Alliance for Fair Board Recruitment v. SEC

Case: 21-60626 Document: 532-1 Page: 1 Date Filed: 12/11/2024

United States Court of Appeals

for the Fifth Circuit United States Court of Appeals

Fifth Circuit

____________ FILED

December 11, 2024

No. 21-60626

____________ Lyle W. Cayce

Clerk

Alliance for Fair Board Recruitment; National Center

for Public Policy Research,

Petitioners,

versus

Securities and Exchange Commission,

Respondent.

______________________________

Petition for Review of an Order of

the Securities & Exchange Commission

Agency No. 34-92590

______________________________

Before Elrod, Chief Judge, and Jones, Smith, Stewart, Dennis,

Richman, Southwick, Haynes, Graves, Higginson,

Willett, Duncan, Engelhardt, Oldham, Wilson,

Douglas, and Ramirez, Circuit Judges. *

_____________________

*

Judge Ho is recused and did not participate in this decision.

Case: 21-60626 Document: 532-1 Page: 2 Date Filed: 12/11/2024

Andrew S. Oldham, Circuit Judge, joined by Elrod, Chief Judge, and

Jones, Smith, Richman, Willett, Duncan, Engelhardt, and

Wilson, Circuit Judges:

Nasdaq proposed rules that compel the companies listed on its ex-

change to disclose information about the racial, gender, and sexual character-

istics of their directors, and to have (or explain why they do not have) at least

two directors who meet Nasdaq’s definition of “diverse.” SEC approved

those rules. We hold, however, that the diversity rules cannot be squared

with the Securities Exchange Act of 1934.

I

This case arises from three rules proposed by Nasdaq and approved

by SEC. We (A) explain the statutory framework governing exchange rule

changes. Next, we (B) explain the rule changes Nasdaq proposed. Then we

(C) explain SEC’s approval decisions. Last, we (D) explain the background

to these proceedings.

A

An SEC-registered stock exchange like Nasdaq is a self-regulatory

organization (“SRO”). See 15 U.S.C. § 78c(a)(26). SROs have historically

exercised substantial market power. See Gregg A. Jarrell, Change at the Ex-

change: The Causes and Effects of Deregulation, 27 J.L. & Econ. 273, 275

(1984) (explaining that the New York Stock Exchange was “a resilient natu-

ral monopoly” because of “the scale economies of providing a continuous

auction market for stocks”). In 1975, Congress concluded that SROs left to

their own devices might wield their market power for purposes that would

not comport with the public interest. See infra, Part II.B.2. So it amended the

Securities Exchange Act of 1934 to provide that SROs may not change their

rules without SEC approval. See Securities Acts Amendments of 1975, Pub.

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L. No. 94-29, § 16, 89 Stat. 97, 147–49 (codified as amended at 15 U.S.C.

§ 78s(b)).

Under § 78s(b), an SRO that wants to adopt “any proposed rule or

any proposed change in, addition to, or deletion from [its] rules” must file

the proposed change with SEC. Id. § 78s(b)(1). When an SRO files a pro-

posed rule change, SEC is statutorily required to publish the proposal for

notice and comment. Ibid. After the notice-and-comment period (and addi-

tional proceedings, if SEC deems them necessary), SEC must approve the

SRO’s proposal if—but only if—“it finds [the proposal] is consistent with

the requirements of ” the Exchange Act. Id. § 78s(b)(2)(C)(i). If SEC does

not make that finding, it must disapprove the proposal. See id.

§ 78s(b)(2)(C)(ii) (“[SEC] shall disapprove a proposed rule change of a self-

regulatory organization if it does not make a finding described in clause (i).”).

The requirements that the Exchange Act imposes on SROs include

the requirements contained in 15 U.S.C. § 78f(b). That subsection provides:

(b) An exchange shall not be registered as a national securities

exchange unless the Commission determines that . . . (5) The

rules of the exchange are designed to prevent fraudulent and

manipulative acts and practices, to promote just and equitable

principles of trade, to foster cooperation and coordination with

persons engaged in regulating, clearing, settling, processing

information with respect to, and facilitating transactions in

securities, to remove impediments to and perfect the mecha-

nism of a free and open market and a national market system,

and, in general, to protect investors and the public interest; and

are not designed to permit unfair discrimination between cus-

tomers, issuers, brokers, or dealers, or to regulate by virtue of

any authority conferred by this chapter matters not related to

the purposes of this chapter or the administration of the

exchange.

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For this case, the most relevant clause in § 78f(b) is the last one in

paragraph (5): An exchange may not “regulate by virtue of any authority con-

ferred by this chapter matters not related to the purposes of [the Exchange

Act] or the administration of the exchange.” That means a proposed ex-

change rule is not “consistent with the requirements of ” the Exchange Act,

id. § 78s(b)(2)(C)(i), if it “regulate[s] . . . matters not related to the purposes

of ” the Exchange Act, id. § 78f(b)(5). Accordingly, before SEC approves a

proposed exchange regulation, it must find that the regulation is related to

the purposes of the Exchange Act.

B

“[W]ith more than 3,300 companies listed,” Nasdaq is the second

largest stock exchange in the world. See NASDAQ: Company Listings,

ADVFN, https://perma.cc/FDE9-N6U8. Following the riots of 2020,

“Nasdaq conducted an internal study of the current state of board diversity

among Nasdaq-listed companies based on public disclosures.” JA690. On

Nasdaq’s telling, it did so in response to “the social justice movement,”

which “brought heightened attention to the commitment of public compa-

nies to diversity and inclusion.” JA689. Nasdaq also recognized that “inves-

tors and investor groups [were] calling for diversification in the boardroom

and legislators at the federal and state level [were] increasingly taking action

to encourage or mandate corporations to diversify their boards and improve

diversity disclosures.” JA724.

Nasdaq said its study revealed that “while some companies already

have made laudable progress in diversifying their boardrooms, the national

market system and the public interest would best be served by an additional

regulatory impetus for companies to embrace meaningful and multi-

dimensional diversification of their boards.” JA690. So Nasdaq fashioned a

“Diversity Imperative for Corporate Boards.” JA689. Pursuant to that

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“Diversity Imperative,” in 2020 alone, Nasdaq submitted for SEC approval

three rules it explained were designed “to advance board diversity among its

listed companies.” JA724; see JA692 (“Nasdaq further believes that a listing

rule designed to encourage listed companies to increase diverse representa-

tion on their boards will result in improved corporate governance . . . .”);

JA713 (“Nasdaq believes” the rules “may influence corporate conduct” and

“will help increase opportunities for Diverse candidates.”).

First, Nasdaq submitted proposed Rule 5606 (the “Disclosure

Rule”). It explained this rule “would require Nasdaq-listed companies . . . to

provide statistical information in a proposed uniform format on the com-

pany’s board of directors related to a director’s self-identified gender, [self-

identified] race, and self-identification as LGBTQ+.” JA689.

Second, Nasdaq submitted proposed Rule 5605(f ) (the “Diversity

Rule”). It explained this rule would generally

require Nasdaq-listed companies . . . (A) to have at least one

director who self-identifies as a female, and (B) to have at least

one director who self-identifies as Black or African American,

Hispanic or Latinx, Asian, Native American or Alaska Native,

Native Hawaiian or Pacific Islander, two or more races or eth-

nicities, or as LGBTQ+, or (C) to explain why the company

does not have at least two directors on its board who self-

identify in the categories listed above.

JA689. Nasdaq emphasized that the Diversity Rule “set[] forth aspirational

diversity objectives—not quotas, mandates, or set asides. Companies that do

not meet the diversity objectives need only explain why they do not.” JA611

(emphasis in original). But even as Nasdaq stressed the modesty of the Rule’s

requirements, it recognized those requirements might sometimes prove

unduly burdensome. So Nasdaq crafted exceptions to give certain kinds of

companies “more flexibility.” JA690. Specifically, Nasdaq provided that

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foreign issuers and smaller reporting companies could satisfy the Rule by hav-

ing two directors who self-identified as female. Ibid. And Nasdaq provided

that companies with smaller boards (i.e., five or fewer directors) could satisfy

the Rule by having one board member who self-identifies as either female or

an underrepresented racial or sexual minority. JA201–02.

Third, Nasdaq submitted proposed Rule IM-5900-9 (the “Recruiting

Rule”). Nasdaq explained this rule would enable it to offer companies who

did not meet the “aspirational diversity objectives” contained in the Diver-

sity Rule, JA611 (quotation omitted), complimentary access “to a board

recruiting solution, which would provide access to a network of board-ready

diverse candidates, allowing companies to identify and evaluate diverse board

candidates, and a tool to support board benchmarking,” JA724. See JA725

(explaining which companies would be provided with complimentary access

to the service). On Nasdaq’s telling, the Recruiting Rule would “aid” com-

panies in “compl[ying] with the Nasdaq Diversity Proposal,” JA724,

because companies failing to meet the Proposal’s “Diverse” director re-

quirement would “need to identify diverse board candidates if they wish[ed]

to satisfy that requirement instead of explaining why they had not satisf[ied]

it,” JA725.

C

SEC approved all three rules in separate but related orders. We (1) ex-

plain SEC’s order approving the Disclosure Rule and the Diversity Rule.

Then we (2) explain SEC’s order approving the Recruiting Rule.

1

First, the Disclosure Rule and the Diversity Rule. Nasdaq submitted

these rules in one proposal, and SEC analyzed them jointly under the rubric

of Nasdaq’s “Board Diversity Proposal.” JA1–2. It found that the Proposal

was consistent with the requirements of the Exchange Act—most relevantly,

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the requirement that exchange rules be related to the purposes of the

Exchange Act. We call this SEC’s “related-to” finding.

Nasdaq said it designed its Board Diversity Proposal in part “to

encourage listed companies to increase diverse representation on their

boards.” JA692. But SEC did not base its related-to finding on the ground

that the Exchange Act permits exchanges to adopt rules designed to alter the

composition of company boards. Instead, SEC explained, information about

the racial, gender, and sexual characteristics of the directors of public com-

panies was “important to” large institutional investors and investment man-

agers such as Blackrock, Vanguard, State Street, the California Public

Employees’ Retirement System, the Teachers Insurance and Annuity Asso-

ciation of America–College Retirement Equities Fund, and Goldman Sachs.

JA2; see also JA7; id. nn.91–92. On SEC’s telling, the Proposal would estab-

lish “a disclosure-based framework” that would make board diversity infor-

mation available to these and other investors on a consistent and comparable

basis. JA5; see also JA7. SEC accordingly reasoned that the Proposal was “de-

signed to promote just and equitable principles of trade, remove impediments

to and perfect the mechanism of a free and open market and a national market

system, and protect investors and the public interest.” JA2, 7.

