Senate Republicans urge SEC to block Nasdaq diversity rule

Republicans on the Senate Banking Committee are urging the U.S. Securities and Exchange Commission (SEC) to block Nasdaq’s proposed diversity requirements for listed companies.

The lawmakers led by Sen. Pat Toomey (R-Pa.), ranking member of the committee, sent a letter to acting SEC Chair Allison Herren Lee on Friday urging her to not approve the rule.

“It is not the role of NASDAQ, as a self-regulatory organization, to act as an arbitrator of social policy or force a prescriptive one-size-fits-all solution upon markets and investors,” the letter reads.

The senators argue that the rules interfere with a board’s duty to its shareholders, violates principles that govern securities disclosures, imposes costs on public corporations and discourages private corporations from going public.

Nasdaq laid out its proposal in December, which would require listed companies to have one director who identifies as female and one who identifies as an underrepresented minority or LGBT. Foreign companies, or companies that are smaller, would have more flexibility, and would be able to meet these requirements by having two female directors.

Companies that don’t meet the requirements would not be subjected to delisting if they provide a public explanation for why they couldn’t meet the goals.

However, the senators say in their letter that board members should be chosen on “merit and ability to serve in corporate performance,” adding that the proposal “compels the prioritization of a narrowly defined concept of diversity in board membership over merit.”

“This weakens shareholder rights by unsettling the proper expectation that a company’s board will be serving the best interests of the corporation and its shareholders by complying with all applicable laws and maximizing returns,” they wrote.

“While we think America’s corporations benefit from boards that avoid groupthink and offer a diversity of perspectives and commend firms that look to increase diversity among their boards, we do not think NASDAQ should be using its quasi-regulatory authority to impose social policies,” the senators added.

In a statement to The Hill, Nasdaq spokesperson Joseph Christinat said “our proposal is a market-led solution that should simplify and standardize disclosure requirements, to avoid the type of regulatory overreach the committee fears.”

The proposal came amid an expansion in “ESG investing,” which considers a company’s environmental, social and governance factors.