On December 1, Nasdaq filed a proposal with the Securities and Exchange Commission (SEC) to adopt new listing rules relating to board diversity and disclosure. If approved by the SEC, these rules will require all operating companies listed on Nasdaq's U.S. exchange (Subject Companies), subject to certain exceptions, to:
- publicly disclose board-level diversity data (proposed Rule 5606); and
- either:
- have at least two "Diverse" directors, including one who self-identifies as a female and one who self-identifies as an "Underrepresented Minority" or LGBTQ+; or
- publicly disclose why they do not (proposed Rule 5605(f)).
The proposed rules define "Diverse" as a person who self-identifies as a female, an Underrepresented Minority, or LGBTQ+ and "Underrepresented Minority" as a person who self-identifies as 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 the proposed rules are approved by the SEC, how can Subject Companies comply, and what happens if they don't? Let's break it down.
Requirements for Compliance
Rule 5606 (Board Diversity Disclosure)
Within one year of SEC approval of Rule 5606, all Subject Companies must annually disclose board-level diversity data using a standard matrix (or a format substantially similar), either on their websites or in their proxy statements or information statements for their annual shareholder meetings.
Rule 5605(f) (Diverse Board Representation)
Within two years of SEC approval of Rule 5605(f), all Subject Companies must either have at least one Diverse director or explain why they do not, either on their websites or in their proxy statements or information statements for their annual shareholder meetings.
Within four years of SEC approval of Rule 5605(f), all Subject Companies (subject to certain exceptions for (1) companies listed on the Nasdaq Capital Market, (2) "Smaller Reporting Companies" (as defined in Rule 12b-2 under the Securities and Exchange Act of 1934), and (3) "Foreign Issuers" (as defined in Rule 5605(f))) must either have two Diverse directors, including one who self-identifies as a female and one who self-identifies as an Underrepresented Minority or LGBTQ+, or explain why they do not, either on their websites or in their proxy statements or information statements for their annual shareholder meetings.
Penalties for Noncompliance
Subject Companies can be delisted for failure to comply with either proposed Rule 5606 or proposed Rule 5605(f) (but only after being given an opportunity to cure the deficiency).
Next Steps
The SEC will approve or disapprove these proposed rules within 30 to 240 calendar days from the date on which the proposal is published in the Federal Register (which has not occurred as of the date of this writing).
Resources for Companies to Meet Compliance Requirements
Nasdaq will also introduce a partnership with Equilar, the leading provider of corporate leadership data solutions, to aid Nasdaq-listed companies with board composition planning challenges.
The partnership will enable Nasdaq-listed companies that have not yet met the proposed diversity objectives to access a larger community of highly qualified, diverse, board-ready candidates to amplify director search efforts.