One commenter argued that SEC’s disclosure rationale could not jus-

tify the Diversity Rule because it did not merely establish a disclosure-based

framework. It also imposed “aspirational diversity objectives” and com-

pelled every Nasdaq-listed company to meet those objectives or explain why

it failed. See JA5 n.54 (acknowledging the comment). But SEC found that “a

better understanding of why a company [had] not [met] the proposed objec-

tives would contribute to investors’ investment and voting decisions.” JA2;

see also JA5 n.54. It therefore declined to distinguish between the components

of Nasdaq’s Proposal. It found that both components—the Disclosure Rule

and the Diversity Rule—were related to the purposes of the Act. See JA16.

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Commissioners Roisman and Peirce dissented. Commissioner

Roisman faulted SEC for failing to “undertake its own reasoned analysis to

evaluate the merits of ” the Proposal. JA27 (quotation omitted). Commis-

sioner Peirce maintained that SEC’s decision to approve the Proposal was

substantively indefensible. In her view, the purposes of the Exchange Act

“boil[ed] down to regulating securities transactions with an eye toward pro-

tecting interstate commerce and the financial system and ensuring the

maintenance of fair and honest markets in securities transactions.” JA37. But

“[t]he Board Diversity Proposal d[id] not advance any of these purposes.”

Ibid. The Proposal instead represented an attempt by Nasdaq and SEC to

use their “leverage over market participants” to remedy a societal challenge

that bore no relation to “the authority granted them in the Exchange Act.”

Ibid.

2

Next, the Recruiting Rule. SEC found that the Recruiting Rule was

consistent with the requirements of the Exchange Act. It did so in part be-

cause the Rule would “assist Eligible Companies . . . to increase diverse rep-

resentation on their boards and would help Eligible Companies to meet . . .

the proposed diversity objectives under the Board Diversity Proposal.” JA21.

SEC acknowledged that an exchange might violate the Act by offering

a benefit to some companies and not others because the Act forbids ex-

changes from engaging in “unfair discrimination between customers, issuers,

brokers, or dealers.” 15 U.S.C. § 78f(b)(5); see JA21. But SEC concluded

that the Recruiting Rule did not unfairly discriminate among issuers—i.e.,

listed companies—because it made sense for Nasdaq to offer the service to

companies that failed to meet Nasdaq’s diversity objectives. It made sense

because those non-diverse companies are “differently situated.” JA21 n.330.

They “may have a greater interest or feel a greater need to identify diverse

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board candidates by utilizing the board recruiting service than” do companies

who satisfy Nasdaq’s understanding of diversity. JA21. SEC also explained

that “offering the one-year complimentary service would help [Nasdaq]

compete to attract and retain listings, particularly in light of the diversity

objective in the separately approved Board Diversity Proposal.” Ibid. 1

D

Alliance for Fair Board Recruitment (“AFBR”) immediately filed a

petition for review in this court. Nasdaq intervened to defend its rules.

Separately, the National Center for Public Policy Research (“NCPPR”)

filed a petition for review in the Third Circuit. The Third Circuit transferred

NCPPR’s petition to this court pursuant to 28 U.S.C. § 2112(a)(5). We con-

solidated the petitions.

II

We start with the Board Diversity Proposal. SEC found that the pro-

posal was “related to” the purposes of the Exchange Act. Both petitioners

contend that SEC’s related-to finding was “arbitrary, capricious, an abuse

of discretion, or otherwise not in accordance with law.” 5 U.S.C.

§ 706(2)(A). 2

_____________________

1

SEC did not seriously consider whether the Recruiting Rule was related to the

purposes of the Act, likely because it concluded that the Rule is not a regulation. Cf. JA21

(simply asserting, in conclusory fashion, such a relationship). Because the Act provides

only that exchanges may not “regulate . . . matters not related to the purposes” of the Act,

15 U.S.C. § 78f(b)(5) (emphasis added), it appears SEC concluded that the Recruiting

Rule could be consistent with the requirements of the Act even if it was not related to the

purposes of the Act.

2

The parties also challenge SEC’s approval on constitutional grounds. We need

not reach those arguments because we resolve the case on statutory grounds. See Ashwander

v. Tenn. Valley Auth., 297 U.S. 288, 347 (1936) (Brandeis, J., concurring).

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We (A) begin, as always, with jurisdiction. After finding it, we turn to

the merits. We (B) explain that an exchange rule is not related to the purposes

of the Exchange Act simply because it is a disclosure rule. The Act exists

primarily to protect investors and the macroeconomy 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 (C) conclude that SEC did not explain how the Board Diversity Proposal

has any connection with those purposes. All it said was that the Proposal is

designed to advance three of the purposes contained in § 78f(b)(5). But those

purposes bear no relationship to the disclosure of information about the

racial, gender, and sexual characteristics of the directors of public companies.

Furthermore, (D) the major questions doctrine confirms our interpretation

of the plain meaning of these three provisions. And (E) SEC’s and Nasdaq’s

counterarguments are unavailing.

A

We start, as always, with jurisdiction. AFBR has Article III standing

to invoke our jurisdiction because one of AFBR’s members is a Nasdaq-

listed company and so is directly regulated by Nasdaq’s rules. See Company

Doe Affidavit at ¶ 2. AFBR may bring suit on behalf of the member because

the member’s interest is “germane to [AFBR’s] purpose” and “neither the

claim asserted nor the relief requested requires the participation of [the]

members in the lawsuit.” Friends of the Earth, Inc. v. Laidlaw Env’t Servs.

(TOC), Inc., 528 U.S. 167, 181 (2000). Because “at least one plaintiff has

standing, the suit may proceed.” Biden v. Nebraska, 143 S. Ct. 2355, 2365

(2023).

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B

Turning to the merits, SEC found that any disclosure-based exchange

rule is related to the purposes of the Exchange Act. See SEC EB Br. 2 (“The

Commission’s conclusion that Nasdaq’s rules are related to, and designed to

promote, the Exchange Act’s core disclosure purpose is well grounded in the

record.”); see also id. at 14, 25; Nasdaq EB Br. 52–53. So we first consider

whether SEC could conclude that a proposed exchange rule is related to the

purposes of the Act simply because it would compel disclosure of information

about exchange-listed companies.

It could not. Congress enacted the original Exchange Act in 1934. In

1975, it undertook an “extensive rewriting.” Richard W. Jennings et

al., Securities Regulation: Cases and Materials 535 (7th ed.

1992). The history makes clear the Act is primarily about limiting specula-

tion, manipulation, and fraud, and removing barriers to exchange competi-

tion. There are other, ancillary purposes, but disclosure of any and all

information is not among them. The obvious implication is that a disclosure

rule is related to the purposes of the Act if and only if it has some connection

to the ails Congress designed the Act to eradicate.

We (1) provide background on the original Exchange Act. Then we

(2) explain the effect of the 1975 Amendments. 3

_____________________

3

The Act has been amended on other occasions, too. See, e.g., Philip A. Loomis,

Jr., The Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, 28 Geo.

Wash. L. Rev. 214, 219 & n.17 (1959). But those amendments left “the essential struc-

ture” of the Act in place. Id. at 219. We accordingly focus on the 1975 Amendments, both

because they are the most significant amendments and because they inserted into the Act

all the statutory provisions at issue in this case.

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1

The Exchange Act regulates stock exchanges. Stock exchanges have

been a staple of the American securities industry since the New York Stock

Exchange (“NYSE”) was founded in 1792. See Jonathan R. Macey & David

D. Haddock, Shirking at the SEC: The Failure of the National Market System,

1985 U. Ill. L. Rev. 315, 316. The basic function of a stock exchange is to

provide a secondary market for trading in stocks—a market where investors

buy stocks from other investors. Secondary markets complement primary

markets, where investors buy stocks directly from companies making public

offerings. See Norman S. Poser, Restructuring the Stock Markets: A Critical

Look at the SEC’s National Market System, 56 N.Y.U. L. Rev. 883, 886

(1981).

The NYSE facilitated the dominant secondary stock market from its

inception through the twentieth century. See id. at 891. In the process, it func-

tioned as a private, de facto regulator. It did so in two ways. First, it created

rules to govern its members—those admitted to trade on the exchange. It also

created an adjudicatory system to resolve disputes related to securities trans-

actions. See William A. Birdthistle & M. Todd Henderson, Becoming a Fifth

Branch, 99 Cornell L. Rev. 1, 15 (2013). Second, it required companies

listed on the exchange to meet certain financial and disclosure requirements.

See Macey & Haddock, supra, at 318. All this regulation helped to instill con-

fidence in stock markets. And that benefited the NYSE because confident

investors are more willing to buy and sell stocks. See Birdthistle & Hender-

son, supra, at 15 (“[E]xtragovernmental regulation increased public confi-

dence in brokers associated with the Board and thereby attracted business.”).

This predominantly private regime lasted for over a century. But as

securities markets grew in the early 1900s, problems emerged that private

ordering could not handle.

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The first problem was rampant fraud. In the decade after the Great

War, Americans paid $50 billion for securities, half of which were worthless.

Elisabeth Keller & Gregory A. Gehlmann, Introductory Comment: A Historical

Introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934,

49 Ohio St. L.J. 329, 334 (1988). An exchange could police fraudulent

dealing in stocks listed on its own platform, but some stocks traded only

“over the counter”—i.e., not on any exchange. Exchanges obviously could

do nothing to prevent fraudulent dealing in those stocks. States tried to solve

the fraud problem with “blue sky” laws, but those proved insufficient, in part

because they were easily gameable. See id. at 332–34. So eventually, Congress

stepped in with the Securities Act of 1933, which required companies offering

securities in primary markets to disclose certain financial and management

information. See id. at 342–47.

Second, policymakers worried about investors who used speculation

and market manipulation to make short-term profits. Speculation generally

involved betting on short-term stock price movements through short selling

or margin trading. See John E. Tracy & Alfred Brunson MacChesney, The

Securities Exchange Act of 1934, 32 Mich. L. Rev. 1025, 1027–31 (1934).

Manipulation involved inducing short-term price movements through wash

sales, matched orders, rumor mongering, or pool operations. Often, manipu-

lators capitalized on those price movements using options. Id. at 1031–33.

These practices often proved harmful to investors. Speculation is like

gambling because “[i]t distracts [the speculator’s] mind from his regular

work or business. If successful, it leads him to improvident excesses of spend-

ing. If unsuccessful, it leads him to breaches of trust and theft, bankrupts his

business and results in loss and degradation to him and his dependents.” Id.

at 1030–31. And manipulation harmed investors for the obvious reason that

“[p]rice manipulations are the result of the deliberate efforts of dishonest

traders to make profits for themselves at the expense of the investing public

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by artificially raising or lowering the price of a particular security.” Id. at

1031. Thus, in the run-up to the passage of the Exchange Act, President

Franklin D. Roosevelt urged Congress to regulate exchanges for the purpose

of protecting the “average investor” who frequently risked his “pay

envelop” or “meager savings” to buy stocks even though he had no means

to discern their “true value.” S. Rep. No. 73-792, at 1–2 (1934); H.R.

