On December 1, 2020, the Nasdaq Stock Exchange submitted proposed rule changes to the SEC seeking approval of new listing requirements for board diversity. The proposed rules seek to require all companies listed on Nasdaq’s U.S. exchange to have at least two diverse directors by a certain date, based on the company’s listing tier, or to explain why they have not met this objective. The proposed rules would also require disclosure of a company’s diversity statistics.
If approved by the SEC as proposed, Nasdaq would adopt listing requirement 5605(f) entitled “Diverse Board Representation.” Rule 5605(f) would require Nasdaq companies, subject to certain exceptions, to have at least one director who self-identifies as female and one director who self-identifies as an Underrepresented Minority (defined by the Equal Employment Opportunity Commission as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities) or as LGBTQ+. Alternatively, Nasdaq companies must explain why the company does not have at least two such directors. Smaller Reporting Companies would be required to have either two female or one female and one Underrepresented Minority or LGBTQ+ directors. Exemptions to the rule would apply to certain companies, including acquisition companies, asset-backed issuers, cooperatives, limited partnerships, management investment companies.
Companies would have two calendar years from the date the SEC approves the proposal to have, or explain why they does not have, at least one diverse director. Companies would be required to have, or explain why they do not have, two diverse directors within:
- four calendar years after approval for Nasdaq Global Select or Global Market tiers; or
- calendar years after approval for companies listed on the Nasdaq capital market.
If approved by the SEC as proposed, Nasdaq would adopt listing requirement 5606 entitled “Board Diversity Disclosure.” Rule 5606 would require Nasdaq companies, subject to certain exceptions, to provide statistical information regarding the company’s board. This information is contained in a prescribed Board Diversity Matrix. The information must be provided either in the company’s proxy statement/information statement for its annual meeting stockholders or on its website.
Companies would have one calendar year from the date the SEC approves the proposal to comply with this rule.
Nasdaq states in the proposed rules that it reviewed dozens of empirical studies and found research demonstrating a positive correlation between diverse boards and improved corporate governance and financial performance. Nasdaq stated in its release to listed companies that it expects the proposed rules to be “at a minimum, a catalyst for debate as part of a broader journey to achieve inclusive representation in business.”
The Securities & Capital Markets team at Michael Best has experts who can assist companies with listing requirements on U.S. exchanges and advise them on complying with securities laws more broadly. Please do not hesitate to contact a member of our team for additional information.