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`Case: 21-60626 Document: 504 Page: 1 Date Filed: 05/13/2024
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`No. 21-60626
`
`IN THE UNITED STATES COURT OF APPEALS
`FOR THE FIFTH CIRCUIT
`
`ALLIANCE FOR FAIR BOARD RECRUITMENT,
`NATIONAL CENTER FOR PUBLIC POLICY RESEARCH,
`
`Petitioners,
`
`v.
`
`SECURITIES & EXCHANGE COMMISSION,
`
`
`Respondent.
`
`
`On Petition for Review of an Order of the
`Securities & Exchange Commission, No. 34-92590
`
`EN BANC REPLY BRIEF FOR PETITIONER
`NATIONAL CENTER FOR PUBLIC POLICY RESEARCH
`
`
`Margaret A. Little
`Senior Litigation Counsel
`Sheng Li
`Litigation Counsel
`NEW CIVIL LIBERTIES ALLIANCE
`1225 19th St. NW, Suite 450
`Washington, DC 20036
`Telephone: 202-869-5210
`
`Attorneys for National Center
`for Public Policy Research
`
`
`
`
`
`
`
`
`
`
`
`

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`CERTIFICATE OF INTERESTED PERSONS
`
`The undersigned counsel of record certifies that the following listed persons
`
`and entities as described in the fourth sentence of Fifth Circuit Rule 28.2.1 have an
`
`interest in the outcome of this case. These representations are made in order that
`
`the judges of this Court may evaluate possible disqualification or recusal.
`
`1. Petitioner National Center for Public Policy Research is a non-profit
`
`corporation and has no parent corporations or subsidiaries.
`
`2. Margaret A. Little and Sheng Li of The New Civil Liberties Alliance—
`
`Counsel for Petitioner National Center for Public Policy Research.
`
`3. Petitioner Alliance for Fair Board Recruitment is a non-profit membership
`
`corporation and has no parent corporations or subsidiaries.
`
`4. Jonathan Berry, R. Trent McCotter, Michael Buschbacher, Jared M. Kelson,
`
`and James R. Conde of Boyden Gray PLLC—Counsel for Petitioner
`
`Alliance for Fair Board Recruitment.
`
`5. The Securities and Exchange Commission is a federal agency.
`
`6. Daniel E. Matro, Vanessa Ann Countryman, Tracy A. Hardin, and John
`
`Robert Rady of the Securities and Exchange Commission—Counsel for
`
`Respondent Securities and Exchange Commission.
`
`7. Allyson Newton Ho, Seth D. Berlin, Bradley G. Hubbard, Stephen J.
`
`Kastenberg, Paul Lantieri, III, Paulette Miniter, Joanne Pedone, Amir C.
`
`
`
`i
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`

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`Tayrani, John Yetter, John Zecca, and Amalia E. Reiss of Gibson, Dunn &
`
`Crutcher LLP; John Zecca, Jeffrey S. Davis, John Yetter, and Joanne Pedone
`
`of The Nasdaq Stock Market L.L.C.; and Burt M. Rublin, Stephen J.
`
`Kastenberg, Paul Lantieri III, Peter F. Andrews, and Seth D. Berlin of
`
`Ballard Spahr LLP—Counsel for Intervenor Nasdaq Stock Market, L.L.C.
`
`8. The States of Arizona, Alabama, Alaska, Arkansas, Florida, Georgia, Idaho,
`
`Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana,
`
`Nebraska, North Dakota, Ohio, Oklahoma, South Carolina, Tennessee,
`
`Texas, Utah, Virginia, and West Virginia.
`
`9. Drew C. Ensign, Joseph A. Kanefield, Brunn (“Beau”) W. Roysden III,
`
`Wilson C. Freeman, James Rogers, Sean D. Reyes, Stanford E. Purser, and
`
`Christopher A. Bates—Counsel for Amici States
`
`10. The Financial Industry Regulatory Authority, Inc. (“FINRA”)
`
`11. Aaron M. Streett, Bridget Moore, and Elisabeth C. Butler of Baker Botts
`
`L.L.P.—Counsel for Amicus FINRA.