Rep. No. 73-1383, at 1–2 (1934).

Policymakers thought the combination of speculation and manipula-

tion sucked “a vast and unhealthy volume of credit [] into securities markets

to the deprivation of agriculture, commerce, and industry, which made pos-

sible the inflation of prices of securities out of all proportion to their value.”

S. Rep. No. 73-792, at 3. The exchanges nonetheless refused to step in. See

id. at 4. And no legislation at the time compelled ongoing disclosures to en-

sure that stock prices represented companies’ intrinsic values, nor combat-

ted secondary market speculation or manipulation. See Keller & Gehlmann,

supra, at 347–52. So Congress stepped in to reform the secondary markets.

The result: the Exchange Act of 1934. In light of the problems that

spurred Congress into action, it is no surprise that the Act evinced an over-

riding concern with investor protection and the promotion of stock market

stability. The Act’s preamble and its legislative purpose section suggest Con-

gress had two primary goals: First, “to prevent inequitable and unfair prac-

tices on [securities] exchanges and markets.” Securities Exchange Act of

1934, Pub. L. No. 73-291, 48 Stat. 881, 881; see also 15 U.S.C. § 78b (legisla-

tion necessary “to insure the maintenance of fair and honest markets in

[securities] transactions”). Second, to stamp out “excessive speculation,”

which causes “unreasonable fluctuations” in “the volume of credit available

for trade, transportation, and industry in interstate commerce” and

“hinder[s] the proper appraisal of the value of securities.” 15 U.S.C.

§ 78b(3).

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Most of the Act’s substantive provisions evince these goals in their

plain text. For example, subject to some exceptions, the Act:

• Limited the amount of money that could be loaned for the

purchase of securities;

• Required brokers and dealers to comply with SEC rules in

short selling, options trading, and related matters;

• Banned wash sales and other fictitious trades;

• Banned pool operations and banned brokers and dealers from

disseminating information about the likely effect of pool

operations on the price of any stock;

• Banned brokers and dealers from disseminating fraudulent

information to induce purchase of a stock;

• Banned brokers and dealers from using manipulative or de-

ceptive devices or contrivances in contravention of SEC rules;

• Required exchanges to register with SEC and to enact rules for

the discipline of members who behave in a manner inconsistent

with “just and equitable principles of trade”;

• Prohibited exchange members from dealing in an unlisted

security, unless approved by SEC; and

• Curtailed insider trading by imposing reporting requirements

and allowing shareholders to sue corporate officers and

directors for disgorgement of short swing profits.

See 48 Stat. at 885–96; see also Tracy & MacChesney, supra, at 1039–44, 1051,

1056.

The Act also required companies listed on a registered stock exchange

to comply with SEC disclosure regulations. See 48 Stat. at 892–93. But Con-

gress did not authorize SEC to mandate disclosure of any information what-

soever. Rather, it vested SEC with a limited power to compel disclosure of

basic corporate and financial information. For example:

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• Articles of incorporation and bylaws;

• Information about the organization, financial structure, and

nature of the business;

• Information about the terms of the securities offered to the

public;

• Information about the compensation of directors and officers

and their ownership of outstanding securities; and

• Balance sheets and other financial statements.

See ibid.

Congress enacted these disclosure provisions to protect investors and

prevent speculation. See Tracy & MacChesney, supra, at 1048 (noting the

“obvious and close connection between the publicity requirements of this

Act and the proper regulation of exchange practices”). First, it thought dis-

closure would prevent companies from hiding financial problems from inves-

tors. See, e.g., S. Rep. No. 73-792, at 10 (“[C]orporations [] have heretofore

managed to withhold from investors their true financial condition.”); id. at

11 (noting issuers frequently “present[ed] to the investing public a false or

misleading appearance as to financial condition”). Second, it thought disclo-

sure would facilitate “the evaluation of prices of securities” and therefore

promote the efficient “direction of the flow of savings into industry.” Tracy

& MacChesney, supra, at 1048. Or put differently, disclosure would stabilize

markets by curbing speculation. See S. Rep. No. 73-792, at 3 (noting that

“the failure of corporations to publish full and fair reports of their financial

conditions” fueled speculation).

That makes sense. If companies could hide their financial conditions,

they could defraud investors or whip them into a speculative frenzy. Disclo-

sure of basic corporate and financial information was a sound antidote. But it

was not an end in itself; it served a purpose—essentially the same purpose

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served by restrictions on margin loans and short sales. That much is clear

from the fact that Congress carefully limited SEC’s power to compel disclo-

sure to the kinds of information that are most likely to eliminate fraudulent

and speculative behavior.

Thus, the text and history of the original Exchange Act indicate

Congress enacted it to protect investors and tackle the manipulation and

speculation that Congress thought fueled the Great Depression. The Act did

a few other things, too. Most notably, it placed limits on the solicitation of

proxies. See 48 Stat. at 895. Those limits were “certainly collateral to the reg-

ulation of exchange practices,” Tracy & MacChesney, supra, at 1055, which

suggests that one of Congress’s ancillary purposes was to ensure “[f ]air

corporate suffrage,” J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964) (quoting

H.R. Rep. No. 73-1383, at 13). See also Tracy & MacChesney, supra, at

1055 (noting the proxy limitations “apparently aim[] at reform of abuses of

proxies”). But nothing in the original Act required disclosure for disclosure’s

sake. The statute was uniformly directed at preventing market abuses.

2

In 1975, Congress made its most significant amendments to the Ex-

change Act. The primary purpose of those amendments was to facilitate the

development of a national securities market. See Securities Acts Amend-

ments of 1975, Pub. L. No. 94-29, 89 Stat. 97, 97 (“An Act [t]o amend the

Securities Exchange Act of 1934 to remove barriers to competition, to foster

the development of a national securities market system and a national clear-

ance and settlement system, . . . and for other purposes.”). To understand

what that means, it is necessary to understand something about how a stock

exchange worked in 1975.

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a

In 1975, a stock exchange had three primary components. First, it had

members: the persons or firms admitted to trade on the exchange. Members

were usually brokers; they traded on behalf of investors. Poser, supra, at 889.

There were lots of exchanges, and brokers were often members of more than

one. Id. at 891. Next, there were specialists: members admitted to an ex-

change for the specific purpose of making a market in a particular stock. See

id. at 889. An exchange would typically admit just one specialist to trade a

particular stock. Id. at 895. Last, there were the stocks. A company would list

its stock on an exchange, and its stock would be traded there. Companies

could list their stock on more than one exchange, and investors could trade

the stock listed on one exchange on other exchanges, too. Id. at 888–89.

Now consider the mechanics of a trade. A customer would call a bro-

ker and place an order. Then the broker would execute that order in one of

two ways. The broker could transact with another broker. Id. at 889–90. But

sometimes it would be too hard or costly to find another broker willing to take

the other side of the customer’s transaction. That is where specialists came

in. To promote liquidity, exchange rules required specialists to buy stock

from brokers trying to sell and to sell stock to brokers trying to buy. See id. at

890.

Investors paid to trade stocks in two ways. First, they paid their bro-

kers a commission. See id. at 889. Second, they indirectly paid specialists in

the form of the bid–ask spread—the difference between the price at which

the specialists were willing to buy and the price at which they were willing to

sell:

For example, a specialist may bid for a stock at a price of fifty

and offer stock at a price of fifty and one-half. In that case he

will buy when requested to do so at fifty and he will sell at fifty

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and one-half. His profit is the fifty-cents-per-share difference

between the bid and the offer.

Id. at 890. Competition between brokers and specialists would drive down

commissions and bid–ask spreads, thus making the trading markets more

efficient and more attractive to investors.

The problem confronting policymakers in the 1970s was that the mar-

ket for securities transactions was not very competitive. The NYSE was the

dominant exchange, and it leveraged its dominance like a cartel. Id. at 891. Its

membership agreement contained a price-fixing provision that required its

members to charge fixed minimum commissions on every transaction. See id.

at 896. To make that provision effective, the NYSE imposed other re-

strictions. For example, it forbade its members from trading exchange-listed

stocks in over-the-counter markets. See id. at 897. It did so because if brokers

could agree to execute a transaction over the counter, they could engage in

price competition, which would undermine the minimum-commission rules.

The NYSE also barred big customers (i.e., institutional investors such as

mutual funds) from obtaining exchange membership and with it the ability to

trade without brokers or specialists. See ibid. These anticompetitive practices

helped brokers and specialists but hurt investors and market efficiency.

b

Enter the national market system (the “NMS”). The goal of the

NMS was to disrupt these anticompetitive trading practices by “alter[ing]

the structure and dynamics of the securities markets so that different markets

trading the same securities [would] for the first time engage in price compe-

tition with each other.” Id. at 884. The idea originated with SEC, which

began taking steps to implement an NMS policy in the early 1970s. See id. at

902, 905.

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SEC’s actions spurred Congress to amend the Exchange Act in 1975.

Those amendments in large part constituted a “legislative mandate to estab-

lish an NMS.” Id. at 906; see S. Rep. No. 94-75, at 3 (1975) (explaining

that “rapid attainment of a national market system as envisaged by this bill is

important . . . to assure that the country maintains a strong, effective and effi-

cient capital raising and capital allocating system in the years ahead”). That

mandate is reflected in § 78k–1(a)(1):

(C) It is in the public interest and appropriate for the

protection of investors and the maintenance of fair and

orderly markets to assure—

(i) economically efficient execution of secu-

rities transactions;

(ii) fair competition among brokers and deal-

ers, among exchange markets, and between

exchange markets and markets other than

exchange markets;

(iii) the availability to brokers, dealers, and

investors of information with respect to

quotations for and transactions in

securities;

(iv) the practicability of brokers executing in-

vestors’ orders in the best market; and

(v) an opportunity, consistent with the provi-

sions of clauses (i) and (iv) of this subpara-

graph, for investors’ orders to be executed

without the participation of a dealer.

(D) The linking of all markets for qualified securities

through communication and data processing facilities

will foster efficiency, enhance competition, increase the

information available to brokers, dealers, and investors,

facilitate the offsetting of investors’ orders, and con-

tribute to best execution of such orders.

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15 U.S.C. § 78k–1(a)(1); see also Poser, supra, at 906 (“[T]he five qualities of

markets set forth [in § 78k–1(a)] are the closest that the legislators came to

explaining the concept of the NMS.”); Macey & Haddock, supra, at 321–22

(similar).

As reflected in the statutory text, the NMS promotes competition in

the market for securities transactions. Congress itself took several steps to

produce that kind of competition. It:

• Abolished minimum fixed-rate commissions, see 15 U.S.C.

