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SEC Approves Nasdaq Board Diversity Rules

By | August 8, 2021

The SEC has approved the Nasdaq board diversity rules.

Diverse Board Representation

In general, each Nasdaq listed company must 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 Diverse director who self-identifies as Female; and (ii) at least one Diverse director who self-identifies as an Underrepresented Minority or LGBTQ+.

Diverse is defined to mean an individual who self-identifies in one or more of the following categories: Female, Underrepresented Minority, or LGBTQ+.

Female is defined to mean an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.

Underrepresented minority is defined to mean 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.

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

Amongst other things, the rules provide accommodations for:

  • A smaller reporting company must have, or explain why it does not have, at least two members of its board of directors who are Diverse, including at least one Diverse director who self identifies as Female. The second Diverse director may include an individual who self-identifies as one or more of the following: Female, LGBTQ+, or an Underrepresented Minority.
  • Each company with a board of directors of five or fewer members must have, or explain why it does not have, at least one member of its board of directors who is Diverse. If a Company has five members on its board of directors before becoming subject to the new rules, it shall not become subject to the requirement to have at least two members of its board of directors who are Diverse if it adds one director to satisfy this this rule for five or fewer board members, thereby becoming a six-member board. However, a company would become subject to the new rules if it subsequently expands its board.
  • Certain modifications are made for foreign private issuers.
  • The following types of companies are exempt: acquisition companies; asset-backed issuers and other passive issuers; cooperatives; management investment companies; and issuers of nonvoting preferred securities, debt securities and derivative securities.

If a company satisfies the requirements of the rule by explaining why it does not meet the applicable diversity objectives of the rule, the company must: (i) specify the requirements of the rule that are applicable; and (ii) explain the reasons why it does not have two Diverse directors (or one Diverse director where permitted). Such disclosure must be provided: (i) in advance of the company’s next annual meeting of shareholders in any proxy statement or any information statement (or if none, Form 10-K etc.) or on the Company’s website. If the Company provides such disclosure on its website, then the Company must also notify Nasdaq regarding the disclosure.  Nasdaq will not evaluate the substance or merits of the response.

Each Company listed on The Nasdaq Global Select Market, The Nasdaq Global Market, and The Nasdaq Capital Market (including a Company with a permitted smaller board) must have, or explain why it does not have, at least one Diverse director by the later of:

  • two calendar years after August 6, 2021 (the “First Effective Date”); or
  • the date the Company files its proxy statement or its information statement (or, if the Company does not file a proxy, in its Form 10-K etc) for the Company’s annual shareholders meeting during the calendar year of the First Effective Date.

Each Company listed on The Nasdaq Global Select Market or The Nasdaq Global Market must have, or explain why it does not have, at least two Diverse directors by the later of:

  • four calendar years after August 6, 2021 (the “Second NGS/NGM Effective Date”); or
  • the date the Company files its proxy statement or its information statement (or, if the Company does not file a proxy, in its Form 10-K or 20-F) for the Company’s annual shareholders meeting during the calendar year of the Second NGS/NGM Effective Date.

Each Company listed on The Nasdaq Capital Market must have, or explain why it does not have, at least two Diverse directors by the later of:

  • five calendar years after August 6, 2021 (the “Second NCM Effective Date”) or
  • the date the Company files its proxy statement or its information statement (or, if the Company does not file a proxy, in its Form 10-K etc.) for the Company’s annual shareholders meeting during the calendar year of the Second NCM Effective Date.

Board Diversity Disclosure

In addition, each Nasdaq listed company must annually disclose, to the extent permitted by applicable law, information on each director’s voluntary self-identified characteristics in a prescribed format referred to as the Board Diversity Matrix. Following the first year of disclosure, all companies must disclose the current year and immediately prior year diversity statistics using the Board Diversity Matrix.

In the proposed Board Diversity Matrix, a company would be required to provide the total number of directors on its board, and the company (other than a Foreign Issuer) would be required to provide the following:

  • the number of directors based on gender identity (female, male, or non-binary) and the number of directors who did not disclose gender;
  • the number of directors based on race and ethnicity (African American or Black, Alaskan Native or Native American, Asian, Hispanic or Latinx, Native Hawaiian or Pacific Islander, White, or Two or More Races or Ethnicities), disaggregated by gender identity (or did not disclose gender);
  • the number of directors who self-identify as LGBTQ+; and
  • the number of directors who did not disclose a demographic background under the second and third bullet points above.

The Board Diversity Matrix must be provided in any proxy statement or any information statement (or if none, Form 10-K etc.) or on the Company’s website.  Companies exempt from the board diversity rules do not need to comply with these disclosures.

This disclosure rule is operative one year after August 6, 2021 (the “Effective Date”). A Company must be in compliance with this rule by the later of:

  • one calendar year from the Effective Date;
  • the date the Company files its proxy statement or its information statement for its annual meeting of shareholders (or, if the Company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) during the calendar year of the Effective Date.

Contact Steve Quinlivan for more information.