On August 6, 2021, the US Securities and Exchange Commission (SEC) approved a Nasdaq rule change that requires its listed companies to have diverse boards or explain why they do not. Subject to certain issuer exemptions and transition periods, the new rule will require that Nasdaq-listed companies have two diverse directors—including one who identifies as female and another as an underrepresented minority or LGBTQ+—or explain why they do not. Nasdaq-listed companies subject to the rules will also be required to release board-level diversity statistics using a standard template, the form of which is available here.

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In a written statement, SEC Chair Gary Gensler said the new rules “will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.”

Foreign issuers (including “foreign private issuers”) and “smaller reporting companies” may satisfy the rule by having, or explaining why they do not have, two female directors. Further, each company with a board of directors of five or fewer members may satisfy the rule by having, or explaining why it does not have, one diverse director.

Nasdaq Global Select Market and Nasdaq Global Market companies will have, or explain why they do not have, one diverse director by the later of August 6, 2023, and two diverse directors by the later August 6, 2025, or the date the company files its proxy or information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s annual shareholder meeting in that year.

Nasdaq Capital Market companies will have, or explain why they do not have, one diverse director by the later of August 6, 2023, and two diverse directors by the later of August 6, 2026, or the date the company files its proxy or information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s annual shareholder meeting in that year.

Companies with boards of five or less directors, regardless of listing tier, will have, or explain why they do not have, one diverse director by the later of August 6, 2023, or the date the company files its proxy or information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s annual shareholder meeting in that year.

After an initial four- or five-year transition period from August 6, 2021, newly listed companies on Nasdaq—including IPOs, direct listings or a company listing in connection with a “de-SPAC” business combination transaction—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, with differing milestones depending on the company’s market tier. Companies listing before the expiration of the initial four- or five-year transition period have the remainder of the applicable initial four- or five-year period or two years from the date of listing (whichever is longer) to satisfy the requirement.

Additional summary information regarding the new rule, including FAQs, issued by Nasdaq is available here. The full text of Nasdaq’s proposed rule change (with the text of the new rule set forth in Exhibit 5 thereof) and its application for approval to the SEC is available here. The SEC’s release approving the new rule is available here.

Charles Darantiere, a summer associate in the Washington, DC, office, also contributed to this article.