`
`12. Nonpartisan Group of Academics and Practitioners in the Field of Corporate
`
`Governance.
`
`13. Mark Wolinsky, Elaine P. Golin, Carrie M. Reilly, Kevin S. Schwartz, Jeohn
`
`Salone Favors, Getzel Berger of Wachtell, Lipton, Rosen & Katz—Counsel
`
`
`
`ii
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`

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`Case: 21-60626 Document: 504 Page: 4 Date Filed: 05/13/2024
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`for Amici Nonpartisan Group of Academics and Practitioners in the Field of
`
`Corporate Governance.
`
`14. Ad Hoc Coalition of Nasdaq-Listed Companies.
`
`15. Pratik A. Shah and Juliana C. DeVries of Akin Gump Strauss Hauer & Feld
`
`L.L.P.—Counsel for Amici Ad Hoc Coalition of Nasdaq-Listed Companies.
`
`16. Investors and Investment Advisers.
`
`17. Steven M. Shepard, Arun Subramanian, and Neal S. Manne of Susman
`
`Godfrey L.L.P.—Counsel for Amici Investors and Investment Advisers.
`
`18. American Civil Liberties Union.
`
`19. Brian Hauss and Sandra S. Park—Counsel for Amicus American Civil
`
`Liberties Union.
`
`20. Academic Experts in the Fields of Business, Management, and Economics.
`
`21. Jeffrey Dubner and Aman T. George of Democracy Forward Foundation;
`
`Peter C. Renn and Karen L. Loewy of Lambda Legal Defense and Education
`
`Fund, Inc.—Counsel for Amici Academic Experts in the Fields of Business,
`
`Management, and Economics.
`
`22. Professor Sean J. Griffith.
`
`23. Heather Gebelin Hacker of Hacker Stephens L.L.P.—Counsel for Amicus
`
`Professor Sean J. Griffith.
`
`24. The Buckeye Institute.
`
`
`
`iii
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`25. Jay R. Carson, David C. Tryon, and Alex M. Certo of the Buckeye Institute;
`
`John J. Park Jr.—Counsel for Amicus the Buckeye Institute.
`
`26. Advancing Academic Freedom et al.
`
`27. J. Marc Wheat and Timothy Harper of Advancing American Freedom, Inc.;
`
`Ilya Shapiro and Tim Rosenberger of Manhattan Institute—Counsel for
`
`Amici Advancing American Freedom et al.
`
`28. Cory R. Liu.
`
`29. Daniel I. Morenoff and Joseph A. Bingham of American Civil Rights
`
`Project; Devon Westhill of Center for Equal Opportunity—Counsel for
`
`Amicus Cory R. Liu.
`
`30. Interfaith Center on Corporate Responsibility
`
`31. Beth-ann Roth, Richard A. Kirby of R/K Invest Law PBC and ESG Legal
`
`Services, Inc.—Counsel for Amicus Interfaith Center on Corporate
`
`Responsibility.
`
`32. Better Markets, Inc.
`
`33. John Paul Schnapper-Casteras of Schnapper-Casteras P.L.L.C.—Counsel for
`
`Amicus Better Markets, Inc.
`
`34. Joseph A. Grundfest, Esq.
`
`35. Steven M. Shepard of Susman Godfrey L.L.P.—Counsel for Amicus Joseph
`
`A. Grundfest, Esq.
`
`
`
`iv
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`36. NAACP Legal Defense & Educational Fund, Inc.
`
`37. Jin Hee Lee, Michaele N. Turnage Young, Jennifer A. Holmes, Amber M.
`
`Koonce, Molly M. Cain, Janai S. Nelson, Samuel Spital, and Elizabeth G.
