United States: Nasdaq Simplifies "Confusing" Timing Requirements For Board Diversity Rules

A new rule change designed to simplify the rules regarding the timing of compliance with the Nasdaq board diversity listing rules has been filed by Nasdaq and declared immediately effective. As you probably remember, on August 6, 2021, the SEC approved Nasdaq's proposal for new listing rules regarding board diversity and disclosure, along with a proposal to provide free access to a board recruiting service. The listing rules adopted a "comply or explain" mandate for board diversity for most listed companies and required companies listed on Nasdaq's U.S. exchange to publicly disclose "consistent, transparent diversity statistics" regarding the composition of their boards in a matrix format. (See this PubCo post.) Now, Nasdaq acknowledges that the formulation of the compliance deadlines, which were tied to the approval date of the proposal by the SEC, is "confusing and unnecessarily complicated." Not Nasdaq's fault though—it meant well! At the time of filing of the proposal, "Nasdaq and listed companies could not know when the proposal would be approved," and Nasdaq "wanted to assure that listed companies had at least one year from the approval of the rules, or until their next annual meeting, to take necessary actions to satisfy the requirements" of the rules. Nasdaq is now making technical changes to several rules to address that problem by eliminating complicated references to the SEC approval date, and instead requiring compliance by December 31st of the applicable year (which, according to Nasdaq, is the fiscal year-end for approximately 80% of Nasdaq-listed companies subject to the rules).

Happy Holidays!

Nasdaq's board diversity rules establish a "disclosure-based framework" under Rules 5605(f) and 5606. Rule 5605(f)(2) requires each Nasdaq-listed company (with specified exceptions) to have, or explain why it does not have, at least two diverse board members, including at least one who self-identifies as female and at least one who self-identifies as an underrepresented minority (as defined) or LGBTQ+. Under Rule 5605(f)(2)(D), each company with a board of directors of five or fewer members (referred to as a "company with a smaller board") needs to have, or explain why it does not have, at least one board member who is diverse.

Prior to the amendment, under Rule 5605(f)(7)(A), each Nasdaq company was required to have, or explain why it did not have, at least one diverse director by the later of: (i) two calendar years after the SEC approval date, August 7, 2023 or (ii) the date the company filed its proxy statement or its information statement (or, if the company does not file a proxy statement, in its Form 10-K or 20-F) for the company's annual shareholders meeting during the calendar year of the "First Effective Date" (two calendar years after the SEC approval date), which could be no later than December 31, 2023. Nasdaq's new amendments simply substitute December 31, 2023, for that more complex formula deadline, i.e., each Nasdaq company must have, or explain why it does not have, at least one diverse director by December 31, 2023.

Under Rule 5605(f)(7)(B), prior to the amendments, companies on the Nasdaq Global Select Market or Nasdaq Global Market had four years to have at least two diverse directors—by the later of August 6, 2025 (four calendar years after the SEC approval date of the proposal), or the date the company filed its proxy statement for its annual shareholders meeting during 2025, which could be no later than December 31, 2025. Nasdaq is replacing this deadline with December 31, 2025. Similarly, under Rule 5605(f)(7)(C), as amended, companies on the Nasdaq Capital Market will have until December 31, 2026 to have at least two diverse directors, or explain why not.

If a company elects disclosure in lieu of compliance with the diversity objectives, the company is required to identify the applicable requirements and explain the reasons why it did not satisfy them. Prior to the amendments, the disclosure was required to be provided in advance of the company's next annual meeting of shareholders. Nasdaq's amendments to Rule 5605(f)(3) allow companies to provide this disclosure on or before December 31st either (a) in any proxy statement or any information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F); or (b) on the company's website. If the company provides the disclosure on its website, it is required to submit the disclosure concurrently with its proxy statement (or 10-K) and submit a URL link to the disclosure through the Nasdaq Listing Center, within one business day after posting. The new amendments provide additional flexibility and simplify compliance by also allowing companies to notify Nasdaq about the alternative public disclosure through an e-mail to drivingdiversity@nasdaq.com.

Under prior Rule 5606(e), each company was required to be in compliance with Rule 5606 (the Diversity Matrix) by the later of August 8, 2022 or the date the company filed its proxy statement for its annual meeting of shareholders during 2022. (Nasdaq is removing Rule 5606(e), "since the rule became effective and operative over a year ago and Nasdaq believes the provision is no longer relevant.") Companies are required to disclose the Matrix annually thereafter, but prior to the amendments, the rule did not provide a specific deadline for subsequent disclosures. As a result, Nasdaq is modifying Rule 5606(b) to specify the timing, which conforms to the timing outlined in Rule 5605(f)(3). More specifically, the Rule 5606 disclosure must be provided "on or before December 31 either: (a) in any proxy statement or any information statement (or, if the Company does not file a proxy, in its Form 10-K or 20-F); or (b) on the Company's website. If the Company provides such disclosure on its website, then the Company must submit such disclosure concurrently with the filing made pursuant to (a) and submit a URL link to the disclosure either through the Nasdaq Listing Center or via an e-mail to drivingdiversity@nasdaq.com, within one business day after such posting."

In the release, Nasdaq indicated that it "believes that using December 31st as the applicable deadline for various elements of the diversity objectives of Rule 5605(f) and Matrix disclosure of Rule 5606 aligns these deadlines with the end of the fiscal year for most companies, which is also the deadline for those companies to hold their annual meeting under Nasdaq's rules. As such, Nasdaq believes that aligning the deadline for these disclosures with the December 31st deadline for most companies to hold the annual meeting will simplify both compliance and compliance monitoring with these rules."

Finally, Nasdaq is amending Rule 5605(f)(3) to change an erroneous reference to a non-existent Rule 5606(f)(2)(D). Under this technical amendment, the reference will be changed to Rule 5605(f)(2)(D).

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