On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit, in a 9-8 en banc decision, vacated the approval of Nasdaq's board diversity rules by the Securities and Exchange Commission (SEC). The court held that the "SEC failed to justify its determination that Nasdaq's Board Diversity Proposal is consistent with the requirements of the Exchange Act."[1] Nasdaq indicated that it will not challenge the decision.[2] This ruling has several important implications for Nasdaq-listed companies as they prepare for the 2025 proxy season.
Key Takeaways
- Nasdaq-listed companies are no longer required to:
- include the board diversity matrix in their proxy statement or on their websites
- provide an explanation if their board composition does not meet Nasdaq's diversity objectives
- Public companies must continue to comply with the diversity disclosure requirements under Item 407(c) of Regulation S-K
- Companies should carefully consider the diversity-related policies of proxy advisory firms and large institutional investors but can be flexible in the format of future diversity disclosures
Vacated Nasdaq Board Diversity Rules
Now-vacated Nasdaq board diversity rules (Rules 5605(f) and 5606) required companies to:
- annually publish a standardized matrix of directors' self-identified diversity characteristics in the proxy statement or on the website; and
- meet Nasdaq diversity objectives (that varied depending on the size of the board and the type of the filer) or explain non-compliance.
Additionally, Nasdaq provided certain non-compliant companies complimentary access to a network of "board-ready diverse candidates" under Rule IM-5900-9.
Regulation S-K Board Diversity Considerations Disclosure Remains Fully Applicable
Publicly traded issuers should remember that the diversity disclosures required by long-standing Item 407(c)(2)(vi) of Regulation S-K[3] remain in force and effect. Accordingly, public companies must disclose:
- whether the nominating committee (or the board) considers diversity in identifying nominees for directors;
- whether the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees; and
- in the event the above-described policy is in place, how the policy is implemented, and how the nominating committee (or the board) assesses the effectiveness of its policy.
The SEC's C&DI Question 116.11 provides some guidance on the scope of these disclosures, clarifying that together with Regulation S-K Item 401(e)[4] disclosure requirements (addressing specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director), in their standing Item 407(c)(2)(vi) disclosures the companies are expected to identify diversity characteristics considered in the determination of director nominees and to provide a description of how the compensation committee considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socioeconomic or demographic characteristics.[5]
Additional Considerations for Board Diversity Disclosures
While disclosure under Nasdaq diversity rules is no longer required, companies should remain mindful of the diversity disclosure and board composition expectations of proxy advisory firms[6] and institutional investors. Depending on the company's investor base, continuing voluntary disclosures related to board diversity and corporate governance goals may be strategically advantageous. Companies now have greater flexibility in determining the content, timing, and format of such disclosures.
Final Thoughts
Companies should revise internal documents, such as Director and Officer Questionnaires, to remove references to the vacated Nasdaq rules. Beyond the Regulation S-K requirements, companies are free to decide how to approach board diversity disclosures moving forward.
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For more information on board diversity disclosure and related matters, please contact any member of the Venable capital markets practice.
[1] Fair Bd. Recruitment v. Sec. & Exch. Comm'n, No. 21-60626, 2024 WL 5078034, at *19 (5th Cir. Dec. 11, 2024).
[2] Q&A Identification Number 1873 on the Nasdaq website states as follows: "Does Nasdaq have a board diversity disclosure rule? On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit vacated the U.S. Securities and Exchange Commission's approval of Nasdaq's board diversity disclosure rule. Nasdaq does not intend to seek further review of that decision." The Q&A is available here.
[3] 17 CFR § 229.407 is available here.
[4] 17 CFR § 229.401 is available here.
[5] See SEC Regulation S-K C&DIs, Question 116.11 available here.
[6] For example, see ISS's proxy voting guidelines on p. 13 (available here) and Glass Lewis 2024 Benchmark Policy Guidelines on p. 42-44 (available here).