SEC Approves NASDAQ Board Diversity Rule – What Listed Companies Must Do Next

SEC Approves NASDAQ Board Diversity Rule – What Listed Companies Must Do Next

The SEC recently approved Nasdaq Inc.’s Board Diversity Rule, which will require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors...

The Securities and Exchange Commission (SEC) recently approved Nasdaq Inc.’s Board Diversity Rule, which will require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the new rule will require most NASDAQ-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.

Investors and Regulators Focused on Board Diversity

As we have discussed in prior articles, diversity is becoming an increasingly important consideration when it comes to selecting board members, with shareholders calling on boards to include more women and racial minorities. While federal regulators have not yet established requirements regarding board diversity, states are beginning to take action. In California, boards must have at least one female member. Starting on January 1, 2021, companies based in Illinois are required to disclose the race and gender of their directors.

With the approval of the SEC, Nasdaq is now on the growing list of organizations regarding board-diversity disclosures. In approving the new rule, the Commission emphasized that investors have indicated an interest in board diversity information. In its Order Approving Proposed Rule Changes, the Commission wrote:

Board-level diversity statistics are currently not widely available on a consistent and comparable basis, even though the Exchange and many commenters argue that this type of information is important to investors. The Board Diversity Proposal would also provide increased transparency and require an explanation regarding why a Nasdaq-listed company does not meet the proposed board diversity objectives, for those companies that do not choose to meet such objectives. It would augment existing Commission requirements that companies disclose whether, and how, their boards or board nominating committees consider diversity in nominating new directors.

Based on the foregoing, the Commission concluded that the proposal would “promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest.”

Requirements Under NASDAQ’s Board Diversity Rule

Nasdaq’s Board Diversity Rule requires companies listed on its U.S. exchange to publicly disclose board-level diversity statistics using a standardized template; and have or explain why they do not have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Under the rule, an “underrepresented minority” is defined as an individual who self-identifies in one or more of the following groups: 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.

The Board Diversity Rule does provide some flexibility for Smaller Reporting Companies and Foreign Issuers. Smaller Reporting Companies can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented minority or LGBTQ+. Similarly, Foreign Issuers can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the company’s principal executive offices, or LGBTQ+. Companies with five or fewer directors can meet the diversity objective by having at least one diverse director.

The new listing rules do not establish a hard target that companies must satisfy. If a company chooses to explain why it does not meet the diversity objectives, it must provide its explanation in its proxy statement, information statement for its annual shareholder meeting, or on the company’s website. Nasdaq will verify that the company has provided an explanation, but will not assess the merits of the explanation.

SPACs Are Exempt

Special purpose acquisition companies (SPACs) are not required to provide disclosure information or to have, or disclose that they do not have, any minimum number of diverse directors until their business combination.  As we have discussed in prior articles, the SEC is taking a closer look at its enforcement policies regarding SPACs, particularly with regard to disclosures related to the de-SPAC process, the business combination made after the IPO. Following the business combination, such companies must meet, or explain why they do not meet the applicable diversity objectives by the later of two years from the date of listing or the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s second annual meeting of shareholders subsequent to the company’s listing.

 Nasdaq Will Phase-In the Board Diversity Rule

With regard to the annual disclose board-level diversity data, companies have until the later of August 8, 2022, or the date the company files its proxy or information statement for the company’s annual shareholder meeting during 2022.

As set forth in Nasdaq guidance regarding the new rules, all operating companies listed on Nasdaq’s U.S. exchange will need to use its Board Diversity Matrix, or a format substantially similar, to annually disclose board-level diversity data. Companies will provide this disclosure in the company’s proxy statement or its information statement (or if the company does not file a proxy, its Form 10-K or 20-F), or on the company’s website. Examples of acceptable (i.e., same or substantially similar) and unacceptable (i.e., substantially different) disclosures are provided there.

If the company elects to provide such disclosure on its website, then the company must publish this disclosure concurrently with its proxy statement or its information statement (or if the company does not file a proxy, its Form 10-K or 20-F). It must also submit a URL link to the disclosure through the Nasdaq Listing Center within one business day after such posting.

Nasdaq-listed companies will have a transition period to meet the rule’s diversity objectives or explain their reasons for not doing so. The compliance deadline is based on a company’s listing tier, as follows:

  • Nasdaq Global Select Market or Nasdaq Global Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023, and two diverse directors by August 6, 2025.
  • Nasdaq Capital Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023 and two diverse directors by August 6, 2026.
  • Companies with boards that have five or fewer directors, regardless of listing tier, are required to have, or explain why they do not have, one diverse director by August 7, 2023.

If a company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s annual shareholders meeting after the anniversary of the Effective Date in the calendar year for each respective year noted above, then the company will have until the date it makes such filing to meet, or explain why it does not meet, the applicable diversity objectives.

Key Takeaway

Nasdaq’s Board Diversity Rule imposes several new requirements on listed companies. While companies have some time to come into full compliance, it is advisable to start the process of diversifying board membership as soon as possible.

Even if not impacted by the new rule, companies of all sizes should have board diversity on their radar and be prepared to address the potential reputational and legal risks of failing to diversify. Given that this is a quickly evolving area of law, we also encourage businesses to stay on top of any new regulatory requirements.

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact Thomas Herndon, Jr.Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.


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AboutDan Brecher

Dan Brecher's experience ranges from general counsel of New York Stock Exchange and NASD/FINRA member brokerage firms to representation of companies in hundreds of public and private securities offerings and advising institutional and high net worth investors.Full Biography

AboutThomas H. Herndon, Jr.

