Hunton Retail Law Resource

On August 6, 2021, the Securities and Exchange Commission (SEC) approved new Nasdaq rules (Rules 5605(f) and Rule 5606) aimed at advancing diversity among board members of Nasdaq-listed companies and increasing disclosure of diversity statistics. Nasdaq’s new rules underscore the increasing attention in recent years in addressing environmental, social and governance (ESG) issues at the board level and creating new compliance obligations for Nasdaq-listed companies.

Nasdaq’s new Rule 5605(f) requires Nasdaq-listed companies to publicly disclose, on an annual basis, board diversity statistics, including gender and demographic data, using either the Nasdaq’s Board Diversity Matrix or a format substantially similar. Board diversity data can be disclosed in the company’s proxy statement, information statement for its annual shareholders meeting (or Form 10-K or 20-F if the company does not file a proxy), or on the company’s website. If a company chooses to provide the data on its website, it must also complete a short form through the Nasdaq Listing Center that includes the hyperlink to the disclosure. Companies must provide the diversity data by no later than August 8, 2022, or the date it files its proxy statement or information statement (or Form 10-K or 20-F if the company does not file a proxy).

In addition, Nasdaq’s new Rule 5606 requires Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one director who self-identifies as female and one director who self-identifies as either an underrepresented minority or LGBTQ+. If a company chooses to explain its reasons for not meeting the diversity objective, it must provide its explanation in its proxy statement, information statement for its annual shareholders meeting, or on its website. Nasdaq will not evaluate the substance or merits of a company’s explanation.

The new diversity objective will be phased in, with a transition period based on a company’s listing tier. Companies will be required to have, or explain why they do not have, at least one diverse director by August 7, 2023. Nasdaq Global Select Market and Nasdaq Global Market companies will be required to have, or explain why they do not have, two diverse directors by August 6, 2025. Nasdaq Capital Market companies will be required to have, or explain why they do not have, two diverse directors by August 6, 2026.

Nasdaq’s rules provide additional flexibility for smaller reporting companies, foreign issuers and companies with five or fewer directors. For instance, smaller reporting companies and foreign issuers can meet the diversity objective with two female directors. Companies with five or fewer directors can meet the diversity objective with at least one diverse director. In addition, SPACs are exempt from Nasdaq’s board diversity rule. However, following the business combination, the company must meet, or explain why it does not meet, the diversity objective by the later of two years from the date of listing or the date the company files its proxy statement or information statement (or Form 10-K or 20-F if the company does not file a proxy) for the second annual meeting of shareholders after the date of listing.

Nasdaq has provided additional resources on its website to assist listed companies with implementation and compliance, including a summary of the new rules, examples of acceptable and unacceptable diversity matrix disclosure, and FAQs.