`
`Caldwell—Counsel for Amicus NAACP Legal Defense & Educational Fund,
`
`Inc.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`/s/ Margaret A. Little
`Counsel of Record for Petitioner
`
`
`
`v
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`

`

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`Case: 21-60626 Document: 504 Page: 7 Date Filed: 05/13/2024
`
`TABLE OF CONTENTS
`
`CERTIFICATE OF INTERESTED PERSONS ........................................................ i
`TABLE OF CONTENTS ......................................................................................... vi
`TABLE OF AUTHORITIES .................................................................................. vii
`ARGUMENT ON REPLY ........................................................................................ 1
`I. SEC AND NASDAQ FAIL TO DEMONSTRATE THAT SEC HAS AUTHORITY TO
`APPROVE THE DIVERSITY RULES ....................................................................... 1
`A. THE DIVERSITY RULES ARE DESIGNED TO REGULATE MATTERS UNRELATED
`TO THE EXCHANGE ACT’S PURPOSES THROUGH IMPERMISSIBLE QUOTAS ......... 1
`B. SEC’S BOUNDLESS INTERPRETATION OF § 6(b)(5) MUST BE REJECTED ............ 4
`II. THE DIVERSITY RULES ARE STATE ACTION UNDER CIRCUIT PRECEDENT ........ 9
`A. SEC’S INTIMATE INVOLVEMENT WITH NASDAQ’S ENACTMENT OF THE
`DIVERSITY RULES ESTABLISHES STATE ACTION ............................................... 9
`B. STATE ACTION IS NEEDED TO AVOID A VIOLATION OF THE PRIVATE
`NONDELEGATION DOCTRINE ...........................................................................14
`III. THE DIVERSITY RULES FLUNK THE ‘PURELY FACTUAL AND
`UNCONTROVERSIAL’ TEST ...............................................................................15
`CONCLUSION ........................................................................................................18
`CERTIFICATE OF SERVICE ................................................................................20
`CERTIFICATE OF COMPLIANCE .......................................................................21
`CERTIFICATE OF ELECTRONIC COMPLIANCE .............................................21
`
`
`
`
`
`
`
`vi
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`

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`
`TABLE OF AUTHORITIES
`
`Page(s)
`
`CASES
`Austin Mun. Sec., Inc. v. NASD,
`757 F.2d 676 (5th Cir. 1985) ................................................................................12
`Barbara v. N.Y. Stock Exch.,
`99 F.3d 49 (2d Cir. 1996) .....................................................................................12
`Basic Inc. v. Levinson,
`485 U.S. 224 (1988) ................................................................................................ 7
`Blount v. SEC,
`61 F.3d 938 (D.C. Cir. 1995) ................................................................................14
`Bostock v. Clayton Cnty.,
`590 U.S. 644 (2020) ..............................................................................................18
`Brown v. Hill,
`No. 21-7116, 2023 WL 3563076 (D.C. Cir. May 19, 2023) .................................. 9
`Burton v. Wilmington Parking Auths.,
`365 U.S 715 (1961) ................................................................................................. 9
`Chamber of Com. v. SEC,
`85 F.4th 760 (5th Cir. 2023) ................................................................................... 1
`Cremin v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
`957 F. Supp. 1460 (N.D. Ill. 1997) .......................................................................13
`D.L. Cromwell Invs., Inc. v. NASD Regul., Inc.,
`279 F.3d 155 (2d Cir. 2002) .................................................................................13
`Dep’t of Com. v. New York,
`139 S. Ct. 2551 (2019) ............................................................................................ 3
`Desiderio v. NASD,
`191 F.3d 198 (2d Cir. 1999) .................................................................................13
`Duffield v. Robertson Stephens & Co.,
`144 F.3d 1182 (9th Cir. 1998) ..............................................................................13
`First Nat. Bank of Bos. v. Bellotti,
`435 U.S. 765 (1978) ................................................................................................ 7
`vii
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`Case: 21-60626 Document: 504 Page: 9 Date Filed: 05/13/2024
`
`Frazier v. Board. of Trustees,
`765 F.2d 1278 (5th Cir. 1985) ..............................................................................10
`Free Speech Coal., Inc. v. Paxton,
`95 F.4th 263 (5th Cir. 2024) .................................................................................16
`Graman v. NASD,
`1998 WL 294022 (D.D.C. 1998) ..........................................................................13
