As we have discussed in prior alerts (here and here), expanding boardroom diversity has been a recent focus for many regulators, issuers, shareholders and other stakeholders. To this end, in December 2020, Nasdaq Inc. proposed new rules that would require the companies listed on its stock exchange either (i) to include on their boards at least one woman, as well as at least one individual who identifies as a racial minority or as LGBTQ+, or (ii) if they fail to meet these standards, to file a written explanation for why they are not meeting Nasdaq's diversity targets. The proposed rule changes would also require disclosure of board-level diversity statistics using a standardized template. According to a review conducted by Nasdaq, more than three-quarters of Nasdaq-listed companies failed to meet the proposed requirements as of late 2020.

On Aug. 6, 2021, the Securities and Exchange Commission (SEC) issued an order accepting Nasdaq's proposed rule changes. According to SEC Chairman Gary Gensler, the changes "will allow investors to gain a better understanding of Nasdaq-listed companies' approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders." The proposed rule changes have been criticized by some Republicans in Congress and some conservative groups, who assert that the rule changes could force the SEC to confront thorny legal issues concerning discrimination, and could be challenged in court on the grounds that they violate the U.S. Constitution or civil rights laws. Conversely, the proposed rule changes have been widely supported by Democratic lawmakers, as well as by many large corporations, including Goldman Sachs Group Inc. and Microsoft Corp.

Following the SEC approval order, Nasdaq posted updated guidance regarding the implementation of the new requirements. The time period for companies to transition to the new rules is generally based on a company's listing tier. Companies in Nasdaq's top two listing tiers - Nasdaq Global Select Market and Nasdaq Global Market - will be expected to have (or explain why they do not have) at least one diverse director within two years (i.e., by 2023), and at least two diverse directors within four years (by 2025).1 Companies in Nasdaq's third listing tier, Nasdaq Capital Market, are similarly expected to have one diverse director within two years (by 2023), and a second within five years (by 2026). Excepted from the tier-based transition approach are companies with five or fewer directors. Regardless of tier, those companies are required to have at least one diverse director within two years, but are not required to have a second diverse director. For all listed companies, the required disclosure of board-level diversity data takes effect in 2022. The new requirements apply to business development companies, but do not apply to special purpose acquisition companies and management investment companies.


1. In a year in which compliance with one of the rule changes is required, the precise date by which compliance must be demonstrated is the later of (i) the SEC's approval date (Aug. 6) and (ii) the date on which the company files its proxy information statement (or, if the company does not file a proxy, inits Form 10-K or 20-F) for the company's annual shareholder meeting in that year.

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