Overview

On August 6, 2021, the U.S. Securities and Exchange Commission approved a December 1, 2020 proposal submitted by The Nasdaq Stock Market LLC to adopt listing rules related to enhancing corporate board diversity (the “Board Diversity Proposal”) and offering certain listed companies access to a complimentary board recruiting service to help advance diversity on company boards (the “Board Recruiting Service Proposal”). The new rules are intended to provide a disclosure-based framework for Nasdaq-listed companies that may impact and inform investors’ investment and voting decisions. The full text of the SEC’s approving Release No. 34-92590 can be found here, and a helpful “What Nasdaq-Listed Companies Should Know” guide from Nasdaq is available here.

 

SEC Approval of Board Diversity Proposal

1. Diverse Board Representation

The SEC approved proposed Nasdaq Rule 5605(f), pursuant to which Nasdaq-listed companies will generally be required to have (or explain why they do not have):

• at least one director who self-identifies as Female; and
  
  
• at least one director who self-identifies as an Underrepresented Minority or LGBTQ+ (collectively, “Diverse Directors”).
  
  

Under Nasdaq Rule 5605(f), “Female” is defined as an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth; “Underrepresented Minority” is defined as an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities; and “LGBTQ+” is defined as an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community. Although Nasdaq defined the term “Underrepresented Minority” to reflect the EEO-1 report categories, a company may determine that it considers directors who self-identify in racial or ethnic categories beyond those described in the EEO-1 categories (such as Middle Eastern, North African or Central Asian, for example) to be diverse; in such case, the company would simply explain what racial and ethnic categories it considers to be diverse when providing the disclosure described under “Disclosure in Lieu of Specified Diversity Measures” below.

Foreign Issuers and Smaller Reporting Companies may satisfy Nasdaq Rule 5605(f) by having at least two directors who self-identify as Female. Companies with five or fewer board directors may satisfy Nasdaq Rule 5605(f) by having one Diverse Director only. Companies that are exempt from Nasdaq Rule 5605(f) include certain acquisition companies, asset-backed issuers and other passive investors, cooperatives, limited partnerships, management investment companies and issuers of non-voting preferred securities debt securities and derivative securities. Special purpose acquisition companies are not required to disclose or have (or disclose that they do not have) any minimum number of Diverse Directors until after the completion of their initial business combination.

2. Disclosure in Lieu of Specified Diversity Measures

While Nasdaq Rule 5605(f) may encourage Nasdaq-listed companies to increase diversity on their boards, it does not mandate any particular board composition. Rather, if a listed company does not have two Diverse Directors, the company may still comply with Nasdaq Rule 5605(f) by (i) identifying the requirements of Nasdaq Rule 5605(f) that apply to the company and (ii) providing a written explanation of why it does not meet the objectives in advance of its next annual meeting of shareholders either (a) in a filed proxy statement or information statement or (b) on its website, and then submitting such website disclosure through the Nasdaq Listing Center within one business day after posting. Nasdaq will not assess the substance or merits of the listed company’s explanation.

3. Transition Periods

Nasdaq Rule 5605(f) provides for several transition periods during which listed companies may gain compliance:

 

If a Nasdaq-listed company files its proxy statement or its information statement (or, if the company does not file a proxy, then in its Form 10-K or 20-F) for the company’s annual shareholders meeting for a given year after each respective date noted above, then the applicable deadline for the company to meet (or explain why it does not meet) the applicable diversity objectives will be the date the company makes such filing. Furthermore, listed companies with five or fewer directors will be required to comply with Rule 5605(f) by August 7, 2023, regardless of Nasdaq market tier.

If a Nasdaq-listed company fails to adhere to Nasdaq Rule 5605(f), the company will receive a notification from the Listing Qualifications Department with a timeframe to cure the deficiency. If the deficiency is not cured within the applicable cure period, the Listing Qualifications Department would issue a Staff Delisting Determination Letter and the company could appeal the determination to the Hearings Panel for further consideration.

 

4. Board Diversity Disclosure Format

The SEC also approved proposed Nasdaq Rule 5606, pursuant to which Nasdaq-listed companies are required to publicly disclose in an aggregated form information on the voluntary self-identified gender and racial characteristics and LGBTQ+ status of the company’s board of directors in a format substantially similar to the table set forth below:

Board Diversity Matrix (As of [DATE])
Total Number of Directors	#
	Female	Male	Non-Binary	Did Not Disclose Gender
Part I: Gender Identity
Directors	#	#	#	#
Part II: Demographic Background
African American or Black	#	#	#	#
Alaskan Native or Native American	#	#	#	#
Asian	#	#	#	#
Hispanic or Latinx	#	#	#	#
Native Hawaiian or Pacific Islander	#	#	#	#
White	#	#	#	#
Two or More Races or Ethnicities	#	#	#	#
LGBTQ+	#
Did Not Disclose Demographic Background	#

Source: Nasdaq “Board Diversity Matrix Disclosure Requirements and Examples,” available here, which also provides additional examples of acceptable formats for disclosure.

 

A Nasdaq-listed company that qualifies as a Foreign Issuer may elect to use an alternative format.

Nasdaq Rule 5606 will become operative August 2022, and companies must comply with Nasdaq Rule 5606 by the later of (i) the date the company files it proxy statement or information statement for its annual meeting of shareholders (or, if the company does not make such a filing, the date it files its Form 10-K or 20-F) during calendar year 2022 or (ii) August 8, 2022. A company that is newly listed on Nasdaq that was not previously subject to a substantially similar requirement of another national securities exchange must satisfy the new requirements within one year of listing.

If a Nasdaq-listed company fails to adhere to Nasdaq Rule 5606, Nasdaq will notify the company of its non-compliance and allow 45 days for the company to submit a plan to regain compliance and thereafter, Nasdaq may provide the company with up to 180 days to regain compliance. If the company does not submit a plan or regain compliance within the applicable time periods, Nasdaq will issue a Staff Delisting Determination. Similar to the consequences relating to Nasdaq Rule 5605(f), the company could appeal the determination to the Hearings Panel for further consideration.

 

SEC Approval of Board Recruiting Service Proposal

Additionally, the SEC approved Nasdaq’s Board Recruiting Service Proposal, pursuant to which Nasdaq will provide Nasdaq-listed companies that do not already have at least two Diverse Directors with one year of complimentary access to a third-party board recruiting service, which would provide access to a network of board-ready diverse candidates for companies to identify and evaluate. This service, valued at an approximate retail value of $10,000 per year according to the SEC’s release, is intended to help listed companies meet the objectives of the Board Diversity Rules.

 

Conclusion

Nasdaq’s Board Diversity Proposal and Board Recruiting Service Proposal were submitted for SEC approval following Nasdaq’s extensive internal study, analysis and consultation of third-party research. Nasdaq’s proposal cited the “heightened attention to the commitment of public companies to diversity and inclusion” and a larger demand for increased board diversity reflective of current investor concerns and expectations. While the newly approved Nasdaq rules do provide companies with phase-in periods to gain compliance with these new rules, Nasdaq-listed companies should begin taking steps now towards gathering voluntary self-identified gender and racial characteristics and LGBTQ+ status of their directors and establishing policies with respect to how such information is compiled and analyzed.

Many public companies already disclose diversity statistics among their board of directors and/or workforce in response to investor demands for such information, and the trend continues toward additional disclosure regardless of regulatory intervention. Companies that are not Nasdaq-listed should consider taking proactive steps towards collecting such information regarding their boards of directors, such as in their annual director questionnaires. This information can be helpful when making decisions regarding disclosure, director succession planning, director skills evaluations and board refreshment.

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