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Alerts and Updates

Proposed Nasdaq Rule Requires Public Disclosure of Board Diversity

December 9, 2020

Proposed Nasdaq Rule Requires Public Disclosure of Board Diversity

December 9, 2020

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In support of the proposed new rules, Nasdaq cited studies that “found an association between diverse boards and better financial performance and corporate governance.”

On December 1, 2020, Nasdaq announced that it filed with the U.S. Securities and Exchange Commission (SEC) a proposal for new listing rules regarding board diversity and related disclosure. If approved, the new rules aim to require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding their board composition. According to Nasdaq, the new rules are intended to “provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective.” In support of the proposed new rules, Nasdaq cited studies that “found an association between diverse boards and better financial performance and corporate governance.”

Diverse Board Representation

Proposed Rule 5605(f) would require Nasdaq-listed companies, subject to certain exceptions, to have at least:

  • one director who self-identifies as a female, and
  • one director who self-identifies as an underrepresented minority or LGBTQ+.

The term “underrepresented minority” would be construed to include Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, and two or more races or ethnicities. Self-identification definitions can be found on Nasdaq’s Board Diversity Disclosure Matrix.

Both smaller reporting companies[1] and foreign issuers[2] would be required to have at least one director who is female; however, smaller reporting companies would be able to satisfy the second diverse director requirement with a director who self-identifies as female, an underrepresented minority or LGBTQ+. Similarly, foreign issuers would be able to comply with the second diverse director requirement with a director who self-identifies as female; a minority based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company’s home country jurisdiction; or LGBTQ+. Any company that ceases to be a foreign issuer or smaller reporting company would be permitted one year from the change of status to comply with the standard rules.

If a company does not satisfy the new diversity expectations, it would be required to explain, in its annual proxy statement or on its website, why it does not have at least two directors on its board who self-identify in the categories listed above.[3] Nasdaq would not assess the substance of the company’s explanation, but would verify that the company has provided an explanation that satisfies the rule. Any company that elects to include the disclosure on its website also would be required to submit a URL link to the information through the Nasdaq Listing Center within 15 days of the company’s annual shareholder meeting.

Board Diversity Disclosure

In addition, under proposed Rule 5606, Nasdaq-listed companies, again subject to certain exceptions, would be required to provide annually, in a proposed Board Diversity Matrix format, statistical information regarding the company’s board of directors related to a director’s self-identified gender, race and sexual orientation as LGBTQ+. The disclosure would be required in either the company’s proxy statement for its annual meeting or on the company’s website.

It is important to note that director self-identification would be completely voluntary. Any director who chooses not to disclose a gender would be included under “gender undisclosed” and any director who chooses not to identify as any race or not to identify as LGBTQ+ would be included in the undisclosed category.

For the first year a company is required to disclose board diversity statistics, the company would be required to publish such statistics for the current year only. Each subsequent year, the company would be required to publish data for the current year and the previous year.

Nasdaq recognized that some foreign issuers may have their principal executive offices located outside of the United States in jurisdictions that may impose laws limiting or prohibiting self-identification questionnaires, particularly as they relate to race, ethnicity or LGBTQ+ status. As such, some foreign issuers may be precluded by law from requesting diversity data from their directors. Additionally, Nasdaq recognized that the definition of underrepresented minority may be inapplicable to a foreign issuer, making the Board Diversity Matrix data less relevant for such companies and not useful for investors. As a result, Nasdaq proposed a separate Board Diversity Matrix for foreign issuers, which would require foreign issuers to provide the number of directors who self-identify as an underrepresented individual in the company’s home country jurisdiction in lieu of the races and ethnicities included in the definition of underrepresented minority.

Compliance Time Frame

As proposed, all Nasdaq-listed companies would be required to publicly disclose the required board diversity statistics within one year of SEC approval of the proposed rules. The time allotted to satisfy the board composition expectations would depend on the company’s listing tier:

  • All companies would be expected to have one diverse director within two years of SEC approval;
  • Nasdaq Global Select Market companies and Nasdaq Global Market companies would be expected to have two diverse directors within four years of the SEC approval; and
  • Nasdaq Capital Market companies would be expected to have two diverse directors within five years of SEC approval.

Consequences for Noncompliance

If a company fails to comply with the requirements of Rule 5605(f) and/or Rule 5606, it will have until the latter of its next annual shareholder meeting or 180 days from the event that caused the failure to cure the deficiency. Companies that do not provide the required disclosure within the applicable cure period would be subject to delisting. However, companies that do not meet the expectations for board diversity on a timely basis would not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives.