`Hamilton v. Dallas Cnty.,
`79 F.4th 494 (5th Cir. 2023) .................................................................................17
`Hardman v. Colvin,
`820 F.3d 142 (5th Cir. 2016) .................................................................................. 5
`Intercontinental Indus., Inc. v. Am. Stock Exch.,
`452 F.2d 935 (5th Cir. 1971) ............................................................... 9, 10, 11, 13
`J.I. Case Co. v. Borak,
`377 U.S. 426 (1964) ................................................................................................ 7
`Jackson v. Metro. Edison Co.,
`419 U.S. 345 (1974) ..............................................................................................10
`Jason v. Am. Arb. Ass’n, Inc.,
`62 F. App’x 557 (5th Cir. 2003) ...........................................................................12
`NAM v. SEC,
`800 F.3d 518 (D.C. Cir. 2015) ................................................................................ 3
`Perpetual Sec., Inc. v. Tang,
`290 F.3d 132 (2d Cir. 2002) .................................................................................13
`R J Reynolds Tobacco Co. v. FDA,
`96 F.4th 863 (5th Cir. 2024) .......................................................................... 16, 17
`SEC v. Blackburn,
`15 F.4th 676 (5th Cir. 2021) ................................................................................... 7
`SEC v. World Tree Fin., L.L.C.,
`43 F.4th 448 (5th Cir. 2022) ................................................................................... 7
`Sparta Surgical Corp. v. NASD,
`159 F.3d 1209 (9th Cir. 1998) ....................................................................... 11, 12
`Sunshine Anthracite Coal Co. v. Adkins,
` 310 U.S. 381 (1940) ...................................................................................... 14, 15
`
`
`
`viii
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`Zauderer v. Off. of Disciplinary Couns.,
`471 U.S. 626 (1985) ....................................................................................... 15, 18
`STATUTES
`15 U.S.C. § 78f(b) ........................................................................................... 7, 8, 13
`15 U.S.C. § 78m(a) .................................................................................................... 6
`15 U.S.C. § 78s(b) ....................................................................................................13
`15 U.S.C. § 78s(c) ................................................................................................8, 13
`15 U.S.C. § 78y(a)(4) ................................................................................................. 5
`OTHER AUTHORITIES
`Derrick Bryson Taylor,
`George Floyd Protests: A Timeline, New York Times, (Nov. 5, 2021) ...............16
`Emily Peck,
`‘The backlash is real’: Behind DEI’s rise and fall, Axios (April 2, 2024) ..........17
`
`
`
`ix
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`

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`ARGUMENT ON REPLY
`
`I.
`
`SEC AND NASDAQ FAIL TO DEMONSTRATE THAT SEC HAS AUTHORITY TO
`APPROVE THE DIVERSITY RULES
`SEC and Nasdaq falter out of the gate by misconstruing the standard of review
`
`that applies to NCPPR’s statutory claims. The substantial evidence review they seek
`
`applies to SEC’s finding of fact that the Diversity Rules facilitate disclosure of race,
`
`gender, and sexuality information to certain investors who want to make decisions
`
`based on those characteristics. SEC Br. 17–18; Nasdaq Br. 47. NCPPR’s § 6(b)(5)
`
`claim challenges SEC’s determination that: (1) satisfying investors’ demand for
`
`information to help them discriminate based on race, gender, and sexuality
`
`information serves the purposes of the Exchange Act, and (2) the Rules’ quota-or-
`
`explain requirements are not quotas that are prohibited by the Act. These conclusions
`
`of law are subject to de novo review, Chamber of Com. v. SEC, 85 F.4th 760, 767
`
`(5th Cir. 2023) (standard of review for legal and constitutional issues is de novo),
`
`which SEC fails.
`
`A. The Diversity Rules Are Designed to Regulate Matters Unrelated
`to the Exchange Act’s Purposes Through Impermissible Quotas
`Section 6(b)(5) explicitly requires SEC to reject any Nasdaq rule that is
`
`“designed” to regulate matters unrelated to the Exchange Act. Nasdaq admitted that
`
`the Diversity Rule is a “listing rule designed to encourage listed companies to
`
`increase diverse representation on their boards[.]” JA692 (emphasis added); see also
`
`

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`JA274 (admitting that the Diversity Rules are “designed to encourage listed
`
`companies to increase diverse representation on their boards”). SEC Commissioners
`
`approving the Rules agree they did so based on their desire for “enhanced diversity.”