§ 78f(e);

• Eliminated exchange rules that prevented institutional

investors from obtaining exchange membership, see id.

§ 78f(b)(2), (c);

• Directed SEC to review every existing exchange rule limiting

members’ ability to trade in over-the-counter markets, see id.

§ 78k–1(c)(4); and

• Forbade SEC and exchanges from adopting rules that would

unnecessarily burden competition, see id. § 78w(a)(2) (SEC);

id. § 78f(b)(8) (exchanges).

To produce inter-exchange competition, Congress also directed SEC to

establish NMS facilities. See id. § 78k–1(a)(2). To implement that directive,

SEC identified several major elements of the NMS. For example, SEC

identified a need for systems that publicly reported cross-market information

about securities transactions and quotations, and systems that routed orders

to buy and sell securities across markets. Poser, supra, at 916.

The 1975 Amendments did a few other things, too. Most notably, they

included several provisions designed to clip SRO authority—the provisions

at issue in this case. For example, the original Exchange Act gave registered

exchanges power to regulate matters “not inconsistent with” the Act. 48

Stat. at 886. The 1975 Congress revised that provision to limit exchange

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regulatory power to matters “related to the purposes” of the Act. See 15

U.S.C. § 78f(b)(5). It also established procedures for SEC review of SRO

rule changes, see id. § 78s(b), and gave SEC authority to amend SRO rules,

see id. § 78s(c).

*

In sum, Congress passed the original Exchange Act primarily to pro-

tect investors and the American economy from speculative, manipulative,

and fraudulent practices. In 1975, it amended the Exchange Act to further

those goals and, additionally, to remove barriers to the development of a

national market system. No doubt the Act has ancillary purposes—for ex-

ample, protection of corporate suffrage. See supra, at 17. There may be other

purposes buried in the Exchange Act’s voluminous text, but our review of

the Act’s history makes clear that disclosure of any and all information about

listed companies is not among them.

So before SEC approves an SRO rule, it must do more than posit that

the rule furthers some “core disclosure purpose” that is found nowhere in

the Act. SEC EB Br. 2, 14, 25. SEC may not approve even a disclosure rule

unless it can establish the rule has some connection to an actual, enumerated

purpose of the Act.

C

In its attempt to connect the Board Diversity Proposal to some actual

purpose of the Exchange Act, SEC made a few passing citations to the pro-

visions of 15 U.S.C. § 78f(b)(5). On SEC’s telling, the Proposal is “designed

to promote [1] just and equitable principles of trade, [2] remove impediments

to and perfect the mechanism of a free and open market and a national market

system, and [3] protect investors and the public interest” because it will make

available information that some investors want. JA2, 7, 15; see also Nasdaq EB

Br. 54–55, 57 (explaining that SEC found the Proposal related to the

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purposes of the Act because it furthers the purposes of the provisions con-

tained in § 78f(b)(5)). SEC’s explanation fails for the obvious reason that

“the [Proposal] is not actually intended or designed to address any matter

relevant to the scope or purposes of ” those provisions. See JA36 (dissent of

Commissioner Peirce). We address each of SEC’s three contentions in turn.

1

SEC first contended that Nasdaq’s Proposal is related to the purpose

of the Act’s mandate that exchanges adopt rules “designed to . . . promote

just and equitable principles of trade.” 15 U.S.C. § 78f(b)(5) (the “J&E pro-

vision”). That is wrong.

When Congress passed the Exchange Act, it recognized that prospec-

tive legislation was incapable of stamping out every kind of securities-related

misconduct. See Birdthistle & Henderson, supra, at 62–63; see also Heath v.

SEC, 586 F.3d 122, 132 (2d Cir. 2009) (“Securities trading is a highly com-

plex field in which it is not always feasible to define by statute or by adminis-

trative rules having the effect of law every practice which is inconsistent with

the public interest or with the protection of investors.” (quoting Avery v.

Moffatt, 55 N.Y.S.2d 215, 228 (1945)) (alteration omitted)). So Congress

supplemented the rules contained in the Act with the J&E provision, which

requires exchanges to self-regulate “methods of doing business which, while

technically outside the area of definite illegality, are nevertheless unfair both

to customer and to decent competitor.” Heath, 586 F.3d at 132 (quoting

6 Louis Loss & Joel Seligman, Securities Regulation 2796

(3d ed. 2002)).

The J&E provision has an easily discernible purpose: It requires ex-

changes to promote ethical behavior. That is obvious from the ethics-laden

terms Congress used: “just” and “equitable.” To be “just” is to conform

“to what is righteous”—i.e., what is morally right. Webster’s New

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International Dictionary 1348 (2d ed. 1934; 1950). To be “equita-

ble” is to possess or exhibit “equity,” or to be “fair”—i.e., “[c]onformed to,

or in conformity with, the established rules and customs.” Id. at 865, 910. So

the J&E provision simply requires exchanges to promote behavior that is

morally right and in conformity with the rules and customs of the securities

profession. See id. at 2683 (defining “trade” as “[c]ollectively, those con-

nected with . . . a trade” in the occupational sense).

That is how the J&E provision has been applied in practice. To com-

ply with the provision, SROs (including exchanges) have adopted broadly

worded “J&E rules”—general rules that require exchange members to abide

by just and equitable principles of trade. See Heath, 586 F.3d at 132 (“[I]n

accordance with the Exchange Act, the NYSE adopted . . . the J&E Rule,

which prohibits registered members from engaging in conduct or proceeding

inconsistent with just and equitable principles of trade.” (quotation and cita-

tion omitted)); see also, e.g., Nasdaq Rules, General 9, § 1(a) (“A member, in

the conduct of its business, shall observe high standards of commercial honor

and just and equitable principles of trade.”), https://perma.cc/WA66-EE22.

SEC and courts have uniformly emphasized that these SRO J&E rules

“state[] a broad ethical principle [that] implements the requirements of [the

J&E provision].” In re Werner, 44 S.E.C. 622, at *2 n.9 ( July 9, 1971) (em-

phasis added); see also, e.g., Heath, 586 F.3d at 132 (“It has long been the view

that [J&E Rules are] designed to enable SROs to regulate the ethical stand-

ards of [their] members.” (emphasis added)); In re Burkes, 51 S.E.C. 356, at

*3 (Apr. 14, 1993) (similar).

With SEC approval, SROs have frequently applied them to discipline

exchange members for conduct that is unethical, such as: violating the secu-

rities laws, see In re L.H. Alton & Co., S.E.C. Release No. 40886 ( Jan. 6,

1999); charging unreasonable rates, see In re Nat’l Ass’n of Sec. Dealers, 5

S.E.C. 627 (Aug. 7, 1939); unjustifiably failing to live up to contractual

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obligations, see In re Samuel B. Franklin & Co., 38 S.E.C. 113 (Nov. 18, 1957);

withholding customer money, see In re Alderman, 52 S.E.C. 366 ( July 20,

1995); and failing to prioritize a customer’s order over a proprietary trade, see

In re E.F. Hutton & Co., S.E.C. Release No. 25887 ( July 6, 1988).

The Board Diversity Proposal is far removed from these ordinary

applications of the concept of just and equitable principles of trade. It is obvi-

ously unethical to violate the law or to disregard a contractual promise. It is

not unethical for a company to decline to disclose information about the

racial, gender, and LGTBQ+ characteristics of its directors. We are not aware

of any established rule or custom of the securities trade that saddles compa-

nies with an obligation to explain why their boards of directors do not have as

much racial, gender, or sexual orientation diversity as Nasdaq would prefer. 4

If there is such a custom, SEC did not cite it in its approval order. It said only

that the Board Diversity Proposal would satisfy some apparently important

investors who demand diversity information. See JA7. That is irrelevant to

the purposes of the J&E provision.

2

SEC next contended that Nasdaq’s Board Diversity Proposal is re-

lated to the Act’s purposes because exchanges must have rules “designed . . .

to remove impediments to and perfect the mechanism of a free and open mar-

ket and a national market system.” 15 U.S.C. § 78f(b)(5) (the “NMS provi-

sion”). That too is wrong.

The NMS promotes free and open markets. Specifically, the NMS

promotes:

_____________________

4

Nothing prevents companies from voluntarily disclosing—or even advertising—

their directors’ social, demographic, political, or any other characteristics. So if certain

investors want to know that information, companies can choose to disclose it.

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(i) economically efficient execution of securities transactions;

(ii) “fair competition” between brokers, dealers, and markets;

(iii) information with respect to quotations for and transactions in

securities;

(iv) the practicability of brokers executing investors’ orders in the

best market; and

(v) opportunities to execute certain orders “without the participa-

tion of a dealer.”

Id. § 78k–1(a)(1)(C)(i)–(v); see also Poser, supra, at 915–16 (noting that the

NMS consists primarily “of a linkage of the markets that would enable cus-

tomers to receive the best available execution of their orders and market mak-

ers and specialists to compete”); supra, at 17–222.

A free and open market is closely related to the NMS concept. A

“free market” is “[a] condition of unrestricted competition.” Webster’s,

supra, at 1004. An “open market” is “a market open to all buyers and

sellers.” Id. at 1706. Before 1975, competition in the market for securities

transactions was restricted because the NYSE’s membership agreement

contained several anticompetitive provisions. The market for securities

transactions was not meaningfully open to all sellers because the market sys-

tem lacked the kinds of facilities necessary to enable non–NYSE specialists

to compete for transactions. The goal of the NMS was to alleviate those con-

ditions and so to “perfect the mechanism of a free and open market.”

15 U.S.C. § 78f(b)(5).

In the context of the NMS provision, then, what Congress meant by

a “free and open market” was a free and open market for securities transac-

tions. See Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244, 2261 n.4 (2024)

(“[S]tatutes can be sensibly understood only ‘by reviewing text in context.’”

(quoting Pulsifer v. United States, 601 U.S. 124, 133 (2024))); see also Brett M.

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Kavanaugh, Fixing Statutory Interpretation, 129 Harv. L. Rev. 2118, 2121

(2016) (explaining that the best reading of a statute must be informed by con-

text). Congress gave SEC broad discretion to flesh out the contours of the

NMS. See, e.g., 15 U.S.C. § 78k–1(a)(2) (“The Commission is directed . . .

to use its authority under [the Exchange Act] to facilitate the establishment

of a national market system for securities . . . in accordance with the findings

and to carry out the objectives set forth in [§ 78k–1(a)(1)].”). The NMS pro-

vision is an extension of that discretion. It gives SEC power to ensure that

exchanges have rules designed to promote the NMS policy that SEC devel-

ops in accordance with Congress’s § 78k–1(a)(2) directive.

