SEC Approves Nasdaq Rules on Board Diversity

September 9, 2021

On Aug. 6, 2021, the U.S. Securities and Exchange Commission (SEC) approved Nasdaq’s new listing rules regarding board diversity and disclosure. The new rules will require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors (including a self-identified female member and a self-identified underrepresented minority or LGBTQ+ member), and to publicly disclose certain diversity statistics about their boards on an annual basis.

Nasdaq initially proposed the new listing rules in December 2020 (as discussed in this Dec. 23, 2020, McGuireWoods client alert), and subsequently amended them on Feb. 26, 2021, to provide companies with more flexibility to meet its diversity objectives by (1) allowing a listed company with a board of five or fewer directors to meet the diversity objective by having only one diverse director (instead of two), (2) providing a one-year grace period for a listed company that no longer meets the diversity requirement due to a vacancy on its board, (3) aligning disclosure requirements with annual meetings, and (4) extending the phase-in period for newly listed companies to meet the diversity objectives.

Read on for additional information regarding the new rules and transition periods for implementing Nasdaq’s diversity objectives.

Board Diversity Matrix — Annual Statistical Disclosure Beginning in 2022

Nasdaq’s new Rule 5606 requires each Nasdaq-listed company to disclose self-identified board demographic data in this board diversity matrix, or one substantially similar, on an annual basis beginning in 2022. After the first year providing the matrix, the rule requires disclosure for the current year and the immediately preceding year. A company may provide this disclosure in its proxy or information statement (or if the company does not file a proxy or information statement, in its Form 10-K or 20-F), or on the company’s website. If the company elects to disclose this information on its website, it must submit a form through Nasdaq’s Listing Center that includes the URL link to the disclosure within one business day after such posting.

Effective Date: A company listed on Nasdaq will have until the later of (a) Aug. 8, 2022, or (b) the date the company files its proxy or information statement for the company’s annual shareholder meeting during 2022, to disclose its initial diversity matrix. Newly listed companies will be required to satisfy this disclosure requirement within one year of listing on Nasdaq.


Board Diversity Objectives — Comply or Explain

Nasdaq’s new Rule 5605(f) will require each Nasdaq-listed company (with certain exceptions) to have, or explain why it does not have, at least two diverse board members, including at least one director who self-identifies as female and at least one director who self-identifies as an “underrepresented minority” or “LGBTQ+” (as such terms are defined under Nasdaq rules). This diversity objective is not a mandate, but instead is in the form of a “comply or explain” disclosure framework.

Similar to the board diversity matrix requirement, if a company chooses to explain why it does not meet the diversity objective, the company must provide its explanation in its proxy or information statement for its annual shareholder meeting (or if the company does not file a proxy or information statement, in its Form 10-K or 20-F), or on its website. This disclosure should be provided in the same manner and at the same time as the board diversity matrix. Nasdaq will verify that the company has provided an explanation, but it will not evaluate the substance of the explanation.

Smaller reporting companies, foreign issuers and companies with five or fewer directors have additional flexibility to meet Nasdaq’s diversity objectives:

  • Smaller reporting companies comply with either (i) two female directors, or (ii) one female director and one director who is LGBTQ+ or an underrepresented minority.
  • Foreign issuers comply with either (i) two female directors, or (ii) one female director and one director who is LGBTQ+ or an underrepresented minority based on the country of the company’s principal place of business.
  • Companies with five or fewer directors comply with only one diverse director instead of two. Companies with five or fewer directors may also comply with the board diversity objectives by adding a sixth director who is diverse before Aug. 6, 2025, or Aug. 6, 2026 (depending on the listing tier), without becoming subject to the requirement to have, or explain why it does not have, at least two diverse directors. If a company subsequently expands its board, it will be required to have at least two diverse directors.

Effective Dates: Nasdaq-listed companies are required to comply with the applicable board diversity objectives, or explain why they do not, by the later of (a) the dates listed below for the company’s applicable listing tier; or (b) the date the company files its proxy or information statement (or, if the company does not file a proxy, its Form 10-K or 20-F) for its annual shareholders meeting in the applicable compliance year listed below.

  • All Nasdaq-listed companies must have, or explain why they do not have, at least one diverse director by Aug. 7, 2023.
  • Companies listed on Nasdaq Global Select Market or Nasdaq Global Market must have, or explain why they do not have, at least two diverse directors by Aug. 6, 2025.
  • Companies listed on Nasdaq Capital Market must have, or explain why they do not have, at least two diverse directors by Aug. 6, 2026.

An extended phase-in period for newly listed companies to meet Nasdaq’s diversity objectives will apply after the end of the transition periods described above.


Exemptions From Board Diversity Rules

The board diversity rules do not apply to special purpose acquisition companies (prior to any business combination); asset-backed issuers and other passive issuers; limited partnerships; management investment companies; issuers of non-voting preferred securities, debt securities and certain derivative securities; and issuers of securities listed under the Nasdaq Rule 5700 series.

What’s Next

Nasdaq-listed companies should take the following steps to prepare for the new Nasdaq rules.

  1. Consider additional questions to include in next year’s annual director and officer questionnaires or other methods for gathering the information required to be reported in the board diversity matrix. For guidance, see these sample questions provided by Nasdaq.
  2. Discuss plans for implementing the new diversity objectives at both the management and board levels. Companies that do not currently meet Nasdaq’s diversity objectives should consider beginning or bolstering their search for diverse board candidates, or consider additional disclosures that will be needed if the company does not have the requisite number of diverse directors within the time frame(s) set forth in the new rules. Nasdaq-listed companies that do not have at least one director who self-identifies as female and one director who self-identifies as an underrepresented minority or LGBTQ+ are eligible for one year of complimentary access to a variety of board recruiting services. For information on obtaining access to these services, click here, here and here.
  3. Establish disclosure controls for obtaining and reporting the information required by the new rules. Consider where the company would like to include the required disclosure (i.e., SEC filing or website posting) in the context of the increased attention to environmental, social and governance (ESG) efforts by shareholder advisory groups and otherwise.

Please see the SEC’s approval order and Nasdaq’s updated guidance and FAQs for more details on the new rules and the timeline for compliance.

For additional guidance on the information in this alert, please contact any of the authors, any member of McGuireWoods’ securities compliance team or your primary McGuireWoods contact.

McGuireWoods’ securities and compliance team assists private and public companies in capital-raising efforts through private and public offerings, and assists public companies with their reporting obligations under the Securities Exchange Act of 1934, including forms 10-K, 10-Q and 8-K, Section 16 reports and DEF 14A (proxy statements), as well as with Regulation FD and Regulation G compliance. We prepare insider-trading policies, develop training programs and assist with other aspects of securities transactions engaged in by company officers, directors and significant security holders, including 10b5-1 plans and Rule 144 compliance.

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