On Dec. 1, 2020, The Nasdaq Stock Market LLC (Nasdaq) submitted a proposal to the U.S. Securities and Exchange Commission (SEC) to require a company listed on its exchanges, with some exceptions, to (a) have at least two diverse directors on its board or explain why it does not meet these objectives and (b) provide standardized disclosure on the composition of its board. In its proposal, Nasdaq noted the gap between “heightened attention” to diversity and the lack of both board diversity and useful disclosure. Nasdaq believes that “the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional diversification of their boards.”

At a high level, the proposal:

• Requires a listed company to include on its board at least one director who self-identifies as “Female” and one director who self-identifies as an “Underrepresented Minority” or “LGBTQ+,” or to provide an explanation as to why it does not meet these objectives.
• Requires a listed company to disclose directors’ voluntary, self-identified diversity information in a Board Diversity Matrix (or a substantially similar format) in its proxy or annual information statement or on its website (with the opportunity to select “Undisclosed” if a director declines to self-identify).
• Sets definitions for Female,[1] LGBTQ+[2] and Underrepresented Minority[3] for consistency.

Exceptions include (a) giving “Foreign Issuers”[4] and “Smaller Reporting Companies”[5] the option to meet the composition requirement by having two Female directors, (b) incorporating a separate “Underrepresented Individual in Home Country Jurisdiction” category for Foreign Issuers (which may have different underrepresented groups in their jurisdictions of organization) and (c) carve-outs for certain companies that are already exempt from corporate governance standards on board composition (e.g., companies without boards or that are not operating companies).

If the SEC approves the proposal, (a) the disclosure requirement would be effective one year after such approval and (b) a listed company generally would need to have at least one diverse director within two years and the second diverse director within four years (for the Nasdaq Global Select Market or the Nasdaq Global Market) or five years (for the Nasdaq Capital Market), or disclose why it does not meet the composition requirement. A newly listed company would have one year from listing to comply with the disclosure requirement and one year from listing, or the longer transition period above (whichever ends later), to comply with the composition requirement (unless already under similar requirements of a national exchange).

Notice of the proposal was published in the Federal Register on Dec. 11, 2020, and comments were solicited through Jan. 4, 2021. While the Securities Exchange Act of 1934 requires the SEC to either approve or deny a self-regulatory organization’s proposed rule change or commence additional proceedings within 90 days of the date of publication, there is the possibility that the Commission may not act on the proposal before the 90-day period ends.

We expect the SEC to consider additional proposals to amend the disclosure regime, including diversity disclosure initiatives in 2021 once the Biden administration nominates a new SEC Chair because of the resignation of SEC Chairman Jay Clayton on Dec. 23, 2020. There will also be continued Congressional action on legislative initiatives to mandate new disclosures for public companies. Some of these new disclosure mandate legislative initiatives could be linked to the acceptance of future COVID-19 financial assistance. As we previously reported, the two Democratic commissioners dissented to amendments to Regulation S-K on Aug. 26, 2020, for failure to address topics such as diversity and climate change. These same Commissioners also dissented to amendments to Regulation S-K on Nov. 18, 2020, for failing to address topics such as supply chain and risk management, human capital management and climate change. For further discussion of recent trends in ESG (environmental, social and governance) matters and predictions, please see our webinar from Nov. 17, 2020.

[1] Defined as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.”
[2] Defined as “an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community.”
[3] Defined 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.” If an individual identifies as Two or More Races or Ethnicities, such individual must also identify those separate categories.
[4] Defined as “(a) a Foreign Private Issuer (as defined in Rule 5005(a)(19) [of the Nasdaq Listing Rules]), or (b) a company that (i) is considered a ‘foreign issuer’ under Rule 3b-4(b) under the [Securities Exchange] Act [of 1934] and (ii) has its principal executive offices located outside of the United States.”
[5] “[A]s set forth in Rule 12b-2 under the [Securities Exchange] Act [of 1934].”