An exchange rule would presumably relate to the purpose of the NMS

provision if it did anything that might plausibly reduce the transaction costs

associated with executing a securities trade—e.g., by lowering broker com-

missions or bid-ask spreads. But SEC did not contend that the Board Diver-

sity Proposal does anything like that. All it said was that the Proposal would

make available information that might contribute to some investors’ invest-

ment and voting decisions. See JA7. Equipping investors to make investment

and voting decisions might be a good idea, but it has nothing to do with the

execution of securities transactions. That means SEC failed to justify its

finding that Nasdaq’s Proposal is related to the purpose of the NMS

provision.

3

Last, SEC contended that Nasdaq’s Board Diversity Proposal is

related to the purpose of the Act’s mandate that exchanges adopt rules

“designed . . . in general, to protect investors and the public interest.” 15

U.S.C. § 78f(b)(5) (the “public interest provision”). That is also wrong.

The public interest provision is a catch-all at the end of a list of things

an exchange must do to obtain and maintain national registration status. The

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Supreme Court has explained that such provisions should be interpreted by

reference to the canons of noscitur a sociis and ejusdem generis. See Fischer v.

United States, 144 S. Ct. 2176, 2183–84 (2024). Under the canon of noscitur a

sociis, a phrase “is given more precise content by the neighboring words with

which it is associated.” Id. at 2183 (quotation omitted). Similarly, ejusdem

generis instructs that “a general or collective term at the end of a list of spe-

cific items is typically controlled and defined by reference to the specific

[items] that precede it.” Id. at 2184 (quotation omitted). 5 That makes sense.

An exchange could not enact a rule designed to protect investors or the public

from the perils of tobacco. So in determining whether Nasdaq’s Proposal is

designed to protect investors and the public interest, the question is whether

it protects investors or the public from the kinds of harms that the Exchange

Act explicitly lists as its targets—that is, speculation, manipulation, fraud,

anticompetitive exchange behavior, &c. See supra, at 11–22.

Lots of exchange listing standards are related to those stated purposes.

For example, Nasdaq requires listed companies to have a majority-

independent board. See Nasdaq EB Br. 11–12 & n.1. That rule at least plausi-

bly prevents fraud by ensuring that directors are insulated from officers so

they can effectively guard against financial malfeasance. In fact, the Exchange

Act itself sometimes imposes a board independence requirement: It requires

board audit committees to be composed entirely of independent directors.

See 15 U.S.C. § 78j–1(m)(3)(A) (“Each member of the audit committee of

_____________________

5

The Supreme Court has said on occasion that courts should interpret catch-all

phrases in light of “the purposes that Congress had in mind when it enacted [the] legisla-

tion.” NAACP v. Fed. Power Comm’n, 425 U.S. 662, 670 (1976); see also Huawei Techs.

USA, Inc. v. FCC, 2 F.4th 421, 439 (5th Cir. 2021) (citing NAACP and reading a public

interest provision in light of the purposes of the relevant statute). Here, the text (especially

as understood through the relevant canons) reveals Congress’s purposes and obviates a

separate purposivist inquiry under NAACP.

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the issuer shall be a member of the board of directors of the issuer, and shall

otherwise be independent.”). Congress enacted that requirement in 2002, in

response to a series of corporate scandals involving outright financial fraud,

such as at Enron and WorldCom. See S. Burcu Avci et al., Do Independent

Directors Curb Financial Fraud? The Evidence and Proposals for Further Reform,

93 Ind. L.J. 757, 758 (2018). It did so for the express purpose of “pro-

tect[ing] investors by improving the accuracy and reliability of corporate dis-

closures made pursuant to the securities laws.” Sarbanes-Oxley Act of 2002,

Pub. L. No. 107-204, 116 Stat. 745, 745. If Congress thinks an independent

audit committee requirement prevents financial fraud, it is not hard to see

how an exchange could conclude a majority-independent board requirement

does, too.

What is the public interest here? Nasdaq told SEC that the Board

Diversity Proposal targeted Exchange Act–related harms because there is an

established link between the racial, gender, and LGTBQ+ identities of a com-

pany’s board members and “the quality of a company’s financial reporting,

internal controls, public disclosures, and management oversight.” JA8.

But Nasdaq offered little support for its assertion that there is an

empirically established—or even logical—link between the racial, gender,

and sexual composition of a company’s board and the quality of its govern-

ance. It proffered some studies that suggest “a positive association between

gender diversity and important investor protections,” JA8, but SEC can-

vassed all the evidence Nasdaq submitted and concluded it was “mixed,”

JA9. 6 And even supposing that Nasdaq’s gender-diversity evidence was

_____________________

6

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

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sufficient, Nasdaq offered only the barest speculation to support the propo-

sition that there is any link between investor protection and racial and sexual

diversity. See JA8 (“[S]ome academics assert that such findings [regarding

gender diversity] may extend to other forms of diversity, including racial and

ethnic diversity.”); JA9 (“With respect to commenters’ view that there is

insufficient evidence to establish a positive relationship between LGBTQ+

diversity and board performance, the Exchange reiterates that it is reasonable

and in the public interest to treat LGBTQ+ status as ‘inextricably’ inter-

twined with gender identity.”). It may be true that an exchange need not pro-

duce conclusive empirical evidence to show that a proposed rule is related to

the purpose of investor protection, but SEC cannot approve a rule simply

because an exchange declared the existence of some fact. If it could, the

statutory limitations on exchange authority would be dead letters. Cf.

Susquehanna Int’l Grp., LLP v. SEC, 866 F.3d 442, 447 (D.C. Cir. 2017)

(holding assertions of “independent outside financial experts” insufficient

to justify SEC approval of an exchange rule).

Moreover, a link between racial, gender, and sexual diversity could

justify only the disclosure component of the Diversity Proposal. The Pro-

posal also imposes an explanation requirement—it requires companies to ex-

plain why they failed to be as diverse as Nasdaq would prefer. That

requirement would serve the goal of investor protection only if there were

some link between the reason for the lack of racial, gender, and sexual diver-

sity on a company’s board and the quality of its governance. That is, Nasdaq

would have to show a corporate-governance delta between (A) non-diverse

boards that have no explanation for their non-diversity and (B) non-diverse

_____________________

of maximizing shareholder wealth. It passed the Act to protect investors from fraud,

manipulation, speculation, and anticompetitive exchange behavior. See supra, at 11–22.

Firm performance has little to do with those objectives.

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boards that have “good” reasons for their non-diversity. Nasdaq offered no

reason to believe such a delta exists.

That is why SEC did not justify its related-to finding by contending

that the Board Diversity Proposal would protect investors from fraud or some

other Exchange Act–related harm. SEC justified that finding only on the

ground the Proposal would satisfy the demand of some important investors

for board diversity information. See JA7. But the public interest provision

must be interpreted in light of the more specific purposes Congress listed

prior to the general catch-all purpose. See Fischer, 144 S. Ct. at 2183–84. The

purpose of satisfying investor demand for any and every kind of information

about exchange-listed companies is not remotely similar to any of those

stated purposes. Accordingly, SEC failed to justify its finding that the Board

Diversity Proposal is related to the purpose of the public interest provision.

D

The major questions doctrine confirms our interpretation of the stat-

ute’s ordinary meaning. To quote Judge Sentelle, finding a hidden disclosure

mandate in the Exchange Act and its amendments requires concluding that

“Congress not only had hidden a rather large elephant in a rather obscure

mousehole, but had buried [it] beneath an incredibly deep mound of specific-

ity, none of which bears the footprints of the beast or any indication that Con-

gress even suspected its presence.” Am. Bar Ass’n v. FTC, 430 F.3d 457, 469

(D.C. Cir. 2005). We (1) explain the doctrine and then (2) hold that no part

of the Exchange Act even hints at SEC’s purported power to remake corpo-

rate boards using diversity factors.

1

The major questions doctrine is as old as the administrative state it-

self. See, e.g., Louis J. Capozzi III, The Past and Future of the Major Questions

Doctrine, 84 Ohio St. L.J. 191, 196–226 (2023). To understand the

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doctrine, consider a case involving the very first modern administrative

agency, the Interstate Commerce Commission (“ICC”). 7 See ICC v. Cincin-

nati, New Orleans & Tex. Pac. Ry. Co., 167 U.S. 479 (1897) (“The Queen and

Crescent Case”). In The Queen and Crescent Case, ICC asserted the power to

use administrative law to affect “[b]illions of dollars [that were] invested in

railroad properties,” “[m]illions of passengers,” and “millions of tons of

freight [that were] moved each year by the railroad companies.” Id. at 494.

Those were major questions, affecting a “vast and comprehensive” swath of

American life. Ibid. So to decide them, ICC needed clear and express author-

ization from Congress: “The grant of such a power is never to be implied.”

Ibid. While Congress gave ICC plenty of far-reaching powers, “nowhere in

the interstate commerce act do we find words” expressly giving ICC the

power to remake future railroad rates. Id. at 500. That was enough to invali-

date ICC’s decision.

By the turn of the twentieth century, the rule was firmly ensconced in

treatises discussing administrative law. See, e.g., Frank J. Goodnow,

The Principles of the Administrative Law of the United

States 326–27 (1905) (“[T]he general rule in this country is that the

administrative authorities . . . may issue ordinances only where the power to

issue such ordinances has been expressly given to them by the legislature.”

(emphasis added)); accord id. at 168–69; J.G. Sutherland, Statutes

and Statutory Construction § 68 (1891). And even during the

_____________________

7

Congress created ICC in 1887. Interstate Commerce Act of 1887, Pub. L. No. 49-

104, 24 Stat. 379, 383. “It is well-nigh universally recognized that the Interstate Commerce

Commission is not only the oldest but the most powerful of the many federal agencies now

operative which exercise some measure of authoritative control of economic conduct.” I.L.

Sharfman, The Interstate Commerce Commission: An Appraisal, 46 Yale L.J. 915, 915

(1937). ICC was the archetype for twentieth-century administrative agencies. See

Bernard Schwartz, Administrative Law 22 (2d ed. 1984).

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headiest days of administrative power in the second half of the twentieth

century, the Supreme Court continued to invoke the doctrine to limit admin-

istrative actions over major questions in the absence of express congressional

authorization. See Capozzi, supra, at 209–16.

In its modern formulation, the major questions doctrine rests on the

principle that administrative agencies have no independent constitutional

provenance. They “are creatures of statute. They accordingly possess only

the authority that Congress has provided.” NFIB v. OSHA, 595 U.S. 109, 117

(2022) (per curiam). So when an agency asserts the power “to substantially

restructure the American energy market,” it must point to “clear congres-

sional authorization for the power it claims.” West Virginia v. EPA, 597 U.S.

697, 723–24 (2022) (quotation omitted); see also Nebraska, 143 S. Ct. at 2372.

Because the agency has no inherent or implied authority, its powers to make

major decisions must come only from unequivocal statutory text.

