Nasdaq Proposes Listing Rules Regarding Board Diversity

Wilson Sonsini Goodrich & Rosati

On December 1, 2020, Nasdaq announced the filing of a proposal with the U.S. Securities and Exchange Commission (SEC) to adopt new listing rules related to board diversity and disclosures. If adopted, these new listing rules would require Nasdaq-listed companies, subject to certain exceptions, to 1) either have, or explain why they do not have, at least two diverse directors, and 2) disclose certain statistical information regarding diversity among the members of the company's board of directors.

Unlike recent California legislation mandating board diversity, the proposed rule does not mandate board diversity, with Nasdaq opting instead to propose what it refers to as a "comply-or-explain" model. Nonetheless, given the potential magnitude of this proposal on board composition and disclosure considerations, Nasdaq has already posted FAQs relating to this proposal, as well as a summary of what Nasdaq-listed companies should know about this proposal, on its Listing Center website.

The following is a summary of some of the key provisions of Nasdaq's proposal.

Diversity Requirement

General Requirement. Nasdaq proposes to adopt Rule 5605(f), which would require Nasdaq-listed companies, subject to certain exceptions, to have, or explain why they do not have, at least two members of the board who are Diverse, including 1) at least one director who self-identifies as Female and 2) at least one director who self-identifies as an Underrepresented Minority or LGBTQ+.1

This "comply-or-explain" model stands in contrast to recent legislation in California. In September 2018, then-California Governor Jerry Brown signed into law Senate Bill 826, mandating representation of women on the boards of publicly held corporations based in California. Subsequently, in September 2020, California Governor Gavin Newsom signed into law Assembly Bill 979, mandating representation of underrepresented communities on the boards of publicly held corporations based in California. These laws, and their respective diversity requirements, are discussed in greater detail in our previous alerts here and here. Given the overlapping, but differing, requirements of California's board diversity laws and Nasdaq's proposal, Nasdaq published a chart highlighting some of the key the differences. Importantly, California's board diversity laws apply to publicly held corporations with principal executive offices located in California, whereas the Nasdaq proposal would apply to Nasdaq-listed companies (subject to limited exceptions discussed below), regardless of the location of their principal executive offices. In addition, the Nasdaq proposal would not supersede or otherwise modify California's board diversity laws; therefore, the board diversity mandates under California's board diversity laws would continue to apply to publicly held corporations with principal executive offices in California in addition to the Nasdaq requirements (if the proposal is approved).

Public Disclosure Requirement. If a Nasdaq-listed company does not have at least two Diverse board members (including at least one who self-identifies as Female, and at least one who self-identifies as an Underrepresented Minority or LGBTQ+), then it would be required to 1) specify the applicable provisions of proposed Rule 5605(f)(2) to which it is subject (such as the applicable diversity objectives and the timeframe applicable to the company's market tier)2 and 2) explain the reasons why it does not have two Diverse directors. In its proposal, Nasdaq stated that it "would not assess the substance of the company's explanation, but would verify that the company has provided one."

The foregoing disclosures would need to be made either in the company's proxy (or information) statement for its annual meeting of shareholders, or on its website. If the company elects to disclose this information on its website, then it would be required to notify Nasdaq of the location where the information is available by submitting the URL link through the Nasdaq Listing Center within 15 calendar days of the company's annual meeting of shareholders.

Accommodations for Foreign Issuers and Smaller Reporting Companies. Under the proposed listing rules, Nasdaq defines "Diverse" to include, among other things, an individual who self-identifies as an "Underrepresented Minority." The definition of "Underrepresented Minority" includes the categories used by the U.S. Equal Employment Opportunity Commission (EEOC), and those categories are to be construed in accordance with the definitions used by the EEOC. Recognizing that these categories of race and ethnicity may not be reflective of racial and ethnic diversity concerns in other countries, Nasdaq has proposed modifying the definition of "Diverse" for Foreign Issuers by removing "Underrepresented Minority" and replacing it with the following: "an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the Company's home country jurisdiction." Foreign Issuers include foreign private issuers and companies with principal executive offices located outside of the United States.

Nasdaq also proposes to provide flexibility for both Foreign Issuers and smaller reporting companies by permitting these companies to satisfy the diversity objectives with two directors who self-identify as Female, rather than requiring at least one director who self-identifies as Female, and at least one director who self-identifies as LGBTQ+ or an Underrepresented Minority (or, in the case of a Foreign Issuer, the substituted definition for Underrepresented Minority).

Transition and Phase-In Periods. If approved by the SEC, there will be a transition period to provide Nasdaq-listed companies with time to comply with these new requirements. Based on the date of the SEC's approval, referred to as the Approval Date, Nasdaq-listed companies would be expected to comply with this new requirement as follows:

  • Companies listed on The Nasdaq Global and Global Select Markets would be required to have, or explain why they do not have, at least one Diverse director no later than two calendar years after the Approval Date, and at least two Diverse directors no later than four calendar years after the Approval Date;
  • Companies listed on The Nasdaq Capital Market would be required to have, or explain why they do not have, at least one Diverse director no later than two calendar years after the Approval Date, and at least two Diverse directors no later than five calendar years after the Approval Date.

