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SEC Approves Nasdaq Board Diversity Rules

Earlier this month, the Securities and Exchange Commission (the “SEC”) issued an order approving new listing rules proposed by The Nasdaq Stock Market LLC (“Nasdaq”) intended to advance board diversity and increase transparency of diversity-related statistics (the “Final Rules”).

Under the Final Rules, Nasdaq-listed companies, other than Exempt Entities (defined below), will be required to:

  • Disclose information about the board’s voluntary self-identified gender and racial demographics and LGBTQ+ status in a form substantially similar to the form listed in new Nasdaq Rule 5606 (the “Diversity Matrix”) for the current year and, following the first year of disclosure, for the current year and immediately prior year (the “Diversity Disclosure Rule”) on an annual, aggregated basis; and
  • Either include on their board of directors, or publicly disclose why their board does not include, a certain number of diverse directors (the “Include or Disclose Rule”).

The Diversity Disclosure Rule takes effect in 2022 (as described below). The Include or Disclose Rule provides a tiered phase-in, beginning in 2023. Companies newly listing on Nasdaq will also have phase-in periods for compliance.

Additionally, the Final Rules give eligible listed companies (basically those that do not already meet the Final Rules’ diversity requirements) one year of complimentary access to a board recruiting service to help them identify and evaluate diverse board candidates.

Background and Approval

Nasdaq proposed the new rules in December 2020, which we discussed in detail in our initial client update on this topic (available here). The SEC received over 200 comment letters from various interested parties, and upon review of those comments, Nasdaq filed Amendment No. 1 to its initial proposed rule changes on February 26, 2021. Amendment No. 1 addressed certain concerns raised during the comment period, including: providing more flexibility for small boards, extending the compliance periods for newly-listed companies, tying disclosure requirements more closely to companies’ annual shareholder meetings, and adding a grace period for non-compliant companies under certain circumstances.

On August 6, 2021, the SEC issued an order approving Amendment No. 1. In a public statement on the approval, SEC Chairman Gary Gensler described the Final Rules as “reflect[ing] calls from investors for greater transparency about the people who lead public companies,” and “allow[ing] investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.” See Chairman Gensler’s full statement here. Although duly approved by a majority of the SEC Commissioners, certain Commissioners expressed concerns about the Final Rules, questioning whether the SEC had the legal authority to adopt the Final Rules as drafted and whether the appropriate legal standards for adopting the Final Rules were met. See statements from Commissioner Elad L. Roisman (available here) and Commissioner Hester M. Peirce (available here).

Diversity Disclosure Rule

  • Companies listed on Nasdaq, other than Exempt Entities (defined below), must annually report aggregated statistical information about the board’s self-identified gender and racial characteristics and self-identification as LGBTQ+ in the Diversity Matrix or a substantially similar format, for the current year and, following the first year of disclosure, for the current year and immediately prior year.
  • “Exempt Entities” means: (1) acquisition companies; (2) asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); (3) cooperatives (as set forth in Rule 5615(a)(2)); (4) limited partnerships (as set forth in Rule 5615(a)(4)); (5) management investment companies (as set forth in Rule 5615(a)(5)); (6) issuers of non-voting preferred securities, debt securities, and derivative securities (as set forth in Rule 5615(a)(6)) that do not have equity securities listed on Nasdaq; and (7) issuers of securities listed under the Rule 5700 series.
  • Required information must be provided in a searchable format in one of the following ways: (1) in the company’s proxy statement or information statement for its annual meeting of shareholders (“Proxy Materials”), (2) if the company does not file Proxy Materials, in an Annual Report on Form 10-K or Form 20-F (“Annual Report”), or (3) on the company’s website, provided that the company must also submit a URL link to the disclosure through the Nasdaq Listing Center, within one business day of the filing of the Proxy Materials or Annual Report.
  • Companies may include supplemental data within the Diversity Matrix; however, companies may not substantially alter the form of the Diversity Matrix. See the Nasdaq website here for examples of the Diversity Matrix, including examples for foreign issuers.

Include or Disclose Rule

  • Companies listed on Nasdaq, other than Exempt Entities and as noted below, must have at least two (2) self-identified “Diverse” directors or must explain why the company does not meet this requirement.
    • Of the two self-identified Diverse directors, at least one must self-identify as Female and at least one must self-identify as LGBTQ+ and/or as an Underrepresented Minority.
    • “Diverse” means any of the following: (1) a director who self-identifies her gender as female, without regard to the individual’s designated sex at birth (“Female”), (2) a director who self-identifies as one or more of: 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 (“Underrepresented Minority”), and (3) lesbian, gay, bisexual, transgender or a member of the queer community (“LGBTQ+”).
  • Foreign issuers and smaller reporting companies have slightly different definitions of “Diverse,” and companies with five or fewer directors (“Small Boards”) must have at least one (1) self-identified Diverse director.
  • For companies opting to explain their lack of diversity rather than meet the diversity requirements, it is not sufficient to merely state the fact of non-compliance; the company must provide a detailed reason for non-compliance. However, Nasdaq emphasized it will not evaluate the substance or merits of that explanation.

