International Capital Markets Newsletter - Winter 2021: New Nasdaq Board Diversity Listing Rules

Dechert LLP

Dechert LLP

On 6 August 2021, the U.S. Securities and Exchange Commission (the “SEC”) approved The Nasdaq Stock Market LLC’s (“Nasdaq”) proposal to adopt listing rules 5605(f) and 5606 related to enhancing board diversity (the “Board Diversity Rules”). The Board Diversity Rules are aimed at improving corporate governance at Nasdaq-listed companies through a “comply or explain” disclosure-based framework and enhanced transparency of board diversity statistics.

Rule 5605(f) – Diverse Directors

Rule 5605(f) requires Nasdaq-listed companies to have (or explain why they do not have) at least two self-identified “diverse” directors, including: (i) at least one who self-identifies as female; and (ii) at least one who self-identifies as an underrepresented minority.

An underrepresented minority includes 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 such races or ethnicities, or LGBTQ+. Alternatively, if a company considers directors who self-identify in racial or ethnic categories beyond those described to be diverse it may explain what racial and ethnic categories it considers to be diverse when providing the necessary disclosure.

Smaller reporting companies (companies with five or fewer board members) and foreign issuers are also subject to the requirement to have two diverse directors, at least one of whom self-identifies as female. Foreign issuers, however, may satisfy the board diversity requirement under a broader definition of diversity and may appoint a director who self-identifies as underrepresented in their home jurisdiction. Smaller reporting companies, meanwhile, are only required to have one diverse director.

A company that chooses to explain why it does not comply with the diverse director requirements must specify which aspect of rule 5605(f) it does not satisfy and provide the reason why. Nasdaq, however, will not evaluate the substance or merits of that explanation.


Rule 5605(f) has a three-year, tiered compliance period starting 7 August 2023 (although newly-listed companies are subject to an extended compliance period):

  • All Nasdaq-listed companies are required to have at least one diverse director within two years (by 6 August 2023 or the date on which the company files its proxy materials for the company’s annual shareholders meeting held during the 2023 calendar year).
  • Larger companies listed on the Nasdaq Global Select Market or Nasdaq Global Market tiers must have two diverse directors by 6 August 2025 or the date on which the company files its proxy materials for the company’s annual shareholders meeting held during the 2025 calendar year.
  • Smaller companies listed on the Nasdaq Capital Market tier have until 6 August 2026 (or the date on which the company files its proxy materials for the company’s annual shareholders meeting held during the 2026 calendar year) to appoint a second diverse director.

Nasdaq-listed companies that do not already satisfy the diverse directors requirement will be offered one-year of complimentary access to a board recruiting service for help accessing board-ready, diverse candidates.

Failure to comply

If a listed company fails to comply or explain, Nasdaq will notify the company that it has until the later of the company’s next annual shareholders meeting or 180 days from the event that caused the deficiency, to cure it.

Rule 5606 - Board Diversity Disclosure

Rule 5606 requires Nasdaq-listed companies to publicly disclose aggregated statistical data (in the format of a standardized matrix set out in the rule) in respect of: (i) the total number of company board members; and (ii) the self-identified gender and racial characteristics and LGBTQ+ status of the board of directors.

This information must be provided in a searchable format in either: (i) the proxy statement for the annual shareholders meeting; (ii) the Annual Report on Form 10-K or Form 20-F; or (iii) on the company’s website. If the information is provided on its website, the company must also submit the disclosure to the Nasdaq Listing Centre no later than 15 calendar days after its annual shareholders meeting.

Foreign issuers must also comply with this disclosure requirement, however, they may again apply a broader definition of diversity.

For the first year, companies are required to provide only current year data. In subsequent years companies must disclose data relating to both the current and prior year.


The compliance period begins on 8 August 2022 or the date on which the company files its 2022 proxy materials, whichever is later (or in its annual report on Form 10-K or 20-F if the company does not file a proxy statement). Newly listed companies must comply with the rule within one year of listing.

Failure to comply

If a listed company fails to comply, it will have 45 days after notification of non-compliance by Nasdaq to submit a plan to regain compliance. Nasdaq may determine to provide the company with a further 180 days to regain compliance following receipt of the plan.

Practical Considerations

The Board Diversity Rules are applicable to the majority of Nasdaq-listed companies with only a limited number of exceptions (including acquisition companies, asset-backed issuers and other passive issuers, as well as issuers of non-voting preferred securities, debt securities and derivative securities that do not list equity securities). Nasdaq-listed companies and companies considering a listing in the near future should take steps now to address their obligations under the new rules by:

  • reviewing the current composition of their board of directors to determine if it complies with the new requirement and, where necessary, begin succession planning;
  • considering adopting a policy requiring the inclusion of women and underrepresented minorities in the pool of new candidates for the board (and update nominating and corporate governance committee charters to reflect this);
  • updating annual D&O questionnaires to include questions on self-identified diversity characteristics, as required to be disclosed in the board diversity disclosure matrix; and
  • consulting with the board of directors about the best way to gather sensitive personal data.

The SEC’s approval of the Board Diversity Rules is in keeping with increased market focus on board diversification. The SEC is expected to propose its own rules regarding board diversity disclosures later this year while the New York Stock Exchange has established the NYSE Board Advisory council to address what it considers “the critical need for inclusive leadership by connecting diverse candidates with companies seeking new directors”.

These new Nasdaq rules may turn out to be at the forefront of a more global approach to encourage board diversity. In the United Kingdom, the UK Financial Conduct Authority (the “FCA”) has also published proposals to adopt a similar “comply or explain” requirement for meeting diversity targets as part of a consultation, which closed on 20 October 2021. The FCA intends to implement the relevant rule changes in late 2021, subject to consultation feedback and FCA Board approval

Written by:

Dechert LLP

Dechert LLP on:

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