On Aug. 6, 2021, the U.S. Securities and Exchange Commission (SEC) approved The Nasdaq Stock Market LLC’s (Nasdaq) proposal, as amended, to implement diversity requirements for companies listed on the Nasdaq exchanges. In a press release accompanying the proposal, Nasdaq stated that its goal was to “provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors.”

At a high level, and with some exceptions, the new rule will require any company listed on the Nasdaq exchanges to (a) have at least two diverse[1] directors on its board or explain why it does not meet this objective and (b) provide standardized disclosures in the form of a Board Diversity Matrix, or similar format, on the composition of its board. Nasdaq amended its proposal on Feb. 26, 2021, to provide additional flexibility to certain companies. Among other things, this amendment granted newly listed companies additional time to comply with the diversity requirements and allowed companies with boards of five or fewer to come into compliance with only one diverse director.

Nasdaq companies are required to comply with the new board diversity rules by the later of the below dates or the date the company files its proxy or information statement for its annual meeting of shareholders in the applicable compliance year (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F):

• Aug. 7, 2023: All Nasdaq-listed companies must have, or explain why they do not have, one diverse director.
• Aug. 6, 2025: Companies listed on the Nasdaq Global Select and the Nasdaq Global Market must have, or explain why they do not have, two diverse directors.
• Aug. 6, 2026: Companies listed on the Nasdaq Capital Market must have, or explain why they do not have, two diverse directors.

Further, a company listed on Nasdaq exchanges will be required to provide a Board Diversity Matrix, or similar disclosure, by the later of (a) Aug. 8, 2022, or (b) the date the company files its proxy or 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 2022 calendar year. The required disclosures must be made in a proxy statement or information statement (or if a company does not file a proxy or information statement, in its Form 10-K or 20-F) or, concurrently with the filing of such statement, on the company’s website.

In his statement on the SEC’s approval of the Nasdaq proposal, SEC Chairman Gary Gensler stated that these “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.” Commissioners Allison Herren Lee and Caroline A. Crenshaw issued a statement in support of the proposal asserting that the rule “should improve the quality of information available to investors for making investment and voting decisions by providing consistent and comparable diversity metrics.”

The Nasdaq proposal was approved over the objections of Commissioner Hester M. Peirce. Commissioner Peirce objected to the proposal because she believed that the rule was (i) inconsistent with the Exchange Act; (ii) did not protect investors; and (iii) was contrary to the public interest. Additionally, Commissioner Elad L. Roisman voiced constitutional concerns in his dissent from the approval.

For more detail, BakerHostetler’s initial alert may be found here, and the full SEC Approval Order can be found here.