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SHEPARD: Nasdaq’s Discriminatory Board-Quota Rule Should Be Defeated In Court

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Scott Shepard Scott Shepard is a fellow at the National Center for Public Policy Research and Director of its Free Enterprise Project.
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Securities and Exchange Commission (SEC) Chairman Gary Gensler’s attempt to politicize the whole American economy to advance his woke agenda faced a critical test last week.

The SEC’s partnership with the Nasdaq stock exchange to mandate discriminatory quotas in corporate board rooms was challenged last Monday before the Fifth Circuit Court of Appeals in New Orleans. Petitioners the National Center for Public Policy Research (note: where I direct its Free Enterprise Project) and the Alliance for Fair Board Recruitment were represented by Margaret Little of the New Civil Liberties Alliance and Jonathan Berry of Boyden Grey & Associates, respectively.

The rule, issued by Nasdaq and approved by the SEC, presents Nasdaq-listed companies with two pernicious choices — they may either illegally take race, sex and sexual orientation into account when selecting board members until they reach Nasdaq’s minimum quota, or they can give Nasdaq a written explanation of why they haven’t done so. The latter would paint a target on the companies’ backs, inviting woke nutjobs to attack them with some of their patented “mostly peaceful” protests.

In other words, says Nasdaq: violate the law, make yourself a target, or lose your Nasdaq listing.

For rules established by the federally licensed exchanges to go into effect, the SEC must bless them. But the SEC is a government actor, and American government actors may not take actions that would encourage discrimination on the basis of race, sex or, more recently, sexual orientation. And under Supreme Court precedent, state actors may no more force citizens to speak as the rule would than they may silence government critics, especially given that the speech the SEC demands would cause the speakers harm.

The SEC violated at least two constitutional amendments (the First and the Fifth) with this rule, and also went well beyond its remit under the Securities Exchange Act (SEA). Congress charged it with regulating markets to ensure that they are “free and open,” not discriminatory and dangerous.

Nasdaq likewise is empowered to make sure that its market functions in a regular and honest fashion, not to demand that companies illegally discriminate or make targets of themselves. In fact, the SEA expressly prohibits the SEC from approving rules that are irrelevant to its “free and open markets” directive.

The SEC and Nasdaq argued in New Orleans that Nasdaq is, despite the SEA’s clear text, a private actor, and that while the SEC is a public actor, its actions were essentially ministerial — that it doesn’t have the power to reject stock-exchange rules properly put before it, whatever their content. This is just wrong.

The SEC has plenary power over Nasdaq’s activities. It is the SEC’s action that facilitated this rule that demands race, sex and orientation discrimination, and it did so without making the factual findings that such discrimination was vital to any interest at all. So the SEC should be found to have acted out of turn in a wide variety of ways, and the rule scrapped.

As it happens, the petitioners in this case drew a three-judge panel made up entirely of Democratic appointees, so it’s possible that its decision will attempt to somehow uphold the rule or reject it on narrow grounds with limited precedential authority. The petitioners will have the opportunity to seek review by all active Fifth Circuit judges at once, though, if the former happens.

All Americans not only have civil rights, but they have the same civil rights, making all discrimination on the basis of race, sex and orientation illegal (not to mention appalling) regardless of who is targeted. While the equity-mongers have forgotten that, the courts are likely to remember.

Scott Shepard is a fellow at the National Center for Public Policy Research and Director of its Free Enterprise Project.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.

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