It seems that if you don’t like a new statute or regulation, just wait a bit and a federal court will strike it down. The latest example is the December 11, 2024 decision by the U.S. Court of Appeals for the Fifth Circuit striking down Nasdaq listing rules, approved by the SEC in 2021, focused on boardroom diversity.
The rules required Nasdaq-listed companies to disclose more information about the gender and racial composition of their boards and, over time, to meet minimum targets for diversity or explain why they had not done so.
In voiding the listing rules, the majority opinion stated as follows:
"The [Exchange] Act exists primarily to protect investors… from speculative, manipulative, and fraudulent practices, and to promote competition in the market for securities transactions. A disclosure rule is related to the purposes of the Act if it has some connection with those purposes, but not otherwise…. "[We] conclude that the SEC did not explain how the Board Diversity Proposal has any connection with those purposes."
Regardless of one’s views on this particular subject, including whether it is possible or advisable to influence social policy through law or regulation, judicial decisions invalidating rules appear to be on the rise. Another case in point was the Fifth Circuit’s decision, one year earlier to the day (!), invalidating the SEC’s efforts to “modernize” the rules regarding disclosure of issuer share repurchases.
While many applauded that decision, and undoubtedly many will applaud the Nasdaq decision, court rulings invalidating SEC rules create potholes, bumps, and lumps on the SEC playing field. Every time a new disclosure requirement is adopted, companies are expected to adjust their disclosure controls and procedures accordingly – or risk an SEC enforcement action if they don’t. When a rule is invalidated, are companies supposed to dismantle those new controls and procedures? Take them down temporarily (to the extent that’s even possible)? And in those cases where modified rules are adopted in response to a court decision, those controls and procedures may need to be modified. And so it goes.
In the wake of the Supreme Court decision dismantling the so-called “Chevron Doctrine,” it seems likely that courts will increasingly scrutinize and invalidate administrative rules and other requirements and prohibitions. In that environment, the moral of the story may well be to be careful what you wish for.
Please direct any questions or observations to Gunster securities law and corporate governance practice leader Bob Lamm.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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