Therefore, if the Approval Date is March 25, 2021, then a company listed on The Nasdaq Global Market would be required to have, or explain why it does not have, at least one Diverse director no later than March 25, 2023, and at least two Diverse directors no later than March 25, 2025.

In addition, Nasdaq is proposing a one-year phase-in period for companies listing on Nasdaq after the Approval Date (whether through an initial public offering, direct listing, transfer from the over-the-counter market or another exchange, or through a de-SPAC merger), which would apply after the end of the applicable transition period discussed above. Accordingly, if a company listed after the expiration of the applicable transition period discussed above, then it would have one year from the date of listing to comply with the applicable requirement in proposed Rule 5605(f)(2). If a company listed after the Approval Date, but prior to the expiration of the applicable transition period discussed above, then it would have the later of the expiration of the applicable transition period or the one-year phase-in period to comply. Foreign Issuers and smaller reporting companies would also be provided a one-year transition period to satisfy the applicable requirements of proposed Rule 5605(f)(2) if they no longer qualify as a Foreign Issuer or smaller reporting company, respectively.

Board Diversity Disclosure

General Requirement. Nasdaq proposes to adopt Rule 5606, which would require Nasdaq-listed companies, subject to certain exceptions, to disclose annually, to the extent permitted by applicable law, a Board Diversity Matrix, substantially in the format provided by Nasdaq here. The Board Diversity Matrix would not include specific names of directors but rather would include the total number of directors on the company's board, as well as the number of directors who self-identify based on certain characteristics, specifically 1) gender identity (male, female, or non-binary), 2) race and ethnicity (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), and 3) LGBTQ+. Any director who chooses not to disclose a gender would be included under "Gender Undisclosed" and any director who chooses not to identify as to any race or not to identify as LGBTQ+ would be included under "Undisclosed."

In the first year of disclosures, companies would only be required to disclose the diversity statistics for the current year. Following the first year of disclosure, companies would be required to disclose the diversity statistics for the current year and the immediately preceding year. Disclosure would need to be made either in a company's proxy (or information) statement for its annual meeting of shareholders, or on its website. If the company elects to disclose this information on its website, then it would be required to submit the disclosure and include a URL link to the disclosure through the Nasdaq Listing Center within 15 calendar days of company's annual meeting of shareholders.

Transition and Phase-In Periods. If approved, proposed Rule 5606 would become operative one year after the Approval Date. Thus, the transition period for this board diversity disclosure requirement is markedly shorter than the transition period for proposed Rule 5605(f) discussed above. Nasdaq is proposing a one-year phase-in period for companies listing on Nasdaq after the Approval Date.

Exemptions to Proposed Rules

Certain companies would be exempt from both the diversity requirement and the board diversity disclosure requirement. These companies include special purpose acquisition companies (prior to any business combination or de-SPAC merger), asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies, issuers of non-voting preferred securities, debt securities and derivative securities, and issuers of securities listed under the Nasdaq Rule 5700 Series.

Companion Proposal

In addition to the proposal discussed above, on December 1, 2020, Nasdaq filed a proposal with the SEC to adopt Listing Rule IM-5900-9. Under this proposed rule, Nasdaq would offer eligible companies (that is, any Nasdaq-listed company that would need to take action to satisfy the diversity requirements discussed above) two seats of a board recruiting solution, to assist the company in identifying and evaluating diverse board candidates. Until December 1, 2022, any eligible company that requests access through the Nasdaq Listing Center will receive complimentary access for one-year from the initiation of the service. In its press release announcing these new proposals, Nasdaq announced a partnership with Equilar to provide this board recruiting solution to eligible companies through the Equilar BoardEdge platform.

What to Do Now?

These proposals were submitted earlier this week to the SEC. Interested parties will have at least 21 days after the SEC publishes these proposals in the Federal Register to submit comments. Instructions on how to submit comments can be found here.


[1] Under the proposed listing rules, Nasdaq defines the capitalized terms used in this paragraph as follows:

Diverse means an individual who self-identifies in one or more of the following categories: Female, Underrepresented Minority, or LGBTQ+;

Female means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth;

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; and

LGBTQ+ means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.

[2] In the proposal, Nasdaq provided sample disclosure that would satisfy this part of the required disclosure for a smaller reporting company listed on the Nasdaq Capital Market tier:

As a Smaller Reporting Company listed on the Nasdaq Capital Market tier, the Company is subject to Nasdaq Rule 5605(f)(2)(C), which requires the company to have, or explain why it does not have, at least two Diverse directors, including at least one director who self-identifies as Female. Under Rule 5605(f)(7), the Company is required to have at least one Diverse director by March 10, 2023, and a second Diverse director by March 10, 2026. The Company has chosen to satisfy Rule 5605(f)(2)(C) by explaining its reasons for not meeting the diversity objectives of Rule 5605(f)(2)(C), which the Company has set forth below.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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