On August 6, 2021, the Securities and Exchange Commission (SEC) approved two board diversity proposals previously filed by the Nasdaq Stock Market LLC (Nasdaq) in December 2020, as modified by amendments in February 2021. The SEC approved the Board Diversity Proposal and Board Recruiting Service Proposal as amended without any further changes.^[1] As previously discussed here, Nasdaq intends that the new rules will promote greater gender, racial, and LGBTQ+ diversity among the boards of directors of Nasdaq-listed companies, as well as promote transparency and accountability in corporate decision-making.

The following client alert includes more detail regarding the newly adopted Nasdaq board diversity rule, but in short, all Nasdaq-listed companies will be required to publicly disclose a board diversity matrix in 2022 and must have, or explain why they do not have, at least one diverse^[2] director on their board by 2023 and a second diverse director in 2025 or 2026 depending on the companies’ Nasdaq market, subject to the specific nuances and limited exceptions discussed below.

Board Diversity Proposal

The highlights of the new rules are as follows:

• General Applicability. All Nasdaq-listed companies must comply with both the board diversity disclosure requirement and the applicable diversity requirement (i.e., the diversity “objective”), except for certain exempt entities and with limited modifications to the diversity objectives for certain companies, discussed below.

• Modified Diversity Objectives for Certain Companies. Smaller reporting companies, foreign issuers, and companies with five or fewer directors have additional flexibility for satisfying the requirements.

• Non-Operating Entities Exempt. The following non-operating entities are exempt from the new rules: certain special-purpose acquisition companies; asset-backed issuers and other passive investors; cooperatives; limited partnerships; management investment companies; issuers of non-voting preferred securities, debt securities, and derivative securities that do not have equity securities listed on Nasdaq; and issuers of securities listed under Nasdaq’s Rule 5700 series.^[3]

• Board Diversity Disclosure Requirement. No later than the later of the date a company files its proxy statement or information statement (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) for the 2022 calendar year or August 6, 2022,^[4] a listed company must annually publicly disclose information on the voluntary self-identified gender, underrepresented minority, and LGBTQ+ status of the company’s board of directors in a specified format (i.e., the board diversity matrix) discussed below. The company can opt to make such board diversity matrix disclosure in one of three places as discussed below.

• Required Board Diversity Matrix. All Nasdaq-listed companies must use Nasdaq’s specific board diversity matrix format,^[5] which is available here, or a substantially similar format to annually disclose each director’s self-identified diversity statistics.^[6] Although companies may include supplemental data in addition to the information required by Nasdaq’s board diversity matrix, each company should take care that the format substantially complies with Nasdaq’s requirements (as further explained here) and that the information is disclosed in a searchable format. For the first year, the disclosure should include the current year only; however, subsequent years’ disclosures must include data from both the current year and prior year.

• Disclosure Location. The required disclosure can be on a company’s website or in its proxy or information statement or Form 10-K or 20-F. If a company opts to include the disclosure on its website, it must do so concurrently with the publication of its proxy statement or information statement (or Form 10-K or 20-F), and must submit a link to the disclosure to Nasdaq within one business day after posting.^[7]

• General Board Diversity Objective. Each listed company is also required to have, or explain why it does not have, two diverse directors on the board, including at least one diverse director who self-identifies as female and one diverse director who self-identifies as an underrepresented minority or LGBTQ+ (subject to the exceptions below) according to the transition periods discussed below.

• Modified Objectives for Certain Companies. Smaller reporting companies and foreign issuers may instead meet the diversity requirements with two female directors. Companies with five or fewer directors can meet the requirements by having at least one diverse director, whether female, underrepresented minority, or LGBTQ+.

• Alternative Disclosure if Objective Not Met (i.e., Comply-or-Disclose). A company must either satisfy the applicable diversity objective or publicly disclose why it cannot meet that requirement. If a company elects to disclose why the diversity objective was not met, it must do so at the same time and in the same location as its board diversity matrix disclosure. Nasdaq has reiterated that it will not evaluate the substantive merits of a company’s explanation.

• Transition Periods. To comply with the applicable diversity objectives, companies are subject to the following transition periods:^[8]

• • A company must have, or explain why it does not have, one diverse director by the later of the date the company files its proxy statement or its information statement for its annual meeting of shareholders (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) during the 2023 calendar year or August 6, 2023.^[9] See discussion above regarding disclosure location.

• • A company must have, or explain why it does not have, two diverse directors by the later of the date that the company files its proxy statement or its information statement for its annual meeting of shareholders (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) during the 2025 (or 2026 for companies listed on the Nasdaq Capital Market) calendar year or August 6, 2025 (or August 6, 2026, for companies listed on the Nasdaq Capital Market). See discussion above regarding disclosure location.

• Consequences for Failure to Comply. If a company does not meet the applicable diversity objective (or fails to make the required disclosure explaining why it does not meet that requirement), Nasdaq’s Listing Qualifications department will promptly notify the company of the deadline to cure the deficiency, which is the later of its next annual meeting or 180 days from the event that caused the deficiency. The company would be able to cure the deficiency either by nominating additional directors so that it satisfies the diversity requirement or by providing the required disclosure.^[10]

• Grace Period for Companies with Board Vacancies. Listed companies that no longer meet diversity objectives as a result of a board vacancy (such as due to a director’s illness, resignation, or death) have a one-year grace period to resume compliance. A company relying on this provision may opt to publicly disclose that it is relying on the grace period rather than curing the deficiency as described above.^[11]

Additional information regarding the new rules can be found on Nasdaq’s FAQs, and Nasdaq has also announced that it will host several live webinars — which will remain available for replay — to assist companies in understanding and implementing the new rules.

