U.S. Securities and Exchange Commission Approves Nasdaq Board Diversity Rules

August 23, 2021

Earlier this month, the U.S. Securities and Exchange Commission approved the Nasdaq Stock Market LLC’s board diversity rule request to adopt listing rules related to board diversity and related disclosures. Beginning August 7, 2021, the rules require each Nasdaq-listed company, subject to certain exceptions, to publicly disclose diversity characteristics of the company’s board of directors and either meet specified diversity thresholds or explain why not. The rules are here.

Key Takeaways

The Rules do not mandate changes to board diversity; rather they require companies that do not have diverse members to explain why.
Many listed companies have as many as four years to be fully compliant with the diversity requirements.
Smaller boards from listed companies with five or fewer directors may satisfy with one diverse director instead of two.
Most Nasdaq-listed companies do not currently meet the diversity requirements set forth in the Rules.

Requirements
The Rules impose two requirements for listed companies:

Rule 5606 requires companies to publicly disclose aggregated board member diversity information; and
Rule 5605(f) requires companies to have at least two diverse directors or explain why they do not (subject to certain limitations or exceptions as explained below).

Specifically, companies must provide aggregated demographic information about their board members in a board diversity matrix. Nasdaq has a preferred board diversity matrix, which is located here.

Effective Date
Rule 5606 – The Rule 5606 demographic information must be provided by the later of (1) August 6, 2022; or (2) the date on which a company files its next proxy statement or information statement for its annual meeting of shareholders (or Form 10-K or 20-F, as applicable). Newly listed companies have a one-year grace period after listing on Nasdaq to comply. The information must be provided in advance of a company’s annual meeting of shareholders in either its proxy or information statement (or Form 10-K or 20-F, as applicable).

Rule 5605(f) – There are two tiers of listed companies which determine Rule 5605(f) compliance deadlines: (1) the Nasdaq Global Select Market or Nasdaq Global Market (“NGS/NGM”) tier and (2) the Nasdaq Capital Market (“NCM”) tier. Companies in the NGS/NGM tier have until August 7, 2023 (two years following the Approval Order) to have at least one Diverse director on their board and until August 6, 2025 (four years following the Approval Order) to be in full compliance with Rule 5605(f). Companies in the NCM tier have until August 7, 2023 (two years following the Approval Order) to have at least one Diverse director and until August 6, 2026 (five years following the Approval Order) to be in full compliance with Rule 5605(f). There is a phase-in period for newly listed companies which follows a similar model.

Consequences for Non-Compliance
Rule 5606 – If a company fails to comply with Rule 5606, the SEC will notify the company that it is not in compliance and will allow the company 45 calendar days to submit a plan to regain compliance with the rule. After review of the plan, the Exchange may provide the company with up to 180 days to regain compliance with Rule 5606. If the company either (1) does not submit a plan to regain compliance or (2) does not regain compliance within the applicable time period (up to 180 days), it will be issued a Staff Delisting Determination, which may be appealed.

Rule 5605(f) – If a company fails to comply with Rule 5605(f), the SEC Listing Qualifications Department will notify the company that it has until the later of (1) its next annual shareholders meeting or (2) 180 days from the event that caused the deficiency, to cure the deficiency. After that period, if the deficiency has not been cured, the Listings Qualifications Department will issue a Staff Delisting Determination, which the company may appeal.

Conclusion
The new rules continue the trend of requiring diversity on boards, which has seen support from state laws enacted to either require or disclose board diversity [1] and from institutional investors [2]. Also, Goldman Sachs has announced that it will only underwrite IPOs in the U.S. and Europe of private companies that have at least one diverse board member.

Corporate board diversity as a key reporting and compliance metric will only expand from here. Corporate leaders who prioritize diversity and inclusion in board operations, recruitment, onboarding, and evaluation will be best positioned to exceed compliance standards and, moreover, benefit from the varying perspectives of a diverse board of directors. For more information about improving board diversity, please see our article in Today’s General Counsel.

Footnotes

[1] California now requires public companies headquartered in California to meet certain board diversity requirements and Illinois requires disclosure of board diversity metrics by public companies headquartered in Illinois.

[2] Late last year, the Diversity Disclosure Initiative (a coalition of institutional investors managing collectively over $3 trillion in assets) published a letter urging portfolio companies to jump on the bandwagon of increasing gender and ethnic diversity on boards.