`
`Commissioners Lee and Crenshaw, Statement on Nasdaq’s Diversity Proposals—A
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`Positive First Step for Investors (Aug. 6, 2021), JA24. Because increasing diverse
`
`representation is not related to the purposes of the Exchange Act, § 6(b)(5) requires
`
`SEC to reject Nasdaq’s rules designed to achieve that impermissible purpose.
`
`The most direct way that the Diversity Rules seek to increase diverse
`
`representation is by requiring each company to have at least one director who is
`
`either a racial or sexual minority, or who identifies as such, JA265, and at least one
`
`director who is female, or who identifies as such, JA264. SEC and Nasdaq contend
`
`that these requirements are not quotas because companies that fail to have the
`
`minimum number of “diverse” directors must explain why. SEC Br. at 25; Nasdaq
`
`Br. at 48. Whether compelled explanation for non-compliance transforms otherwise
`
`unlawful quotas into permissible disclosures is a question of law subject to de novo
`
`review. The answer is “no” because compelled explanation is simply the penalty for
`
`not meeting quotas.
`
`A quota enforced with a penalty—no matter how slight—is a quota. Here,
`
`being compelled to speak about a controversial subject such as racial and gender
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`representation is anything but slight. It is a significant, government-compelled public
`
`
`
`2
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`self-incrimination penalty with foreseeable consequences—including the potential
`
`to damage stock performance—the very opposite of investor protection. It is of no
`
`moment that “companies are not required to utter [specific] government-dictated
`
`language,” SEC Br. 53, because any explanation must at least convey that the
`
`company is not “diverse.” Cf. NAM v. SEC, 800 F.3d 518, 556 (D.C. Cir. 2015)
`
`(rejecting SEC’s “argu[ment] that issuers can explain the meaning of ‘conflict free’
`
`in their own terms”). Nasdaq need not “assess the substance of the company’s
`
`explanation,” Nasdaq Br. 48, because the substance is not the point. Rather, the point
`
`is to “[r]equir[e] a company to publicly condemn itself” for not meeting the Rules’
`
`diversity goals and thereby “stigmatize and shape behavior.” NAM, 800 F.3d at 530.
`
`The Court should “not … exhibit a naiveté from which ordinary citizens are
`
`free.” Dep’t of Com. v. New York, 139 S. Ct. 2551, 2575 (2019). Such naiveté is
`
`especially inappropriate here because Nasdaq openly admitted the Diversity Rules
`
`are “designed to encourage listed companies to increase diverse representation on
`
`their boards[.]” JA692. It does so by stigmatizing companies that fall short of the
`
`Rules’ quotas, thereby encouraging companies to hire based on race, gender, and
`
`sexuality. SEC’s approval of the Diversity Rules violates § 6(b)(5) because the
`
`quota-or-explain requirements regulate demographic matters unrelated to the
`
`Exchange Act’s purposes. The very fact that the identity of AFBR’s member(s) had
`
`to be filed under seal—recognized by all parties and the court as necessary to protect
`
`
`
`3
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`

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`them from harassment and reputational and/or financial harm—tells the story. See
`
`AFBR’s Motion for Protective Order, Doc 63-2; Decl. of Abigail Fisher, Doc. 63-4;
`
`Affidavit of Edward Blum, Doc. 63-3; and Order Granting Protective Order, Doc.
`
`70.
`
`B. SEC’s Boundless Interpretation of § 6(b)(5) Must Be Rejected
`Nasdaq states that “[t]he Commission reasonably concluded that the Board
`
`Diversity Rules are ‘designed’ to” serve § 6(b)(5)’s objectives. Nasdaq Br. at 54–
`
`55. But SEC’s interpretations of § 6(b)(5)’s objectives are conclusions of law subject
`
`to de novo review. Thus, the question is not whether the SEC’s conclusions are
`
`“reasonable,” but rather whether they are correct. SEC’s conclusions are incorrect
`
`because they rest on an indefensible interpretation of § 6(b)(5) to mean whatever a
`
`group of investors whom SEC endorses wants it to mean.