Thomas H. Herndon, Jr. is a partner in Scarinci Hollenbeck’s litigation practice group with over nineteen years of experience handling a wide variety of general litigation matters and general corporate matters. Mr. Herndon, Jr. has routinely handled matters relating to corporate disputes, cyber litigation, transportation litigation, construction litigation, as well as corporate liability on behalf of his clients. He is also experienced in advising clients in matters relating to commercial real estate, labor & employment, corporate & regulatory compliance as well as corporate transactions & business.Full Biography

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SEC Approves NASDAQ Board Diversity Rule – What Listed Companies Must Do Next

SEC Approves NASDAQ Board Diversity Rule – What Listed Companies Must Do Next
Author: Dan Brecher, Thomas H. Herndon, Jr.

The Securities and Exchange Commission (SEC) recently approved Nasdaq Inc.’s Board Diversity Rule, which will require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the new rule will require most NASDAQ-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.

Investors and Regulators Focused on Board Diversity

As we have discussed in prior articles, diversity is becoming an increasingly important consideration when it comes to selecting board members, with shareholders calling on boards to include more women and racial minorities. While federal regulators have not yet established requirements regarding board diversity, states are beginning to take action. In California, boards must have at least one female member. Starting on January 1, 2021, companies based in Illinois are required to disclose the race and gender of their directors.

With the approval of the SEC, Nasdaq is now on the growing list of organizations regarding board-diversity disclosures. In approving the new rule, the Commission emphasized that investors have indicated an interest in board diversity information. In its Order Approving Proposed Rule Changes, the Commission wrote:

Board-level diversity statistics are currently not widely available on a consistent and comparable basis, even though the Exchange and many commenters argue that this type of information is important to investors. The Board Diversity Proposal would also provide increased transparency and require an explanation regarding why a Nasdaq-listed company does not meet the proposed board diversity objectives, for those companies that do not choose to meet such objectives. It would augment existing Commission requirements that companies disclose whether, and how, their boards or board nominating committees consider diversity in nominating new directors.

Based on the foregoing, the Commission concluded that the proposal would “promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest.”

Requirements Under NASDAQ’s Board Diversity Rule

Nasdaq’s Board Diversity Rule requires companies listed on its U.S. exchange to publicly disclose board-level diversity statistics using a standardized template; and have or explain why they do not have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Under the rule, an “underrepresented minority” is defined as an individual who self-identifies in one or more of the following groups: 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.

The Board Diversity Rule does provide some flexibility for Smaller Reporting Companies and Foreign Issuers. Smaller Reporting Companies can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented minority or LGBTQ+. Similarly, Foreign Issuers can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the company’s principal executive offices, or LGBTQ+. Companies with five or fewer directors can meet the diversity objective by having at least one diverse director.

The new listing rules do not establish a hard target that companies must satisfy. If a company chooses to explain why it does not meet the diversity objectives, it must provide its explanation in its proxy statement, information statement for its annual shareholder meeting, or on the company’s website. Nasdaq will verify that the company has provided an explanation, but will not assess the merits of the explanation.

SPACs Are Exempt

Special purpose acquisition companies (SPACs) are not required to provide disclosure information or to have, or disclose that they do not have, any minimum number of diverse directors until their business combination.  As we have discussed in prior articles, the SEC is taking a closer look at its enforcement policies regarding SPACs, particularly with regard to disclosures related to the de-SPAC process, the business combination made after the IPO. Following the business combination, such companies must meet, or explain why they do not meet the applicable diversity objectives by the later of two years from the date of listing or the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s second annual meeting of shareholders subsequent to the company’s listing.

 Nasdaq Will Phase-In the Board Diversity Rule

With regard to the annual disclose board-level diversity data, companies have until the later of August 8, 2022, or the date the company files its proxy or information statement for the company’s annual shareholder meeting during 2022.

As set forth in Nasdaq guidance regarding the new rules, all operating companies listed on Nasdaq’s U.S. exchange will need to use its Board Diversity Matrix, or a format substantially similar, to annually disclose board-level diversity data. Companies will provide this disclosure in the company’s proxy statement or its information statement (or if the company does not file a proxy, its Form 10-K or 20-F), or on the company’s website. Examples of acceptable (i.e., same or substantially similar) and unacceptable (i.e., substantially different) disclosures are provided there.

If the company elects to provide such disclosure on its website, then the company must publish this disclosure concurrently with its proxy statement or its information statement (or if the company does not file a proxy, its Form 10-K or 20-F). It must also submit a URL link to the disclosure through the Nasdaq Listing Center within one business day after such posting.

Nasdaq-listed companies will have a transition period to meet the rule’s diversity objectives or explain their reasons for not doing so. The compliance deadline is based on a company’s listing tier, as follows:

  • Nasdaq Global Select Market or Nasdaq Global Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023, and two diverse directors by August 6, 2025.
  • Nasdaq Capital Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023 and two diverse directors by August 6, 2026.
  • Companies with boards that have five or fewer directors, regardless of listing tier, are required to have, or explain why they do not have, one diverse director by August 7, 2023.

If a company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s annual shareholders meeting after the anniversary of the Effective Date in the calendar year for each respective year noted above, then the company will have until the date it makes such filing to meet, or explain why it does not meet, the applicable diversity objectives.

Key Takeaway

Nasdaq’s Board Diversity Rule imposes several new requirements on listed companies. While companies have some time to come into full compliance, it is advisable to start the process of diversifying board membership as soon as possible.

Even if not impacted by the new rule, companies of all sizes should have board diversity on their radar and be prepared to address the potential reputational and legal risks of failing to diversify. Given that this is a quickly evolving area of law, we also encourage businesses to stay on top of any new regulatory requirements.

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact Thomas Herndon, Jr.Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.