Board Recruiting Service Proposal

The SEC also approved Nasdaq’s Board Recruiting Service Proposal. The board recruiting service will offer eligible^[12] listed companies access to a complimentary board recruiting solution to help advance diversity on company boards. Specifically, certain Nasdaq-listed companies will be provided with one year of complimentary access for two users to the board recruiting service, which will provide access to a network of board-ready diverse candidates for companies to identify and evaluate.

Future Board Diversity Disclosure Implications

Although some states have adopted board diversity disclosure requirements or mandated board diversity,^[13] Nasdaq’s new board diversity rules are the first board diversity disclosure requirements in the United States imposed at a national level. These board diversity disclosure rules may presage the future of national board diversity reporting requirements, as both the SEC and Congress are considering mandatory disclosure requirements for public companies. According to the SEC’s rulemaking agenda, the SEC intends to propose new rules regarding board and director nominee diversity disclosures as soon as October 2021. Alternatively, Congress may pass legislation mandating board diversity disclosure. This June, the House passed a bill that would require board, director nominee, and executive officer diversity disclosures. Further, the SEC’s approval of the new Nasdaq rules may inform future steps that the SEC considers in proposing more widespread board diversity disclosure requirements for public companies later this fall, as Nasdaq’s approach provides a way for the SEC to test the waters before imposing new federal public company disclosure requirements.

[1] Although the SEC has the authority to approve or disapprove of proposals (pursuant to Section 19(b)(2)(C) of the Securities Exchange Act of 1934), the SEC does not have the ability to make any changes to a rule proposal as submitted, or to disapprove of a rule proposal on the grounds that the SEC would prefer an alternative rule in its stead.

[2] Nasdaq considers “diverse” directors to be those who self-identify as female, an underrepresented minority, or LGBTQ+, or any combination of these diverse categories. For companies incorporated in the United States, Nasdaq defines an “underrepresented minority” as an individual who self-identifies as one or more of the following: 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 (i.e., a person who identifies with more than one of these categories or one or more of these categories and White (not of Hispanic or Latinx origin)). “LGBTQ+” means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or a member of the queer community. As defined in the board diversity matrix, non-binary “refers to genders that are not solely man or woman; someone who is non-binary may have more than one gender, no gender, or their gender may not be in relation to the gender binary.” However, a company would not satisfy the diversity objectives proposed by Rule 5605(f)(2) if a director self-identifies solely as non-binary. Further, emeritus directors, retired directors, and members of an advisory board are excluded from consideration.

[3] If a company ceases to be exempt, or no longer qualifies as a foreign issuer or smaller reporting company, it must comply with the rules as of the later of (1) one year from the date that the company no longer qualifies; or (2) 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 the company’s first annual meeting subsequent to losing its prior status.

[4] Newly listed companies must satisfy this disclosure requirement within one year of listing. Note that although companies have until August 6, 2022 to comply with the disclosure requirement, calendar year-end companies will likely be required to publicly disclose their board diversity matrix much earlier in 2022. If a company does not opt to include the board diversity matrix in its 2022 proxy or information statement or 2021 Form 10-K or 20-F, the company may include the required board diversity disclosure on its website; however, it must do so concurrently with the filing of either its proxy or information statement or Form 10-K or 20-F, which for calendar year-end companies is likely to be well before the August 6, 2022 deadline.

[5] Note that Nasdaq has also provided a special format for foreign issuers.

[6] If not already doing so, companies will need to collect diversity-related information from each director. Many companies are already doing so in their annual D&O Questionnaires. Further, note that if a director who is diverse chooses not to voluntarily disclose diversity to the company, which results in the company not complying with the diversity objective, the company may provide an alternative public disclosure under Rule 5606(f)(3) explaining that it has directors who do not wish to be identified or counted as diverse in order to satisfy the rule.

[7] If a company includes the board diversity matrix in its proxy statement or information statement (or if the company does not file a proxy, its Form 10-K or 20-F), it does not need to provide a copy to Nasdaq.

[8] Note that newly listed companies have altered phase-in periods with additional time to comply, depending on the Nasdaq market on which a company is listed and whether it has five or fewer board members.

[9] Companies with boards that have five or fewer directors, regardless of listing tier, are only required to have one diverse director, or explain why not, by the later of the applicable 2023 dates.

[10] Companies that fail to comply within the curative period ultimately would be subject to Nasdaq delisting procedures, with applicable appeal rights.

[11] In such case, the company would have until the later of (i) one year from the date of vacancy or (ii) the date the company files its proxy statement or information statement, or, if the company does not file a proxy or information statement, its Form 10-K or 20-F in the calendar year following the date of vacancy, to meet, or explain why it does not meet, the applicable diversity objectives.

[12] Eligible companies include any listed company that represents to Nasdaq that it does not have (1) at least one director who self-identifies as female and (2) at least one director who self-identifies as an underrepresented minority or LGBTQ+. Foreign issuers and smaller reporting companies are eligible if they represent to Nasdaq that they do not have at (1) at least one director who self-identifies as female and (2) at least one director who self-identifies as female, an underrepresented minority, or LGBTQ+.

[13] For example, California and Washington have mandated board diversity through legislation. Other states, such as New York, Illinois, and Maryland, have imposed mandatory board diversity reporting requirements. Several other states are considering similar types of legislation or non-binding resolutions urging companies to voluntarily improve board diversity.