`
`SEC interprets § 6(b)(5) to permit mandatory disclosure of any “information
`
`that contributes to informed investment and proxy voting decisions.” SEC Br. 17–
`
`18. But that simply raises the question of what type of information contributes to
`
`“informed” decisions. On this point, SEC states that “conclusive empirical evidence”
`
`of a relationship between diversity and investment performance is not needed. SEC
`
`Br. 22. SEC’s evidentiary threshold is actually far lower. SEC did not ask whether
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`“conclusive evidence” supports such a relationship when approving the Rules.
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`Rather, it evaluated Nasdaq’s claim “that there is substantial evidence that board
`
`
`
`4
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`diversity promotes investor protection” and corporate governance. JA8; see also 15
`
`U.S.C. § 78y(a)(4) (requiring SEC approval of exchange rules to be “supported by
`
`substantial evidence.”). SEC rejected Nasdaq’s claim that diversity improves
`
`governance. See JA9 (“Studies of board diversity mandates, in any event, do not
`
`provide a reliable basis for evaluating the likely overall effects of the Board Diversity
`
`Proposal, which does not mandate any particular board composition.”).1
`
`SEC’s approval of the Rules despite rejecting this claim necessarily implies it
`
`believes “substantial evidence” of a relationship to investment performance is not
`
`needed for information to contribute to “informed” investment decisions, and thus
`
`to be the subject of mandatory disclosure under § 6(b)(5). See SEC Br. 19. SEC
`
`further states that mandatory disclosure is appropriate so long as a “broad array” of
`
`investors seek it. SEC Br. 22. And the administrative record is devoid of any
`
`
`1 SEC’s and Nasdaq’s supplemental briefs downplay SEC’s rejection of Nasdaq’s governance-
`improvement evidence. See SEC at 35; Nasdaq at 56. Nasdaq’s proposal repeatedly claimed that
`a positive relationship between diversity and corporate governance is supported by “substantial
`evidence,” see JA284, 382, 385, 416–17, 542, 550–51, 693, 715, 717, meaning “such relevant
`evidence as a reasonable mind might accept to support a conclusion,” Hardman v. Colvin, 820
`F.3d 142, 147 (5th Cir. 2016). If the evidence had been genuinely mixed, such that a reasonable
`mind might agree with Nasdaq, SEC would have accepted Nasdaq’s claims under the substantial
`evidence standard. See JA8. SEC’s refusal to accept Nasdaq’s claim under that standard implies
`that, despite calling the evidence “mixed,” id., it concluded that the evidence Nasdaq presented
`does not allow a reasonable mind to accept that diversity improves corporate governance.
`5
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`
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`principled reasoning as to how any of this is designed to meet the purposes of the
`
`’34 Act.
`
`Under this view, if SEC decides a broad array of investors wants disclosures
`
`of greenhouse gas emissions, then § 6(b)(5)’s statutory objectives must include such
`
`mandatory disclosures, even if linkage between emissions and financial performance
`
`is not supported by “substantial evidence.” Similarly, if a broad array wants
`
`information about companies that do business with Israel or any controversial
`
`company or country, then such government-sanctioned disclosures must serve
`
`§ 6(b)(5)’s supposedly subjective statutory purposes. SEC’s interpretation of
`
`§ 6(b)(5) would lack a fixed meaning—when investors’ whims change (or the
`
`Commission’s perception of those whims), so would the statute’s requirements.
`
`The Exchange Act does not authorize mandatory disclosures for the purpose
`
`of satisfying investor demand, which is an incoherent and boundless regulatory
`
`principle. Griffith Amicus Br. 16. Rather, such disclosures must be grounded in
`
`investor protection to be consistent with the Act. See 15 U.S.C. § 78m(a)
`
`(authorizing mandatory disclosures that are “necessary or appropriate for the proper
`
`protection of investors and to insure fair dealing in the security.”). Mandatory
`
`disclosures must protect investors, not as citizens who “do not share a common set
`
`of political or social views,” but rather as shareholders of for-profit companies who
`
`“are united by a desire to make money, for the value of their investment to increase.”
