5 things to know about Nasdaq’s board diversity requirement
On Friday, the SEC issued this 82-page Order approving both Nasdaq’s proposed board diversity disclosure requirement and a proposed board recruiting service proposal. Both of these proposals were originally proposed last December and then amended in February. The Nasdaq also updated this three-pager about what listed companies should know.
The amendments included several practical changes to the proposed rules, including providing a different standard for companies with boards of five or fewer directors and incorporating grace periods and phase-in periods. Nasdaq’s letter to the SEC regarding the amendments also responded to many of the comments received on the original proposal.
Unlike regulations proposed by the SEC, the SEC can only approve or reject proposed rules for self-regulatory organizations like Nasdaq, and cannot make changes. These amendments were an important avenue for Nasdaq to respond to many of the initial comments submitted to the SEC regarding the proposed rules, and the letter accompanying the amendments is cited repeatedly in the Order. Nasdaq characterizes its new rules as a disclosure-based framework, not a mandate.
These new Nasdaq rules do three things for a Nasdaq-listed company (all of which are subject to certain exceptions or more limited requirements for certain types of companies):
- Disclose diversity of board composition in a matrix – Require it to disclose – in an aggregated matrix form, to the extent permitted by applicable law – the voluntary self-identified gender and racial characteristics and LGBTQ+ status of the company’s board. This is Rule 5606.
- Minimum two diverse directors – Require it to have – or explain why it does not have – at least two members of its board who are diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an Underrepresented Minority (a defined term) or LGBTQ+. This is Rule 5605(f).
- One year of free director recruiting – Provide a company that does not have at least one director who self-identifies as female and at least one director who self-identifies as an Underrepresented Minority or LGBTQ+ one year of complimentary access for two users to a board recruiting solution from a third party service provider, which would provide access to a network of board-ready diverse board candidates.