TheCorporateCounsel.net

Yesterday, in Alliance for Fair Board Recruitment v. SEC, (5th Cir.; 12/24), the 5th Circuit held that the SEC exceeded its authority when it approved Nasdaq’s board diversity rule. The case was decided by a 9-8 vote, and the Court’s action overrules a 5th Circuit panel’s prior decision upholding the rule.

In reaching this decision, the 5th Circuit concluded that the SEC’s actions implicated the “major questions” doctrine and that absent a clear Congressional directive, the agency lacked the statutory authority to authorize Nasdaq’s rule. The SEC and Nasdaq argued, among other things, that because “full disclosure” was central to the Exchange Act, the SEC had broad authority to adopt a board diversity disclosure requirement. The Court disagreed, and this excerpt from the majority’s opinion indicates that it viewed the scope of the authority granted by the Exchange Act more narrowly:

SEC and Nasdaq contend that Supreme Court precedent establishes that full disclosure is the “core” purpose of the Exchange Act. . . But that is not true. What the Court has actually said is that the Act “embrace[s] a fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor. and thus to achieve a high standard of business ethics in the securities industry.” Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972) (emphasis added) (quotation omitted); compare post, at 45 (Higginson, J., dissenting).

In other words, the Court has acknowledged that disclosure is not an end in itself but rather serves other purposes, such as the purpose of promoting ethical behavior or “the purpose of avoiding frauds.” Ibid. Thus, nothing in the Court’s precedents undermines our conclusion that a disclosure rule is related to the purposes of the Act only if it is related to the elimination of fraud, speculation, or some other Exchange Act–related harm.

The Court ultimately concluded that the board diversity rule was “far removed” from the purposes of the Act. According to a Bloomberg Law article on the decision, Nasdaq doesn’t plan to appeal the ruling, while the SEC is “reviewing the decision and will determine next steps as appropriate.”

– John Jenkins