`
`
`
`6
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`First Nat. Bank of Bos. v. Bellotti, 435 U.S. 765, 805 (1978) (White, J., dissenting);
`
`See also Buckeye Amicus Br. 7–10. Because there is no “substantial evidence” that
`
`board diversity increases investment returns, the Diversity Rules’ disclosure
`
`requirements fall outside of the Act’s investor-protection purpose and thus may not
`
`be approved by SEC. See 15 U.S.C. § 78f(b)(6).
`
`The cases cited by SEC and Nasdaq only underscore petitioners’ point that
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`disclosures must relate to the purposes of the Exchange Act. Basic Inc. v. Levinson,
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`485 U.S. 224, 246 (1988) (material misrepresentations that affect stock price); J.I.
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`Case Co. v. Borak, 377 U.S. 426, 431 (1964) (deceptive or inadequate disclosure in
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`proxy solicitation that impedes “fair corporate suffrage.”). SEC’s contention that
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`information beyond just “balance-book” issues is important to investors cites cases
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`that address market integrity. SEC Br. 21, 29. SEC v. World Tree Fin., L.L.C., 43
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`F.4th 448, 465 (5th Cir. 2022) (conflicts of interest); SEC v. Blackburn, 15 F.4th
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`676, 681 (5th Cir. 2021) (criminal history of individuals influencing management).
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`Likewise, Nasdaq’s citation of its rules requiring a majority independent board,
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`disclosures of waivers of the exchange’s code of conduct, and disclosure of third-
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`party compensation of board members, Nasdaq Br. 11–12, clearly implicate integrity
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`of governance directly relevant to the Exchange Act’s core purposes of honest
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`markets and investor protection.
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`
`
`7
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`Case: 21-60626 Document: 482 Page: 23 Date Filed: 05/07/2024
`Case: 21-60626 Document: 504 Page: 18 Date Filed: 05/13/2024
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`Nothing like that is presented by these Rules. No reasonable argument can be
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`made that the Diversity Rules’ disclosures involve deception, misrepresentation,
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`conflicts of interest, or questions about management integrity that would bear upon
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`company performance. Each of these cases refutes SEC and Nasdaq’s argument that
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`there is no “materiality” requirement because all of the disclosures in the cases they
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`cite have direct relevance to the purposes of the Act—namely honest markets; just
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`and equitable principles of trade; fostering cooperation and facilitation of
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`transactions in securities; removing impediments to the mechanism of a free and
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`open market and a national market system; and to protect investors and the public
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`interest. 15 U.S.C. § 78f(b)(5). SEC Br. 28, Nasdaq Br. 60–63.
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`SEC thus confirms NCPPR’s characterization of the agency’s argument
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`positing that, under their view, SROs “could compel the disclosure of any
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`information so long as some investors want it.” NCPPR Br. 26. Such power
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`untethered to the Exchange Act’s purposes would not be limited to SROs. Because
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`SEC can add to or amend an SRO’s rules “as the Commission deems necessary or
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`appropriate,” 15 U.S.C. § 78s(c), SEC could also compel such disclosures through
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`SROs it supervises. The Court must reject this boundless interpretation that
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`
`
`8
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`Case: 21-60626 Document: 482 Page: 24 Date Filed: 05/07/2024
`Case: 21-60626 Document: 504 Page: 19 Date Filed: 05/13/2024
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`eviscerates the prohibition against SEC’s approval of rules not designed to serve the
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`purposes of the Act.
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`II. THE DIVERSITY RULES ARE STATE ACTION UNDER CIRCUIT PRECEDENT
`A. SEC’s Intimate Involvement with Nasdaq’s Enactment of the
`Diversity Rules Establishes State Action
`This Court should follow its own precedent in Intercontinental Indus., Inc. v.
