On December 1, 2020, Nasdaq proposed new listing rules with the U.S. Securities and Exchange Commission (SEC) that would require companies listed on Nasdaq's U.S. exchange to disclose diversity information about their board of directors and require them to have at least two diverse directors, or explain why they have not met that standard. Specifically, the rules would require most Nasdaq-listed companies to have at least one director who self-identifies as a female and one who self-identifies as either from an underrepresented minority or LGBTQ+. An "unrepresented minority" is defined as an individuals who self-identifies in one or more of the following groups: 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. Foreign companies and smaller reporting companies would have some flexibility to satisfy the requirement by having two female directors.

Nasdaq's stated goal of the proposal is to provide stakeholders with more understanding of a company's board composition and improve investor confidence that all listed companies are considering diversity in the context of director-selection. In support of this goal, Nasdaq presented an analysis of over two dozen studies finding an association between diverse boards and better financial performance and corporate governance.

If approved by the SEC, the new rule would be implemented in stages and will depend on a company's Nasdaq listing tier (Nasdaq Global Select Market, Nasdaq Global Market and Nasdaq Capital Market). All companies will be expected to have one diverse director within two years of the SEC's approval of the proposed rule. Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have two diverse directors within four years of the SEC's approval of the listing rule, while companies listed on the Nasdaq Capital Market will be expected to have two diverse directors within five years of the SEC's approval.

Significantly, companies that do not meet these board composition requirements can avoid delisting by simply providing a public explanation of their reasons for not meeting the objectives. Nasdaq has stated in its FAQs for the proposed rule that it will not assess the substance of a company's explanation of why they do not have the minimum number of diverse directors under the proposed rule. Rather, Nasdaq will merely verify that the company has provided such an explanation.

The proposal has received public support from organizations such as U.S. Chamber of Commerce, the American Civil Liberties Union, the NAACP, as well as certain large public companies. Some commenters, notably U.S. Senator Dianne Feinstein (D-CA), stated that this approach "strikes an appropriate balance between strongly encouraging board diversity while not making it mandatory." For advocates wanting mandatory diverse director rules, the proposed rule and its enforcement falls far short of that.

If these proposals are approved, some practical considerations for companies listed on Nasdaq will be for such companies to begin implementing processes for attracting diverse board candidates and also evaluating the company's governing documents to ensure that new diverse directors can be elected within the timelines set forth in the proposed rules, or to begin considering the content of its explanation for not meeting the requirements and the potential reception to such explanation from its stakeholders. The proposed rules are subject to review by the SEC and were published in the Federal Register on December 11, 2020. The SEC has until March 11, 2021 to determine whether to approve the proposed rules.

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