2

Under Supreme Court precedent, “this is a major questions case.”

West Virginia, 597 U.S. at 724. Put simply, the “economic and political

significance” of SEC’s action is “staggering by any measure.” Nebraska, 143

S. Ct. at 2373 (quotation omitted). SEC “claimed to discover in a long-extant

statute an unheralded power” that it “located . . . in the vague language of an

ancillary provision of the Act.” West Virginia, 597 U.S. at 724 (quotation

omitted). In doing so, SEC has intruded into territory far outside its ordinary

domain.

Start with economic significance. As explained above, Nasdaq is the

second-largest stock exchange in the world. As of today, the market cap of

companies traded on the Nasdaq exchange exceeds $25 trillion, greater than

the real GDP of the United States. Largest Stock Exchange Operators World-

wide, Statista, https://perma.cc/873E-EUT3. That is not to say that

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everything SEC does to regulate Nasdaq automatically implicates a major

question. But prescribing rules such as these, which attempt to transform the

internal structure of many of the largest corporations in the world, surely

does. Such rules come close to regulating “the entire economy.” Whitman v.

Am. Trucking Ass’ns, 531 U.S. 457, 474 (2001).

The political significance is likewise staggering. These rules came in

response to “the social justice movement,” as an attempt to increase “diver-

sity and inclusion” across “public companies.” JA689. We can think of few

more politically divisive issues in the Nation. Compare, e.g., Students for Fair

Admissions, Inc. v. President & Fellows of Harvard Coll., 600 U.S. 181, 258

(2023) (Thomas, J., concurring) (“[I]t has long been apparent that ‘diversity

[was] merely the current rationale of convenience’ to support racially dis-

criminatory admissions programs.” (quoting Grutter v. Bollinger, 539 U.S.

306, 393 (2003) (Kennedy, J., dissenting))), with id. at 384 (Sotomayor, J.,

dissenting) (“Diversity is now a fundamental American value, housed in our

varied and multicultural American community that only continues to

grow.”).

SEC’s proposed exercise of power is novel, too. The relevant statu-

tory provisions date either to 1934 or 1975. Either way, these qualify as “long-

extant statute[s].” West Virginia, 597 U.S. at 724; see id. at 733–34 (relevant

provision amended in 1990); NFIB, 595 U.S. at 114 (relevant provisions dated

to 1970). In all that time, SEC has never claimed the authority to impose

diversity requirements, or anything resembling them, on corporate boards.

Further, SEC’s efforts “raise an eyebrow” by stepping outside its

ordinary regulatory domain of market manipulation and proxy voting and

intruding into the province of other agencies. West Virginia, 597 U.S. at 730

(quotation omitted). SEC does not ordinarily regulate companies’ commit-

ments “to diversity and inclusion.” JA689. If Congress had granted a diver-

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sity mandate to any agency (an altogether unclear assumption), we would

have expected Congress to give it to the Equal Employment Opportunity

Commission or even the Department of Justice. Cf. Civil Rights Act of 1964,

42 U.S.C. §§ 2000e et seq. Of course, even the agencies that regulate diver-

sity in the workplace have not asserted the power SEC does in this case. That

makes SEC’s burden under the major questions doctrine all the heavier.

But it is not just other agencies that ordinarily regulate in this field; it

is primarily the States. 8 The Supreme Court has long recognized that a

corporation is a “mere creation of local law.” Paul v. Virginia, 75 U.S. 168,

181 (1868); see also Trs. of Dartmouth Coll. v. Woodward, 17 U.S. (4 Wheat.)

518, 636 (1819) (Marshall, C.J.) (“A corporation is an artificial being, invisi-

ble, intangible, and existing only in contemplation of [state] law. Being the

mere creature of law, it possesses only those properties which the charter of

its creation confers upon it, either expressly, or as incidental to its very exist-

ence.”). Furthermore, “[n]o principle of corporation law and practice is

more firmly established than a State’s authority to regulate domestic corpo-

rations,” because “regulation of corporate governance is regulation of enti-

ties whose very existence and attributes are a product of state law.” CTS

Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89 (1987). As the Court

explained:

_____________________

8

That is not to say, of course, that corporate governance is exclusively the province

of state regulation. The federal government can regulate (and in the past has regulated)

certain aspects of corporate governance. The important point for present purposes, how-

ever, is that this task falls primarily to the States—and hence is one factor triggering the

major questions doctrine. For example, there are plenty of examples of federal regulation

over the landlord–tenant relationship: The Fair Housing Act and the Department of Hous-

ing and Urban Development are just the most obvious. Still, the landlord–tenant relation-

ship is “the particular domain of state law,” so the major questions doctrine applies when

federal agencies use implied powers to regulate it. Ala. Ass’n of Realtors v. DHHS, 594 U.S.

758, 764 (2021) (per curiam).

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[It] is an accepted part of the business landscape in this country

for States to create corporations, to prescribe their powers, and

to define the rights that are acquired by purchasing their shares.

A State has an interest in promoting stable relationships among

parties involved in the corporations it charters . . . .

Id. at 91.

Thus, by unsettling the “stable relationships among parties involved”

in corporate boards, ibid., SEC has “intrude[d] into an area that is the

particular domain of state law,” Ala. Ass’n of Realtors v. DHHS, 594 U.S.

758, 764 (2021) (per curiam); see also West Virginia, 597 U.S. at 742 (Gorsuch,

J., concurring) (suggesting that the major questions doctrine serves in part to

protect federalism). That provides another reason to think that SEC’s exer-

cise of purported authority presents a major question.

In situations like this, the major questions doctrine “counsels skepti-

cism” toward SEC’s exercise of this unprecedented power. West Virginia,

597 U.S. at 732. “To overcome that skepticism, the Government must . . .

point to ‘clear congressional authorization’ to regulate in that manner.” Ibid.

(quoting Util. Air Regul. Grp. v. EPA, 573 U.S. 302, 324 (2014)). And that

clear authorization is sorely lacking. All SEC can do is point to “a vague stat-

utory grant” in the Exchange Act. Ibid. It gestures to language such as “just

and equitable principles of trade,” or to its mandates to “perfect the mecha-

nism of a free and open market” and adopt rules “designed . . . , in general,

to protect investors and the public interest.” 15 U.S.C. § 78f(b)(5). “[S]horn

of all context,” these provisions could be rendered “empty vessel[s]” for

SEC to exercise nearly unlimited regulatory authority. West Virginia, 597

U.S. at 732. That unlikely result bolsters our reading of the statute: Such

“vague statutory grant[s]” fall far short of “the sort of clear authorization

required by [Supreme Court] precedents.” Ibid.

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E

SEC and Nasdaq offer five principal responses. First, they say ex-

changes should have broad leeway to formulate rules governing listed com-

panies because exchanges are private institutions that were in operation long

before Congress passed the Exchange Act. See Oral Arg. 45:44–47:35. But it

is hard to see why that matters. In 1975, Congress limited the regulatory

power of exchanges to matters that are related to the purposes of the Act. See

15 U.S.C. § 78f(b)(5). We cannot ignore what Congress did in those Amend-

ments just because exchanges once operated free from federal oversight.

Second, SEC and Nasdaq tell us that exchanges have long imposed

substantive corporate governance rules, even after the 1975 Amendments.

See Nasdaq EB Br. 11–12; see also Corporate Governance Scholars Br. 13

(explaining that the NYSE imposed an independent board requirement

“only two years after the 1975 amendments”). That the NYSE imposed an

independent board requirement is not surprising because there is no doubt

that exchanges may adopt corporate governance rules that are related to the

purposes of the Exchange Act. See supra, at 288–29 (explaining Nasdaq’s

independent board requirement relates to the purposes of the Act because it

is designed to prevent fraud). 9 It does not follow, however, that exchanges

may adopt corporate governance rules that are not related to those purposes.

_____________________

9

SEC cited other Nasdaq listing standards in its approval order. For example,

Nasdaq’s quorum requirement, which provides that listed companies must obtain votes

from the shareholders of one-third of the issuer’s outstanding shares on any matter that

requires a shareholder vote. See JA15; see also Nasdaq Listing Rule 5620(c). We need not

definitively decide the question here, but it seems obvious that quorum requirements have

some connection with the purpose of investor protection. The whole point of requiring

shareholders to approve certain corporate actions is to ensure that investors have the means

to protect themselves from harms that approximate fraud—e.g., to prevent the directors of

a corporation from using corporate funds (which for all practical purposes belong to the

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Third, it is true that SEC has violated the 1975 Amendments in the

past. For example, SEC approved a rule proposed by the Long-Term Stock

Exchange (“LTSE”) that requires LTSE-listed companies to adopt and

publish a policy on the company’s approach to diversity and inclusion. See

JA15 n.202 (citing LTSE Rule 14.425(a)(1)(C)). But SEC cannot nullify the

statutory criteria governing exchange rules by repeatedly ignoring them.

“[T]he Executive can[not] acquire authority forbidden by law through a pro-

cess akin to adverse possession.” Biden v. Texas, 597 U.S. 785, 830 (2022)

(Alito, J., dissenting).

Fourth, SEC and Nasdaq contend the Board Diversity Proposal is

merely a disclosure requirement and that it does not actually remake the

boardrooms of America’s corporations. This contention is flatly inconsistent

with the administrative record. Nasdaq described the Board Diversity Pro-

posal to impose “aspirational diversity objectives.” JA611. 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.

Fifth, SEC and Nasdaq contend that Supreme Court precedent estab-

lishes that full disclosure is the “core” purpose of the Exchange Act. See

SEC EB Br. 2, 14, 25; Nasdaq EB Br. 52. 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

_____________________

shareholders) to pay corporate officers unjustifiable salaries. But if corporations could

satisfy shareholder approval requirements by holding votes that do not involve even some

minimal number of investors, shareholder approval requirements would be pointless. And

if that were not enough, the Supreme Court has said that the Act’s proxy solicitation re-

quirements demonstrate that the Act has as a purpose the protection of “fair corporate

suffrage.” Borak, 377 U.S. at 431. There is little doubt that a quorum requirement has at

least some connection with that purpose.

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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 disclo-

sure rule is related to the purposes of the Act only if it is related to the elimi-

nation of fraud, speculation, or some other Exchange Act–related harm. See

supra, at 11–22.

Even Nasdaq acknowledges that there is some limit on the kinds of

disclosure rules an exchange could adopt. It says an exchange could adopt a

disclosure rule only if there is (1) investor demand for the information that

the rule would make available, (2) a demonstrated link between that infor-

mation and corporate governance or investor protection, and (3) an eviden-

tiary record that establishes both those things. See Oral Arg. at 50:40–52:05. 10

But even if Supreme Court precedent establishes that “full disclosure” is the

core purpose of the Act, it is hard to see why an exchange rule would have to

comply with Nasdaq’s three-part test to be related to that purpose. Would

not every disclosure rule be related to the purpose of full disclosure? For ex-

ample, a rule that compelled disclosure of the religious affiliations of compa-

nies’ directors. Or the presidential candidate they voted for in the most

recent election. Or their position on the hottest political issue of the day. Or

whether they recycle, drive electric vehicles, and take public transit. We see

no basis to derive such an unlimited principle from Affiliated Ute Citizens.

