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As John shared last week, the 5th Circuit held that the SEC exceeded its authority when it approved Nasdaq’s board diversity rule in Alliance for Fair Board Recruitment v. SEC (5th Cir.; 12/24) — applying a narrow interpretation of the scope of the authority granted by the Exchange Act. On the Business Law Prof Blog, Tulane Law Prof Ann Lipton comments on the potentially broader implications of this narrow reading:

[W]hile there surely are those who approach things differently – I’d argue the mainstream view today is that the meta purpose of the securities laws is to ensure that investors have sufficient information to accurately price securities (according to risk/return), with the broader goal of ensuring efficient capital allocation throughout the economy.  We want investors to give money to useful and productive businesses, and not to businesses that will set resources on fire, and the securities laws facilitate that.  (Here are two cites; there are countless more)

Fraud prevention suggests a much narrower scope for SEC disclosure regulation than does regulation for accuracy in pricing.

So, it’s not surprising that the Fifth Circuit went from there to hold that the diversity disclosure rule does not serve the narrow purpose of preventing fraud.  At one point, it went so far as to suggest the rule might be barred even if it provided financially useful information to investors:

“Moreover, SEC may have asked the wrong question. SEC considered evidence respecting the effects of diversity on firm performance. See JA9. But it is not clear what firm performance has to do with the Exchange Act. Of course, investors generally like it when firms make more money, but Congress did not pass the Exchange Act for the purpose of maximizing shareholder wealth. It passed the Act to protect investors from fraud, manipulation, speculation, and anticompetitive exchange behavior. Firm performance has little to do with those objectives.”

Ann says she expected this broad rhetoric suggesting a “dramatic curtailment of all securities disclosure requirements” to be applied to the climate rules (in the event of a decision striking them down) resulting in “spillover effects to other, more traditional securities disclosure rules, which would damage the entire system.” “How ironic,” she continues, “that the Fifth Circuit did that anyway with the diversity rules – only it did so, as far as I can see, quite intentionally, in what looks like the first step in a project to pare back the securities laws across the board.”

It seems that the securities laws may be in for a dramatic shift in the coming years — not just because of the incoming administration.

– Meredith Ervine