Case: 21-60626 Document: 532-1 Page: 1 Date Filed: 12/11/2024
United States Court of Appeals
for the Fifth Circuit
____________
No. 21-60626
____________
Alliance for Fair Board Recruitment; National Center for Public Policy Research,
versus
Securities and Exchange Commission,
______________________________
Petition for Review of an Order of
the Securities & Exchange Commission
Agency No. 34-92590
______________________________
Petitioners,
Respondent.
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.
United States Court of Appeals Fifth Circuit
FILED
December 11, 2024
Lyle W. Cayce Clerk
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
A
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.
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.
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 se-
curities, 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
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.
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
“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 di-
rector 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
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
1
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.
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,
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.
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.”
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
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
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).
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
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.
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
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).
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
deceptive 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:
• 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 pre-
vent 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 disclosure would
prevent companies from hiding financial problems from investors. 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 disclosure would
facilitate “the evaluation of prices of securities” and therefore promote the
efficient “direction of the flow of savings into industry.” Tracy & MacChes-
ney, 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
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 corpo-
rate 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 (not-
ing 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.
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
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.
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 quo-
tations 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.
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 in-
vestors 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 regula-
tory 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 rules,
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
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
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 securities laws, 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 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:
(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 17–22.
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 sell-
ers.” Id. at 1706. Before 1975, competition in the market for securities
transactions was restricted because the NYSE’s membership agreement con-
tained several anticompetitive provisions. The market for securities transac-
tions 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.
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
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
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
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
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
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
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
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-
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:
[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.
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 28–29 (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.
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
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.
*
III
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).
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
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.
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
(End of Document)
