The National Center for Public Policy Research, a conservative think tank advocating free market policies, sued the U.S. Securities and Exchange Commission (SEC) on Tuesday after it approved the Nasdaq’s controversial “diversity” rule.

As the Associated Press reported recently:

The new policy — the first of its kind for a U.S. securities exchange — requires most of the nearly 3,000 companies listed on Nasdaq to have at least one woman on their board of directors, along with one person from a racial minority or who identifies as gay, lesbian, bisexual, transgender or queer. It also requires companies to publicly disclose statistics on the demographic composition of their boards.

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Nasdaq-listed companies with five or fewer board members, however, will only be required have one diverse member.

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Companies that don’t meet the diversity criteria will not be delisted but must publicly explain why they could not comply.

The policy attempts to avoid the problem of racial, gender, and sexual quotas — which are often illegal — by allowing companies that don’t comply with the policy to write a report explaining why they have failed or refused to do so. Critics contend that the “comply or report” approach is the same as a hard quota, since few companies will want to risk the public cost of opposing the policy or admitting they have not complied with it.

Nevertheless, in August, the SEC approved the policy, leading to several lawsuits, including Monday’s legal challenge. The National Center for Public Policy Research issued a press statement explaining the reasoning for its lawsuit:

The National Center, represented by the New Civil Liberties Alliance (NCLA), argues that the SEC lacks the authority to establish such quotas. The SEC’s regulatory authority, established by the 1934 Securities and Exchange Act, is limited to regulation of securities to ensure honest markets and to enforce federal laws that punish fraud. The lawsuit asserts that approving market rules establishing quotas for boards of directors exceeds that limited authority.

“The SEC has grown increasingly politicized in recent years, and especially since the arrival of Chairman Gary Gensler,” said Scott Shepard, Director of the National Center’s Free Enterprise Project. “It has a narrowly circumscribed authority: that of protecting shareholders in limited ways. In no way does this extend to social engineering of the sort attempted by the Nasdaq rule. It was thus illegitimate for the SEC to approve the rule. The approval was especially appalling because the rule in effect requires companies to either subordinate merit to illegal race-, sex- and orientation-based discrimination, or open themselves to the howling left-wing mob.”

The lawsuit notes that the Nasdaq’s new rules allow people who simply “self-identify” as female, black, or queer, to qualify.

California is the only state thus far to have mandated diversity quotas on corporate boards above a minimum size. However, the state’s liberal voters last year rejected Proposition 16, which would have overturned Proposition 209, which bars the state from using racial preferences or affirmative action policies in contracts, hiring, or admissions to the state’s university system.

Joel B. Pollak is Senior Editor-at-Large at Breitbart News and the host of Breitbart News Sunday on Sirius XM Patriot on Sunday evenings from 7 p.m. to 10 p.m. ET (4 p.m. to 7 p.m. PT). He is the author of the recent e-book, Neither Free nor Fair: The 2020 U.S. Presidential Election. His recent book, RED NOVEMBER, tells the story of the 2020 Democratic presidential primary from a conservative perspective. He is a winner of the 2018 Robert Novak Journalism Alumni Fellowship. Follow him on Twitter at @joelpollak.