On August 6, 2021, the Securities and Exchange Commission (SEC) approved The Nasdaq Stock Market LLC’s (Nasdaq) Board Diversity Rule, which is intended to enhance board diversity and transparency among companies listed on its exchange.1 Under the Nasdaq Board Diversity Rule, beginning in August 2022, Nasdaq will require each Nasdaq-listed company, subject to certain exceptions, to publicly disclose in an aggregated form, to the extent permitted by applicable law, information on the voluntary self-identified gender and racial characteristics and LGBTQ+ status of the company’s board of directors. The Nasdaq Board Diversity Rule applies to business development companies (BDCs).
Subject to a transition period, Nasdaq will also recommend that each Nasdaq-listed company, subject to certain exceptions, have at least two members of its board of directors 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 or LGBTQ+ (each term defined below).
If such Nasdaq-listed company does not have two such Diverse members of its board of directors, Nasdaq will require such company to explain why it does not have at least two members of its board of directors who are Diverse.
As discussed further below, Nasdaq-listed companies will need:
- to disclose the board diversity matrix beginning August 8, 2022;
- at least one Diverse director or explanation of noncompliance beginning August 7, 2023; and
- at least two Diverse directors or explanation of noncompliance beginning August 6, 2025 for BDCs listed on the Nasdaq Global Select Market and the Nasdaq Global market, or beginning August 6, 2026 for BDCs listed on the Nasdaq Capital Market.
Companies with five or fewer directors can meet the diversity objective by having, or explaining why they do not have, one Diverse director by the later of August 7, 2023 or the date the company files its proxy statement for its 2023 annual shareholders meeting.
The terms Diverse, Female, LGBTQ+ and Underrepresented Minority are defined under the Nasdaq Board Diversity Rule as follows:
- Diverse: an individual who self-identifies as Female, as an Underrepresented Minority or as LGBTQ+;
- Female: an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth;
- LGBTQ+: an individual who self-identifies as lesbian, gay, bisexual, transgender, or as a member of the queer community; and
- Underrepresented Minority: an individual who self-identifies as one or more of the following: 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.
Board diversity disclosure
The Nasdaq Board Diversity Rule also will require Nasdaq-listed companies, subject to certain exceptions, to annually disclose statistical information related to self-identified gender, race and self-identification as LGBTQ+ for each member of its board of directors.
Companies will be required to provide this disclosure in their proxy statement or information statement for their annual shareholder meeting, or on their website. If the company chooses to disclose the information on its website, the company must also include a URL link to the disclosure through the Nasdaq Listing Center no later than 15 calendar days after the company’s annual shareholder meeting.
After the first year of including the new required disclosure, all companies must disclose diversity statistics for the current year and year immediately prior, as described in the Nasdaq Board Diversity Rule. Notably, the diversity disclosure requirement is limited only to the boards of directors of Nasdaq-listed companies, and does not require disclosure of diversity metrics for management and staff.
Companies would be required to make this disclosure using the following Board Diversity Matrix or a substantially similar format:
Entities exempt from compliance with the Nasdaq Board Diversity Rule include: acquisition companies; asset-backed issuers and other passive issuers; cooperatives; limited partnerships; management investment companies; issuers of non-voting preferred securities, debt securities and derivative securities; and issuers of certain other securities listed under Nasdaq’s Rule 5600 Series.2
Although BDCs are management investment companies, and are subject to almost all of the same corporate governance regulation as registered investment companies under the Investment Company Act of 1940, as amended, BDCs are carved out of Nasdaq’s definition of management investment companies and are not exempt from the Nasdaq Board Diversity Rule. As a result, BDCs will be required to comply with the Nasdaq Board Diversity Rule based on the timeline below.
Compliance requirements and timing
Under the Nasdaq Board Diversity Rule, Nasdaq-listed companies must be in compliance based on the following timetable, beginning from the date that the SEC approved the Nasdaq Board Diversity Rule (August 6, 2021):
Newly listed companies, so long as they were not previously subject to a substantially similar requirement of another national securities exchange, will be required to comply with the Nasdaq Board Diversity Rule by the later of (a) the compliance periods described above or (b) two years after the date of listing.
Foreign Issuer and Smaller Reporting Company compliance
Foreign Issuers (including Foreign Private Issuers) and Smaller Reporting Companies have more flexibility in how they may comply with the Nasdaq Board Diversity Rule. Both may satisfy Nasdaq Board Diversity Rule by having two Female directors (in lieu of one Female and one Underrepresented Minority or LGBTQ+ director). Foreign Issuers are also able to comply with the second Diverse director requirement with a director who meets a distinct definition of “diverse” based on the country of the Foreign Issuers principal executive offices.3
Cure period and noncompliance
Under the Nasdaq Board Diversity Rule, if a company fails to comply with the Nasdaq Board Diversity Rule, it has until the later of (i) its next annual shareholder meeting or (ii) 180 days from the event that caused the deficiency, to cure. The company can cure the deficiency either by nominating additional directors so that its board satisfies the diversity requirement or by providing the requisite disclosure via proxy statement, information statement or on the companies’ websites.
If a company does not regain compliance within the applicable cure period, it will become subject to delisting.
Boards of directors planning to onboard new directors should take several steps to prepare, including:
- Reviewing the required public filings, which will include the new directors’ biography;
- Reviewing the required filings under Section 16 of the Securities Exchange Act of 1934 (the “1934 Act”), and the new director’s ownership of the company’s common stock; and
- Reviewing the new director’s directors’ and officers’ questionnaire, which will require the new director to answer questions about their personal information and potential conflicts of interest, as well as potentially completing a background check.
What comes next
While the new Nasdaq requirements resulting from the Nasdaq Board Diversity Rule did not become immediately effective upon SEC approval, Nasdaq-listed companies may consider starting to compile diversity statistics for their boards and reviewing Diverse candidates for director seats.
The Nasdaq Board Diversity Rule can be found here.