court’s en banc review were:

“(1) whether approval of the Rule and its compulsion of discrimination and controversial disclosure requirements are unconstitutional state action; and

(2) whether the Rule is justified under the Exchange Act on the sole basis that select financial activists want to encourage board selection based on race and sex.”

The petition contended that the listing rule violated the Equal Protection clause and, by compelling controversial disclosure, the First Amendment, citing the conflict minerals decision, Nat’l Ass’n of Mfrs. v. SEC. (See this PubCo post.) The petition also challenged the panel’s conclusion that no state action was involved, arguing that “requiring private parties to encourage discrimination that otherwise would not have occurred” is in effect, state action by the SEC. And the “unique relationship between the SEC and national stock exchanges like Nasdaq means exchange rules are subject to constitutional requirements, as well.”

Bloomberg has reported that the SEC plans to keep defending its approval of the Nasdaq rule and that it believes the October decision was correct. With the unfortunate politicization of rulemaking and judicial decisions, a lot of folks will assume that the judges’ political party will dictate the outcome here, and that the rehearing is “the beginning of the end” for this rule.

– Liz Dunshee