_____________________

10

Ironically, the Proposal fails Nasdaq’s own test. See supra, at 29–31.

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*

In sum, SEC’s related-to finding was “arbitrary, capricious, an abuse

of discretion, or otherwise not in accordance with law.” 5 U.S.C.

§ 706(2)(A). That means SEC failed to justify its determination that

Nasdaq’s Board Diversity Proposal is consistent with the requirements of the

Exchange Act. See 15 U.S.C. § 78s(b)(2)(C).

III

Finally, the Recruiting Rule. In that Rule, Nasdaq proposed to offer

companies that do not meet the “aspirational diversity objectives,” JA611,

contained in the Board Diversity Proposal access to a complimentary board-

recruiting service that would provide “access to a network of board-ready

diverse candidates,” JA20. Nasdaq said it proposed the Recruiting Rule in

part to “aid” companies in “compliance with the Nasdaq Diversity Pro-

posal.” JA724. It explained that companies that do not meet the Diversity

Proposal’s “aspirational diversity objectives,” JA611, “will need to identify

diverse board candidates if they wish to satisfy that requirement instead of

explaining why they do not satisfy it,” JA725.

SEC found the Recruiting Rule consistent with the requirements of

the Exchange Act. It did so in part because the Rule would “assist Eligible

Companies . . . to increase diverse representation on their boards and would

help Eligible Companies to meet (or exceed, in the case of a Company with a

Smaller Board) the proposed diversity objectives under the Board Diversity

Proposal.” JA21. SEC acknowledged that an exchange might violate the Act

by offering a benefit to some companies and not others because the Act for-

bids exchanges from engaging in “unfair discrimination between customers,

issuers, brokers, or dealers.” 15 U.S.C. § 78f(b)(5); see JA21.

But it concluded that the Recruiting Rule did not unfairly discriminate

among issuers—i.e., listed companies. In doing so, SEC reasoned that it

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made sense for Nasdaq to offer the service to companies that do not meet the

objectives contained in the Board Diversity Proposal because those compa-

nies “may have a greater interest or feel a greater need to identify diverse

board candidates by utilizing the board recruiting service than” companies

who do meet those objectives. JA21. And, it explained, “offering the one-year

complimentary service would help [Nasdaq] compete to attract and retain

listings, particularly in light of the diversity objective in the separately

approved Board Diversity Proposal.” Ibid.

NCPPR contends SEC’s decision to approve the Recruiting Rule

was arbitrary and capricious. See 5 U.S.C. § 706(2)(A). But Nasdaq’s author-

ity to offer benefits pursuant to the Recruiting Rule before this court expired

on December 1, 2023. See JA173. And Nasdaq represents that no company is

receiving service under the Recruiting Rule as of September 30, 2024.

Nasdaq Supp. Ltr. Br. at 1 ( July 24, 2024). NCPPR’s challenge is accord-

ingly moot.

* * *

For the foregoing reasons, we GRANT the consolidated petitions for

review and VACATE SEC’s order approving Nasdaq’s Board Diversity

Proposal. And we DENY AS MOOT NCPPR’s petition for review of the

Recruiting Rule.

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Stephen A. Higginson, Circuit Judge, joined by Stewart, Dennis,

Southwick, Haynes, Graves, Douglas, and Ramirez, Circuit

Judges, dissenting:

As intervenor Nasdaq observed, “[i]ssues of diversity in the board-

room raise important questions on which people of good faith can disagree.”

Nasdaq Reh’g Response Br. 21. Here, a wide range of investors and listed

companies told Nasdaq that information about board composition wasn’t

standardized or efficient to procure, but that investors were seeking it, none-

theless. Nasdaq responded with a rule (the “Disclosure Rule”) that stand-

ardizes access to this information, which the market said was relevant, and

that requires companies without at least two diverse board members to state

why—an explanation that would never be assessed for substance. 1

The SEC, in its limited reviewing role, concluded after independent

study that Nasdaq’s Rule was consistent with the purposes of the Exchange

Act and therefore approved it. The SEC relied on its finding that substantial

evidence supported the conclusion that investors sought this information in

the face of inaccuracies, inefficiencies, and asymmetries (while carefully not-

ing that Nasdaq had not offered substantial evidence to support a conclusion

from the SEC that boardroom diversity improved corporate performance).

The SEC expressly concluded that this was a disclosure-based rule, not a

_____________________

1

The Disclosure Rule requires each Nasdaq-listed company to disclose infor-

mation on the voluntarily provided gender and racial characteristics and LGBTQ+ identity

of the company’s board of directors. Subject to certain exceptions, each Nasdaq-listed com-

pany is also required to have, or explain why it does not have, at least one board member

who is a woman and one board member who is an underrepresented racial minority or

LGBTQ+. Nasdaq does not evaluate the substance of a company’s explanation of why it

does not have two diverse board members; Nasdaq merely confirms that the explanation

has been submitted. For example, a company might state that it “doesn’t consider the in-

formation useful to investors” or “prioritizes diversity of thought or geography.” With

that, the company has complied with Nasdaq’s Disclosure Rule.

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hiring quota. Indeed, Nasdaq modeled its Disclosure Rule on the form that

EEOC already requires companies to use to report employee demographic

information. The SEC approved the Rule because the reviewing scheme that

Congress created doesn’t permit the SEC to displace Nasdaq’s private busi-

ness judgment—informed by investor behavior—with agency policy priori-

ties.

I

Nasdaq is a private, limited liability company. See Second Amended

Limited Liability Company Agreement of The Nasdaq Stock Market LLC

(July 9, 2009), https://tinyurl.com/2s3vt8nw. It enters into voluntary con-

tractual agreements with companies, under which Nasdaq agrees to facilitate

the listing and trading of securities and the listed companies agree to abide by

Nasdaq’s rules. See Nasdaq, Initial Listing Guide (Jan. 2022), https://ti-

nyurl.com/bdh8794f; Nasdaq, Listing Agreement, https://ti-

nyurl.com/2whjhzt3. Nasdaq competes with other exchanges for these

listings, regularly refining its rules so that companies will choose to list with

it rather than with competitors like the New York Stock Exchange.

Under the Exchange Act, the SEC “shall” approve a rule proposed

by an exchange “if it finds” that the rule is “consistent with the require-

ments” of the Act. 15 U.S.C. § 78s(b)(2)(C)(i). So, an exchange’s proposed

rule must be approved if it is consistent with the requirements that “[t]he

rules of the exchange are designed to prevent fraudulent and manipulative

acts and practices, to promote just and equitable principles of trade, to foster

cooperation and coordination with persons engaged in regulating, clearing,

settling, processing information with respect to, and facilitating transactions

in securities, to remove impediments to and perfect the mechanism of a free

and open market and a national market system, and, in general, to protect

investors and the public interest” and “are not designed to permit unfair

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discrimination between customers, issuers, brokers, or dealers, or to regulate

by virtue of any authority conferred by this chapter matters not related to the

purposes of this chapter or the administration of the exchange.” Id.

§ 78f(b)(5). 2

This limited role that Congress carved out for the SEC in overseeing

private ordering through rules proposed by self-regulatory organizations

(SROs) does not permit the SEC to displace business judgment with its own

policy priorities. As corporate law scholars and practitioners forcefully ex-

plain, “[u]nlike nations where innovation occurs primarily by national man-

date, our corporate governance system encourages private experimentation

by stock exchanges and companies, so that new approaches can be tested,

refined, and either become the basis for broader market practices or aban-

doned as unwise.” Nonpartisan Group of Academics & Practitioners in Cor-

porate Governance in Support of Intervenor-Nasdaq Br. 31. In this system,

the even more limited role of courts is to ask whether the SEC’s decision not

to intervene in this private ordering—and thus to approve the SRO-proposed

rule—was arbitrary, capricious, or an abuse of discretion. See Domestic Sec.,

Inc. v. SEC, 333 F.3d 239, 248 (D.C. Cir. 2003). “The petitioner[s] ha[ve]

the burden of proving that the agency’s determination was arbitrary and ca-

pricious.” Medina Cnty. Env’t Action Ass’n v. Surface Transp. Bd., 602 F.3d

687, 699 (5th Cir. 2010) (citation omitted). The SEC’s factual determina-

tions are reviewed for substantial evidence. 15 U.S.C. § 78y(a)(4).

The majority, however, overlooks this limited SEC role, fixed by Con-

gress, and instead creates a new, mandatory and enlarged role for SEC inter-

vention, ordering the SEC to displace largely private ordering with alternate

_____________________

2

The SEC must also find that the proposed rule would “not impose any burden on

competition not necessary or appropriate,” 15 U.S.C. § 78f(b)(8).

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policy priorities. The majority interprets the Exchange Act to require the

SEC “to clip SRO authority” whenever an SRO does not sufficiently show

“some connection to the ails Congress designed the Act to eradicate.” Ante

at 11, 21. These are described variously by the majority as “prevent[ing] mar-

ket abuses,” “eliminat[ing] fraudulent and speculative behavior,” and “pro-

mot[ing] ethical behavior,” as well as other “ancillary purposes.” 3 “Ante at

16-17, 22-23.” But, according to the majority, see ante at 11, these purposes

do not include the elimination of information asymmetries regarding corpo-

rate board leadership—the very leaders entrusted with investors’ money and

whose identity investors across the full spectrum of our economy seek. This

conclusion does not find support in well-established caselaw. See Kokesh v.

SEC, 581 U.S. 455, 458 (2017) (Exchange Act “serves the fundamental pur-

pose of substituting a philosophy of full disclosure for the philosophy of ca-

veat emptor” (cleaned up)); Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477-

78 (1977) (“fundamental purpose of the 1934 Act [is] to substitute a philoso-

phy of full disclosure for the philosophy of caveat emptor” (internal quota-

tion marks and citation omitted)); Intercontinental Indus., Inc. v. Am. Stock

Exch., 452 F.2d 935, 940 (5th Cir. 1971) (“The requirement of full disclosure

of all corporate information which might influence investment decisions is

the very heart of the federal securities regulations.”).

Crucially, this case concerns a rule proposed by Nasdaq, a private com-

pany that, in a competitive market with other exchanges, contracts with other

companies to facilitate the listing and trading of securities. Nasdaq updates

its rules regularly, competing with other exchanges for listings. The Ex-

change Act requires that the SEC approve these exchange-proposed rules but

encourages self-regulation by sharply limiting SEC review such that the SEC

_____________________

3

The majority does not explain what these “ancillary purposes” might be, other

than the example of “protection of corporate suffrage.” Ante at 21.