Compliance Periods

The Final Rules provide the following phase-in periods:

Listed Companies (other than newly listing companies):

  • Must comply with the Diversity Disclosure Rule by the later of (1) August 8, 2022, or (2) the date the company files its Proxy Materials for its annual shareholders meeting held during the 2022 calendar year. When the compliance period requirements refer to the date of filing of Proxy Materials, companies that do not file Proxy Materials can refer instead to the date of their corresponding Annual Report. The remainder of this Update will refer simply to Proxy Materials in those instances, with this understanding.
  • Must comply with the Include or Disclose Rule as follows:
    • At Least One Diverse Director by 2023: Any company listed on the Nasdaq Global Select Market, Nasdaq Global Market or Nasdaq Capital Market (including a company with a Small Board) must have, or explain why it does not have, one Diverse director by the later of (1) August 7, 2023, or (2) the date the company files its Proxy Materials for the its annual shareholders meeting held during the 2023 calendar year.
    • At Least Two Diverse Directors:
      • Any company listed on Nasdaq Global Select Market or Nasdaq Global Market, except those with a Small Board, must have, or explain why it does not have, at least two Diverse directors by the later of (1) August 6, 2025, or (2) the date the Company files its Proxy Materials for the its annual shareholders meeting held during the 2025 calendar year.
      • Any company listed on the Nasdaq Capital Market, except those with a Small Board, must have, or explain why it does not have, at least two Diverse directors by the later of (1) August 6, 2026, or (2) the date the Company files its Proxy Materials for the company’s annual shareholders meeting held during the 2026 calendar year.

Newly Listing Companies:

  • Must comply with the requirements of the Diversity Disclosure Rule within one year of listing date.
  • Compliance with the Include or Disclose Rule takes a tiered approach based on the particular Nasdaq market and the size of the company’s board:
    • A company newly listing on the Nasdaq Global Select Market or the Nasdaq Global Market must have, or explain why it does not have:
      • at least one Diverse director by the later of (i) one year from the listing date, or (ii) the date the company files its Proxy Materials for the company’s first annual shareholders meeting following listing; and
      • at least two Diverse directors by the later of (i) two years from the listing date, or (ii) the date the company files its Proxy Materials for the company’s second annual shareholders meeting after its listing.
    • A company newly listing on the Nasdaq Capital Market must have, or explain why it does not have, at least two Diverse directors by the later of (i) two years from the listing date, or (ii) the date the company files its Proxy Materials for the company’s second annual shareholders meeting after its listing.
    • A Small Board company newly listing on the Nasdaq Global Select Market, Nasdaq Global Market or Nasdaq Capital Market must have, or explain why it does not have, at least one Diverse director by the later of (i) two years from the listing date, or (ii) the date the company files its Proxy Materials for the company’s second annual shareholders meeting after its listing.

Grace Period and Cure Periods

For listed companies out of compliance with the Include or Disclose Rule due to a board vacancy, the company will have until the later of (i) one year from the date of the vacancy, or (ii) the date the company files its Proxy Materials for its annual shareholder meeting for the following calendar year, to regain compliance.

For failure to comply with the Include or Disclose Rule, a company has until the later of (i) its next annual shareholders meeting, or (ii) 180 days from the event that caused the deficiency, to cure the deficiency.

For failure to comply with the Diversity Disclosure Rule, a company has 45 days after notification of non-compliance to submit a plan to reestablish compliance. Nasdaq will then provide up to 180 days to reestablish compliance.

Putting the Rules into Practice

Companies currently listed, or considering listing, on Nasdaq should promptly and carefully evaluate their board composition and consider what, if any, change should be made. Companies should be cognizant that, while the Final Rules do not strictly mandate any director inclusion, investor perception of compliance or lack thereof with the Final Rues may become a factor in evaluating investment decisions. Additionally, although the Final Rules provide several years for companies to achieve full compliance, the director identification and onboarding process can be time-intensive. We encourage affected companies to consider promptly their compliance strategies and resulting recruitment needs.

Whether other exchanges will follow the lead of Nasdaq is not yet known. However, the current trend towards diversity, equity and inclusion awareness and engagement, coupled with the SEC’s now demonstrated support of Nasdaq’s initiative, suggest that we may see similar rule changes in the future. All publicly listed companies, or those considering going public, would do well to pay close attention to developments in this area.

For additional information related to anything contained in this Client Update, please contact any member of our Securities Law Practice Group.


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