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On December 1, 2020, Nasdaq filed a proposed rule with the U.S. Securities and Exchange Commission (SEC) that would require certain Nasdaq-listed companies to have at least two diverse directors (according to self-reported gender, race, and sexual orientation) or explain why the company has not been able to meet the proposed minimum diversity standards, and disclose certain board diversity-related statistics.

While many have lauded Nasdaq’s proposed rule to promote board diversity, there have been vocal critics of the proposed rule. Notably, in a letter dated February 12, 2021, Republican members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs asked that the SEC disapprove the rule. Even certain diversity advocates opposed the rule; for example, some disability advocates objected that the rule promoted gender and racial diversity while excluding disability diversity.

In response to criticism and comments, on February 26, 2021, Nasdaq filed an amendment to its proposed rule and submitted a lengthy response to comments on the proposed rule. On March 10, 2021, the SEC published a notice and order to solicit comments on the revised proposed rule.

Summary of the Amended Proposed Rule

The revised proposed rule would provide more flexibility to listed companies in achieving compliance. Nasdaq also changed compliance to a “diversity objective” instead of the prior “diversity requirement.” Changes in the proposed rule include the following:

  • More flexibility to companies with smaller boards. A listed company with five or fewer directors would meet the diversity objective by having one diverse director instead of two.
  • One-year grace period for board vacancies. Listed companies would have a “one year grace period” to meet the proposed diversity objective due to a vacancy on the board (“for example if a diverse director falls ill or resigns”).
  • Alignment with annual meetings. The timing of the proposed disclosure requirements are revised such that disclosures would be made “publicly available in advance of annual shareholder meetings to align with the timing of other governance-related disclosures, such as those provided in the proxy.”
  • Longer phase-in period for new listings. Newly listed companies would have two years, rather than one year, to fully meet the diversity objectives.

Nasdaq’s proposed amendments are subject to SEC review and remain open for public comments.

The Takeaway

The fate of Nasdaq’s amended proposed rule and its SEC approval determination remains to be seen. However, in light of increasing social awareness of diversity and inclusion challenges, including a push by large investors and proxy advisory firms to champion diversity and other environmental, social, and governance (ESG) factors, public companies may want to consider steps to diversify boards and prepare for regulatory changes.

Ogletree Deakins’ Diversity and Inclusion Practice Group and Financial Services Industry Group will monitor and report on developments with respect to this topic and will post updates on the firm’s Diversity and Inclusion blog.

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