On August 6, 2021, the Securities and Exchange Commission (the “SEC”) approved the board diversity rule proposed by the Nasdaq Stock Market LLC (“Nasdaq”) mentioned in our previous article (the “Board Diversity Rule”). Nasdaq Rule 5605(f) requires each non-exempt Nasdaq-listed company to have, or explain why it does not have, at least two members of its board of directors who are diverse. The rule defines “Diverse” to mean an individual who self-identifies in at least one of the following categories: Female, Underrepresented Minority, or LGBTQ+ (all of which are defined below).

More specifically, the rule requires each listed company to have, or explain why it does not have, at least two members of its board of directors who are Diverse, including (i) at least one director who self-identifies as Female (defined as an individual who self-identifies as a woman, regardless of the individual’s designated sex at birth), and (ii) at least one director who self-identifies as an Underrepresented Minority (defined as 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) or LGBTQ+ (defined as an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community).

Exceptions and Exemptions From The Rule

The rule provided for exceptions for certain Nasdaq-listed companies:

  • Foreign Issuers are required to have, or explain why they do not have, at least two members who are Diverse, including at least one Diverse director who self-identifies as Female; however, the second director of a Foreign Issuer may include a Diverse individual who is only considered Diverse in the country of the company’s principal executive offices, even if such individual would not be considered Diverse in the United States.
  • Smaller Reporting Companies (as defined within Rule 12-b under the Act) may satisfy the Board Diversity Rule by having two Female directors.
  • Companies with a board of directors of five or fewer members must have, or explain why it does not have, one member of its board of directors who is Diverse.

A number of other companies are also exempt from the requirements of the Board Diversity Rule, including acquisition companies listed under IM-5101-2, asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies, issuers of non-voting preferred securities, debt securities and Derivative Securities that do not have equity securities listed on Nasdaq, and issuers of securities listed under the Rule 5700 Series.

Board Diversity Disclosure

The SEC also approved Rule 5606, in which non-exempt Nasdaq-listed companies must annually disclose information on each director’s voluntary self-identified characteristics. The companies will be required to disclose the total number of directors that identify as female, male, non-binary, or chose not to disclose gender, and further disclose each director’s demographic background, including such director’s racial and ethnic backgrounds and LGBTQ+ status. This rule does not apply to the exempt companies, as defined in Rule 5605(f)(4).

Deadlines To Comply

The deadline to comply with the Board Diversity Rule depends on which Nasdaq exchange such company is listed. Companies listed on The Nasdaq Global Select Market, The Nasdaq Global Market or The Nasdaq Capital Market must have, or explain why they do not have, at least one Diverse director by the later of (i) August 6, 2023; or (ii) the date the company files its proxy statement or its information statement for the company’s annual shareholders meeting during 2023.

Companies listed on The Nasdaq Global Select Market or The Nasdaq Global Market must have, or explain why they do not have, at least two Diverse directors by the later of (i) August 6, 2025; or (ii) the date the Company files its proxy statement or information statement for the company’s annual shareholders meeting during 2025. Companies listed on The Nasdaq Capital Market must have, or explain why they do not have, at least two Diverse directors by the later of (i) August 6, 2026; or (ii) the date the company files its proxy statement or information statement for the company’s annual shareholders meeting during 2026.

Companies must comply with the annual disclosure requirements of Rule 5606 by the earlier of (i) August 6, 2022 or (ii) the date the company files its first proxy statement or its information statement for its annual meeting of shareholders.

Key Takeaways

Companies should start taking steps now to address the requirements under these new rules. Appropriate disclosure methods and procedures in connection with gathering the information required to fulfill the obligations under these diversity requirements should be developed in order to efficiently and ethically comply.

The SEC’s Order approving Nasdaq’s proposed rule can be found here.

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Photo of David R. Earhart David R. Earhart

Leader of the Capital Markets and Securities Practice Group, David’s practice covers all areas of corporate, transactional and securities law, everything from complex mergers, acquisitions and dispositions to representation of both issuers and underwriters in all types of public and private offerings of…

Leader of the Capital Markets and Securities Practice Group, David’s practice covers all areas of corporate, transactional and securities law, everything from complex mergers, acquisitions and dispositions to representation of both issuers and underwriters in all types of public and private offerings of debt and equity.