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`Am. Stock Exch., 452 F.2d 935, 941 (5th Cir. 1971), to hold that “intimate
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`involvement” between Nasdaq and SEC brings the Diversity Rules within the
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`Constitution’s purview. SEC and Nasdaq contend that Intercontinental is no longer
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`good law because it cited Burton v. Wilmington Parking Auths., 365 U.S 715 (1961),
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`which they in turn say has been narrowed. SEC Br. 40–41; Nasdaq Br. 44–45.
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`SEC and Nasdaq overstate Intercontinental’s reliance on Burton.2 The
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`Intercontinental panel merely cited that case as one of “numerous court decisions”
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`finding state action. 452 F.2d at 941. It did not cite Burton’s reasoning to conclude
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`that the SEC has “intimate involvement” with an exchange’s de-listing decisions.
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`Rather, that conclusion rests on Exchange Act provisions requiring that: (1) an
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`exchange must register with the Commission, (2) its “rules must be submitted to the
`
`
`2 They also overstate the narrowing of Burton. It is not limited to the “lessee” context as SEC
`suggests. SEC Br. at 40. Rather, it still stands for the proposition that state action occurs where the
`government is in “a position of interdependence” with the nominally private entity. Brown v. Hill,
`No. 21-7116, 2023 WL 3563076, at *4 (D.C. Cir. May 19, 2023) (quoting Burton, 365 U.S. at
`725).
`
`
`
`
`9
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`Case: 21-60626 Document: 482 Page: 25 Date Filed: 05/07/2024
`Case: 21-60626 Document: 504 Page: 20 Date Filed: 05/13/2024
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`Commission and are subject to alteration or supplementation by the Commission,”
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`(3) an exchange’s “members are closely regulated by the Commission,” (4) “[a]
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`security may not be delisted without application to the Commission,” and (5) an
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`exchange “may be suspended or its registration withdrawn by the Commission.” Id.
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`at 941 n.9 (citing 15 U.S.C. §§ 78f, 78i, 78k, 78l, 78q, 78s).
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`Intercontinental’s reasoning fits the state-action standard recognized by
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`SEC’s and Nasdaq’s own cases that purport to narrow Burton. In Jackson v. Metro.
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`Edison Co., 419 U.S. 345, 358 (1974), cited at SEC Br. 41 and Nasdaq Br. 44, the
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`Court held that being “heavily regulated” was not enough to establish a private
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`actor’s decisions as state action. Instead, there must be a “symbiotic relationship
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`[like the one] presented in Burton” between the private actor and the government.
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`Id. at 357. Likewise, Frazier v. Board of Trustees, 765 F.2d 1278, 1287–88 (5th Cir.
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`1985), cited at SEC Br. 40 and Nasdaq Br. 45, recognized that state action is
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`established by “[a] symbiotic relationship … [that] denotes a level of functional
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`intertwining whereby the state plays some meaningful role in the mechanism leading
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`to the disputed act.”
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`SEC clearly “plays a meaningful role in the mechanism” of Nasdaq’s listing
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`rules and decisions. See id. An exchange’s “rules govern[ing] its decision to list, not
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`to list, or to de-list an offering” are “issued pursuant to the Exchange Act’s directive
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`that self-regulatory organizations adopt rules and by-laws in conformance with the
`
`
`
`10
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`

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`Case: 21-60626 Document: 482 Page: 26 Date Filed: 05/07/2024
`Case: 21-60626 Document: 504 Page: 21 Date Filed: 05/13/2024
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`Exchange Act.” Sparta Surgical Corp. v. NASD, 159 F.3d 1209, 1212 (9th Cir. 1998)
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`(citing 15 U.S.C. § 78o-3(b)). Additionally, “SEC must approve the rules” before
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`they take effect and “‘may abrogate, add to, and delete from’ rules of a self-
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`regulatory organization as it ‘deems necessary or appropriate[.]’” Id. (citing 15
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`U.S.C. §78s(b), (c)). The Exchange Act provisions on which Sparta Surgical relied
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`to conclude that SROs’ delisting decisions are subject to absolute immunity are the
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`s