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must approve rules if certain requirements are met. Consistent with Con-

gress’s scheme, the SEC’s authority to impose its own judgment on exchanges

and the companies that list on them is, unlike that of the exchanges them-

selves, extremely limited. See Nonpartisan Group of Academics & Practition-

ers in Corporate Governance Br. 24-25 (noting that “petitioners ignore

settled requirements of statutory interpretation” to “gut this key distinc-

tion,” “reversing 30 years of settled understanding by corporations, ex-

changes, regulators, and courts”). 4 The majority mis-equates the SEC’s

federal government disclosure-mandating authority with private sector SRO

self-regulating authority. Ante at 15-17.

II

It was not arbitrary or capricious for the SEC to allow, as consistent

with the purposes of the Act, this private ordering disclosure rule about cor-

porate leadership composition. The SEC concluded that the Disclosure Rule

is “designed to . . . remove impediments to and perfect the mechanism of a

free and open market and a national market system,” among other objectives,

because the Disclosure Rule would “contribute to the maintenance of fair

_____________________

4

The majority perceives a major questions doctrine friction. “Ante at 31-36.” But

for good reason, petitioners themselves abandoned that argument at the en banc stage. As

explained at length in the panel opinion, this is not a major questions case. All. for Fair Bd.

Recruitment v. Sec. & Exch. Comm’n, 85 F.4th 226, 256-58 (5th Cir. 2023), reh’g en banc

granted, opinion vacated, No. 21-60626, 2024 WL 670403 (5th Cir. Feb. 19, 2024); see also,

e.g., Mayfield v. U.S. Dep’t of Lab., 117 F.4th 611, 616-17 (5th Cir. 2024) (holding that a

Department of Labor rule that increased by 50% the minimum salary required to qualify for

a FLSA exemption did not implicate the major questions doctrine and further observing

that, “even once triggered, whether the doctrine is one interpretative tool among many or

a clear-statement rule is the subject of ongoing debate”). Moreover, throughout its opinion,

the majority seems to suggest that the SEC should have exercised more, not less, of its stat-

utorily limited authority to disapprove Nasdaq’s Disclosure Rule.

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and orderly markets.” 86 Fed. Reg. at 44,425. AFBR argues that this deter-

mination is not supported by substantial evidence.

The statutory objective to “remove impediments to and perfect the

mechanism of a free and open market and a national market system,” 15

U.S.C. § 78f(b)(5), concerns the “maintenance of fair and orderly markets.”

15 U.S.C. § 78k-1(a)(1)(C); see NASDAQ OMX Grp., Inc. v. UBS Secs., LLC,

770 F.3d 1010, 1021 (2d Cir. 2014) (explaining that the Exchange Act “makes

plain that maintenance of fair and orderly markets is the animating goal of

federal securities law” and that the “remov[ing] impediments” is a means to

“this end” (internal quotation marks and citation omitted)). 5 As AFBR

acknowledged at the panel stage, fair and orderly markets assure economi-

cally efficient securities transactions and fair competition among market par-

ticipants. See 15 U.S.C. § 78k-1(a)(1)(C)(i)-(ii).

The SEC’s finding that the Disclosure Rule would “contribute to the

maintenance of fair and orderly markets” and is therefore “designed to . . .

remove impediments to and perfect the mechanism of a free and open market

and a national market system,” 86 Fed. Reg. at 44,425, is supported by sub-

stantial evidence. The SEC found that “[b]oard-level diversity statistics are

currently not widely available on a consistent and comparable basis, even

though [Nasdaq] and many commenters argue that this type of information

is important to investors.” Id. In making this finding, the SEC relied on nu-

merous comments from market participants. See, e.g., id. at 44,429 nn.72 &

79.

Importantly, it is unrebutted in this administrative record, or in this

litigation, that a wide range of investors seek corporate board composition

_____________________

5

The “fair and orderly market” that Nasdaq operates is the exchange itself. See

NASDAQ OMX, 770 F.3d at 1021.

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No. 21-60626

information. Indeed, petitioners never contend that the SEC lacked substan-

tial evidence for its conclusion that investors wanted the information, nor do

they challenge the SEC’s conclusion that the lack of information that inves-

tors found relevant to their investing decisions created both inefficiencies (as

investors sought it out) and asymmetries (as only large, sophisticated inves-

tors could secure it). JA 2, 7-8. Nasdaq pointed to evidence, credited by the

SEC, from listed companies like Microsoft, business organizations like the

U.S. Chamber of Commerce, small investors, and large investment manage-

ment firms like Goldman Sachs and Vanguard, that board composition infor-

mation was highly sought after but inefficient to acquire, especially accurately

and usefully. JA 6-7 & nn.73-77, 91-92. As the SEC noted, this evidence in-

cluded comments from “[s]ome of the largest and most sophisticated asset

managers, who operate in competitive markets and are subject to a fiduciary

duty to their clients,” and have shared a desire for this information. SEC

Reh’g Response Br. 16 (citing JA 7 & nn.91-92). Nasdaq, therefore, cannot

be characterized as responding only to the whims of a few activist institu-

tional investors.

Petitioners didn’t establish that the SEC was without substantial evi-

dence for its conclusion that Nasdaq’s proposed rule “would provide widely

available, consistent, and comparable information that would contribute to

investors’ investment and voting decisions.” JA 7. Nasdaq pointed to evi-

dence from studies and commenters that “current board diversity disclo-

sures are insufficient and noncomparable,” JA 638, leaving investors

“struggl[ing] to get uniform and transparent data,” JA 652. 6 This created

_____________________

6

Because the Disclosure Rule standardizes disclosures of board diversity infor-

mation, including the format and timing of disclosures, the SEC reasonably found that the

Disclosure Rule “would make it more efficient and less costly for investors to collect, use,

and compare information on board diversity” and would “mitigate any concerns regarding

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No. 21-60626

“information asymmetries between larger stakeholders, who are able to col-

lect [diversity] data directly from companies, and smaller investors, who

must rely on incomplete public disclosures,” JA 210, and are prevented from

getting information that could inform investment and proxy-voting, JA 5-8,

nn.73, 78, 80; JA 44; JA 205; JA 646-47, regardless of a particular investor’s

views, JA 8.

It is especially clear that the SEC’s approval of Nasdaq’s Disclosure

Rule was not arbitrary or capricious when that decision is viewed in the con-

text of both the information that companies must already submit to the gov-

ernment and the SRO-proposed rules that the SEC has previously approved

as consistent with the Act. Companies with over 100 employees must report

demographic information about their workforce composition to EEOC, via

the EEO-1 form. JA 703 n.159 (citing U.S. Equal Employment Opportunity

Commission, EEO–1: Who Must File, https://www.eeoc.gov/employ-

ers/eeo-1-survey/eeo-1-who-must-file (now available at https://

www.eeocdata.org/pdfs/WHO_MUST_FILE.pdf (last accessed Dec. 6,

2024))). Nasdaq took the categories of information that companies are al-

ready reporting and, after adding LGBTQ+ identity, asked that the same in-

formation be collected from directors, who aren’t considered employees. JA

703. Listing companies are already asked, by the SEC, whether the

_____________________

unequal access to information that may currently exist between certain (likely larger and

more resourceful) investors who could obtain the information and other (likely smaller)

investors who may not be able to do so.” 86 Fed. Reg. at 44,430. As the SEC explained,

under the Disclosure Rule, companies must “make board-level diversity disclosures in a

substantially similar format”; “following the first year of disclosure, disclose the current

year and immediately prior year” information; provide the information “in a searchable

format”; and “provide the required disclosures in a proxy statement or information state-

ment . . . in advance of the company’s annual shareholders meeting or provide the required

disclosures on the company’s website concurrently with the filing of the company’s proxy

statement or information statement.” 86 Fed. Reg. at 44,430 n.90.

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“nominating committee [for the board] (or the board) considers diversity in

identifying nominees for director,” and, if so, to describe whether there is a

policy and how effective that policy is. 17 CFR 229.407(c)(2)(vi). And other

SROs, with which Nasdaq must compete globally for listings, have been al-

lowed to enact similar rules without SEC intervention to override them as

inconsistent with the Act’s purposes. JA 720 (citing Long-Term Stock Ex-

change Rule Book, Rule 14.425, under which listed companies must adopt

and publish policies that explain their “approach to diversity and inclu-

sion”). 7

Instead of calling any of these conclusions into question to argue that

the SEC lacked substantial evidence that the Disclosure Rule would remove

market information impediments, petitioners instead argue that the Ex-

change Act requires the SEC to question whether investors should have wanted

that information. AFBR Opening Br. 13-15; NCPPR Opening Br. 4-8. The

requirement that the SEC interrogate investors’ motivations is nowhere in

the Exchange Act and is contrary to the SEC’s limited role in reviewing pri-

vate exchange-proposed rules for consistency with the Act, rather than for

adherence to the SEC’s preferred business judgment. “Judicial intrusion into

this private space would require a ruling with no limiting principle and would

trample on space traditionally left to private ordering.” Nonpartisan Group

of Academics & Practitioners in Corporate Governance Br. 31. Setting aside

the SEC’s approval of Nasdaq’s Rule is “effectively asking this [c]ourt to

rule as a matter of law that managers with more than $18 trillion under man-

agement are behaving irrationally.” Prof. Joseph Grundfest Br. 19.

_____________________

7

Indeed, had the SEC disapproved of the Disclosure Rule, Nasdaq would have had

a compelling case that the SEC had acted arbitrarily and capriciously, given both its limited

supervisory role and also the precept of administrative law that like cases be treated alike.

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This administrative record shows the SEC’s limited reviewing role in

action. The SEC carefully observed that studies on the impact of diversity in

boardrooms were mixed—in part because most of the studies it was pre-

sented with relied on a quota system, which it found was not comparable to

the proposed disclosure system—such that the SEC could not rely on this

explanation from Nasdaq as an independent justification for approving the

Rule. But the SEC concluded that Nasdaq’s Rule “would provide widely

available, consistent, and comparable information that would contribute to

investors’ investment and voting decisions,” JA 7, even though the SEC

couldn’t say independently whether investors were making the right call in

doing so.

* * *

Congress created a unique, limited role for the SEC that didn’t permit

it to reach a different conclusion here, regardless of whatever good faith dis-

agreement might exist in policy debates about disclosure of corporate board

leadership composition. If Nasdaq misapprehended investor appetite for this

information and the willingness of the listed companies it contracts with to

provide it, the marketplace of competing exchanges—and not the policy pref-

erences of this court or a federal agency—will resolve that. I respectfully dis-

sent.

51