Jones Day

The Board Diversity Proposal generally requires 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," defined as at least one director who self-identifies as female and one director who self-identifies as an underrepresented minority or LGBTQ+. Smaller reporting companies, those with five or fewer directors, and foreign issuers have different standards. In addition, each Nasdaq-listed company will be required annually to disclose its board-level diversity data in a specified format that would include the total number of directors on the board, as well as (i) the number of directors based on gender identity and the number of directors who did not disclose gender; (ii) the number of directors based on race and ethnicity, disaggregated by gender identity; (iii) the number of directors who self-identify as LGBTQ+; and (iv) the number of directors who did not disclose a demographic background.

If a company elects to satisfy the disclosure requirements of the new rule by explaining why it does not meet the applicable diversity objectives, it must specify the particular aspect of board diversity it fails to satisfy and explain the reasons why it does not have two diverse directors (or one diverse director for a company with a smaller board).

The Board Recruiting Service Proposal will provide companies with one year of complimentary access to a recruiting service to help connect them with a network of board-ready diverse candidates to evaluate.

The new rules requiring diverse board representation, or disclosure regarding the reason for a lack of such diverse representation, provide for gradual compliance for currently listed companies:

SEC Approves Chart

The board-level diversity data required by the new rules must be disclosed by the later of (i) August 8, 2022, or (ii) the date the company files its proxy statement for its 2022 annual meeting of shareholders. If the proxy statement is filed before August 8, 2022, and does not disclose board-level diversity data, the data must be disclosed on the company's website by August 8, 2022.

Failure to adhere to the new rules could result in delisting if not remedied within specified grace periods.

SEC Chair Gary Gensler said the 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." Two of the five SEC Commissioners voted against the Board Diversity Proposal, while none of the Commissioners objected to the Board Recruiting Service Proposal.

To adopt the rules, the SEC concluded, under the Securities Exchange Act of 1934, that they "are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest." 15 U.S.C. 78f(b)(5). SEC Commissioners Hester Peirce and Elad Roisman expressed support for the Board Diversity Proposal's goals but objected to its legality. Commissioner Peirce argued that the rule "fall[s] outside the purposes of the [Exchange] Act, which Congress made quite narrow in scope." Commissioners Peirce and Roisman also questioned whether, if subject to it, the rules complied with the Constitution, including free speech rights.

Looking Ahead

Nasdaq-listed companies and their boards of directors should take steps to evaluate their obligations under the new rules and, in particular, diversity at the board level and the scope of disclosure in current filings.

Given the recently concluded period of public comment for the SEC to consider new action on climate change disclosures and intensifying focus on environmental, social, and corporate governance ("ESG") issues, we expect the question of how far securities regulators can and should reach beyond their historical areas of concern to respond to social and political concerns will continue to be front and center.

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