Challenge To Nasdaq Diversity Rule Filed In Federal Court Of Appeals

Professor Stephen Bainbridge writes that the Alliance for Fair Board Recruitment has filed a petition for review with the Fifth Circuit Court of Appeals challenging Nasdaq's board diversity rule.  Some readers may be wondering why the petition was filed with the Court of Appeals rather than the District Court. 

In general, judicial review of agency actions is governed by Chapter 7 of the Administrative Procedure Act as well as numerous agency specific statutes.   In this case, the petitioner sought review pursuant to Section 25(a) of the Securities Exchange Act of 1934.  That statute provides that a person "aggrieved" by a "final order" of the SEC entered pursuant to the Exchange Act may obtain review of the order in the United States Court of Appeals.

Although I have not researched the matter, it seems to me that a case can be made for filing the petition  pursuant  to  Section 25(b) of the Exchange Act rather than Section 25(a).   While Section 25(b) also provides for review by the Court of Appeals, it is available to persons "adversely affected" by a "rule of the Commission" promulgated under specified provisions of the Exchange Act, including Section 19. 

In this case, the SEC issued the challenged order pursuant to Section 19(b)(2).  The fact that there is an order supports the filing of the petition for review pursuant to Section 25(a).   However, Section 19 prescribes in some detail the process for approval of self-regulatory organization rules and thus Nasdaq's rule would appear to have been promulgated pursuant to Section 19 and thus subject to Section 25(b).  Nonetheless, it may be that Nasdaq's rule is not considered a "rule of the Commission" within the meaning of Section 25(b).

There are some differences between Section 25(a) and Section 25(b).  Section 25(a) focuses on facts and evidence while In  Section 25(b)(4) also lists the specific circumstances in which the Court of Appeals is not required to affirm and enforce the rule being challenged.  On balance, it seems to me that the provisions of Section 25(b) are more apropos to review of the SEC's approval of Nasdaq's rule than Section 25(a).

Procedural rules governing petitions for review of agency rules are found in Rule 15 of the Federal Rules of Appellate Procedures.