Nasdaq Proposes New Listing Rules Aimed at Promoting Board Diversity and Transparency

Capital Markets

On December 1, 2020, Nasdaq, Inc. (“Nasdaq”) filed a proposal with the U.S. Securities and Exchange Commission (the “SEC”) to adopt new listing rules aimed at promoting board diversity and disclosure of board diversity statistics.  This article answers some of the key questions stemming from the proposal:

I.  What exactly do the newly proposed listing rules require?

 The newly proposed listing rules can be broken down into two broader categories:

  • Disclosure of Board Diversity Statistics

Newly proposed Rule 5606(a) would require each Nasdaq-listed company to publicly disclose information on each director’s voluntary self-identified gender and racial characteristics and LGBTQ+ status (as defined below).  This information would be required to be disclosed annually in a format similar to the “Board Diversity Matrix” published by Nasdaq in connection with the proposed rules.

The matrix would include the following:

a)  The number of diverse directors based on gender identity;
b)  The number of diverse directors based on race and ethnicity; and
c)  The number of directors who self-identify as LGBTQ+.

Directors who choose not to disclose a gender would be included under a “Gender Undisclosed” category and any directors who choose not to identify as any race or not to identify as LGBTQ+ would be included in a “Undisclosed” category at the bottom of the table.

Pursuant to proposed Rule 5606(b), Nasdaq will require listed companies to provide the above-described disclosure in their annual meeting proxy statements or on their website.  If a company elects to disclose the required information on their website, it must submit the URL link to the information to the Nasdaq Listing Center within 15 days of the annual shareholder meeting.

  • Requirement to Have Diverse Directors

Newly proposed Rule 5605(f)(2) would require each Nasdaq-listed company to have, or explain why it does not have, at least two members of its board of directors who are “Diverse,” including at least one who self-identifies as female and one who self-identifies as an “Underrepresented Minority” or LGBTQ+.

Any listed company that does not satisfy the board composition diversity requirements, must provide an explanation in its proxy statement or on the company’s website.  Importantly, Nasdaq has signaled that it will not assess the substance of such an explanation, but will instead just verify that such an explanation has been provided.  However, companies may not satisfy the explanation requirement by merely stating something like “the Company does not comply with Nasdaq’s diversity rule”; a substantive explanation must be provided.  Further, we believe that investors will increasingly focus on Board diversity and failure to achieve some level of diversity could make investors avoid a company and therefore hurt its stock price.

II.  Are any companies exempt from the proposed rules?

The following types of Nasdaq-listed companies are exempt from both the Board diversity and related disclosure requirements:

a)  Acquisition companies listed under IM-5101-2;
b)  Asset-backed issuers and other passive investors;
c)  Cooperatives;
d)  Limited partnerships;
e)  Management investment companies;
f)  Issuers of non-voting preferred securities, debt securities and/or derivative securities only;
g)  Issuers of securities listed under the Rule 5700 Series (i.e., securities other than common or preferred stock and warrants)

Further, the proposed rules provide flexibility for foreign issuers and smaller reporting companies regarding compliance with the director diversity requirement.  Smaller reporting companies may satisfy the requirement by having two female directors.  The details surrounding foreign issuer compliance flexibility are beyond the scope of this article.

III.  How is “Diverse” defined under the proposed rules?

Pursuant to proposed rule 5605(f)(1), a “Diverse Director” is defined as an individual who self-identifies in one or more of the following categories: Female, Underrepresented Minority, or LGBTQ+.  See below for expanded definitions from Nasdaq:

    • “Female” means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth;
    • “LGBTQ+” means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community; and
    • “Underrepresented Minority” means 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.

IV.  What is the timeframe for compliance with the proposed rules?

All Nasdaq-listed companies (unless exempt) must be compliant with the board diversity statistics disclosure rules within one year of the SEC’s approval of the rule.  Further, any company newly listing on Nasdaq must satisfy the disclosure rule within one year of listing.

In contrast, the timeframe for compliance with the director diversity rule itself is partially based on a company’s listing tier.  All Nasdaq-listed companies (unless exempt) will be expected to have, or explain why they do not have, at least one Diverse director within two years of the SEC’s approval of the new rule.  Companies listed on the Nasdaq Global Select market and Nasdaq Global Market will be required to have, or explain why they do not have, two Diverse directors, within four years of the SEC’s approval of the new rule.  Companies listed on the Nasdaq Capital market will be required to have, or explain why they do not have, two Diverse directors, within five years of the SEC’s approval.

Newly listed companies will be given one year from the date of listing to satisfy the diverse board composition requirements, unless such company lists before the above described initial compliance timeframes.

Blake Leger and Don Reynolds are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.