A federal appeals court blocked Nasdaq rules to increase boardroom diversity, saying that the Securities and Exchange Commission did not have the authority to approve them.

Wednesday’s ruling from the Republican-dominated 5th US Circuit Court of Appeals scraps diversity rules approved by the Securities and Exchange Commission in 2021. 

The rules required thousands of public companies that trade on Nasdaq to have at least one woman, person of color or LGBTQ member on their boards unless they explained why they did not. Companies also must report the diversity of their corporate directors each year.

The legal challenge was brought by the National Center for Public Policy Research, a conservative think tank, and Alliance for Fair Board Recruitment, a group founded by anti-affirmative action activist Edward Blum. The groups claimed the boardroom diversity rules violate civil rights laws and encourage racial and gender discrimination.

The Nasdaq said it reviewed the court's decision and would not "seek further review."

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"We maintain that the rule simplified and standardized disclosure requirements to the benefit of both corporates and investors," it said in a statement to USA TODAY.

Stefan Padfield, director of the Free Enterprise Project at the National Center for Public Policy Research, said the court reached "the right conclusion."

"The SEC was reaching beyond its statutory authority to try and engage in progressive social engineering," Padfield told USA TODAY. "The court's decision here is not only correct on the law, but also consistent with the will of the American people, who are sick and tired of seeing their government engage in divisive identity politics."

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Though corporate diversity, equity and inclusion efforts are broadly supported by the American public – especially younger Americans – they face growing scrutiny in the courts and in statehouses across the country as conservative foundations, think tanks and political operatives push back against diversity, equity and inclusion policies in corporate America.

The effort to foster greater diversity on corporate boards is facing other challenges. A multistate probe is investigating whether the Nasdaq has run afoul of anti-discrimination laws.

“Given Nasdaq’s zealous desire to impose quotas on companies, several of which are headquartered in our states, we are interested in learning what policies Nasdaq has in place to ensure its listed companies are following federal and state anti-discrimination laws,” the attorneys general of 22 states wrote in a joint letter released in October.

The court ruling is the latest setback for DEI, which is facing growing legal challenges.

After the murder of George Floyd in 2020 forced a historic reckoning with race in America, businesses pledged to make their workforces and their leadership better reflect the communities they serve.

Under pressure from investors and regulators, they shuffled their slate of corporate directors to add more Black executives and women to the line-up.

California passed laws requiring publicly traded companies headquartered in the state to add women and people from underrepresented groups to their boards of directors or face hefty fines. The laws were effective in boosting diversity on boards but were struck down in the courts.

Employees of color are underrepresented at every level of power in corporate America, according to USA TODAY data investigations. One analysis in 2023 found that white men account for 7 in 10 executive officers in the nation’s largest companies. About 1 in 7 of these companies had executive teams made up only of white men.

DEI critics allege that women and people of color are being handed jobs and promotions at the expense of more qualified and deserving candidates.

On the campaign trail, President-elect Donald Trump promoted the idea that white Americans were targets of racism and made reversing Joe Biden’s “woke takeover” of Washington a priority of his second term in office.

Proponents say DEI programs are critical to level the playing field for people of color and women. JPMorgan Chase’s Jamie Dimon and other business leaders have repeatedly stressed that diversity is good for business.

Previously a three-judge panel of the 5th Circuit upheld the SEC’s approval of the Nasdaq rules in 2021, finding that the regulator acted within its authority.

But the full court decided to take up the matter. All nine judges in the majority were appointed by Republican presidents, including the ruling’s author, US Circuit Judge Andrew Oldham, who was appointed by President-elect Donald Trump in his first term.

Reuters contributed to this report.

(This story has been updated to add information.)