Rule 5605(f) and Rule 5606 exempt compliance by acquisition companies listed under IM-5101-2; asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies, issuers of nonvoting preferred securities, debt securities and derivative securities; and issuers of securities listed under the Rule 5700 Series. Notably, “controlled companies” are not exempt under from the new rules as proposed.

SEC Guidance for Disclosure of Self-Identified Diversity Characteristics

While the disclosure that would be required by the proposed new rules does not require companies to publicly identify which director self-identified as a particular gender, race, ethnicity or LGBTQ+, it is important to note the SEC guidance relating to disclosure of self-identified diversity characteristics in a company’s proxy statement pursuant to Items 401 and 407 of Regulation S-K.

Item 401(e) of Regulation S-K requires a company to describe the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director. If diversity is considered when nominating directors, Item 407(c)(2)(vi) of Regulation S-K requires a company to disclose whether its nominating committee or the board has a policy with regard to the consideration of diversity in identifying director nominees and describe how such a policy is implemented.

The SEC guidance provides that, if a board or nominating committee considers self-identified diversity characteristics during the nomination process (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background) and the individual consents to disclose such characteristics, the SEC expects the company to disclose those characteristics and how they were considered. The SEC also expects the description of diversity policies to include a discussion of how such diversity characteristics are considered by the nominating committee during the nomination process. Consideration will need to be given with respect to how to document director consent in connection with any disclosure of self-identified diversity characteristics (i.e., director and officer questionnaires, written consents, board minutes, etc.).

Identification of Diverse Directors

Nasdaq is working to assist Nasdaq-listed companies with board composition planning. Through a partnership with consultant Equilar, Inc., Nasdaq expects to help companies “access a larger community of highly-qualified, diverse, board-ready candidates to amplify director search efforts.”

SEC Review Process

The SEC will provide a minimum of 21 days from the time the proposed rule changes are published in the Federal Register for the public to comment on the proposal. After publication in the Federal Register, the SEC has 30 to 240 calendar days to review the proposal.

Probability of Approval

News media has reported that Nasdaq attempted to persuade the SEC to take the lead role with respect to board diversity by mandating diversity disclosure for all companies, which apparently was unsuccessful. Six states have already implemented legislation related to board diversity. For example, California requires companies headquartered in the state to have at least one director who self-identifies as a female and at least one director from an underrepresented community. With the incoming Biden administration, it is more likely that the SEC will approve Nasdaq’s proposed rules, and the SEC may even take action to more broadly impose board diversity composition and/or disclosure requirements.

Next Steps

Foreign Issuers Only

If the proposed Nasdaq rules are adopted, foreign issuers should determine if any laws in their home country jurisdiction limit or prohibit self-identification questionnaires in general or specifically as they relate to race, ethnicity or LGBTQ+ status. Further, if applicable laws do not prohibit the collection of this information, foreign issuers should determine whether any official data is available with respect to the categories that would constitute an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in their home country jurisdiction.

All Issuers

If the proposed Nasdaq rules are adopted, questions should be prepared to solicit, on a purely and clearly voluntary basis, the relevant information, including a question as to whether the information disclosed may be included in the company’s public filings or if it is to be confidential. As disclosure of this information may be a sensitive matter, thought should be given as to whether these questions should be included in the director and officer questionnaire completed annually or whether they are better included in a separate questionnaire that can be sent directly to, and maintained in confidence by a third party such as the issuer’s counsel.

About Duane Morris

Attorneys in the firm’s Corporate Practice Group regularly engage with foreign counsel and can assist in preparing the relevant questions and with navigating and complying with the proposed Nasdaq rules. Duane Morris’ Diversity and Inclusion Advancing Leadership (DIAL) Toolkit counsels clients on best practices for creating and sustaining a corporate culture of diversity and inclusion.

For More Information

If you have any questions about this Alert, please contact Driscoll R. Ugarte, Darrick M. Mix, partner and Chief Diversity and Inclusion Officer Joseph K. West, any of the attorneys in our Corporate Practice Group or the attorney in the firm with whom you are in regular contact.


[1] Generally, a company qualifies as a “smaller reporting company” if (i) it has public float of less than $250 million or (ii) it has less than $100 million in annual revenues and no public float or public float of less than $700 million. Public float is calculated by multiplying the number of the company’s common shares held by nonaffiliates by the market price.

[2] “Foreign issuer” means any issuer which is a foreign government, a national of any foreign country or a corporation or other organization incorporated or organized under the laws of any foreign country.

[3] According to the New York Times, over the past six months, Nasdaq found that more than 75 percent of its listed companies did not meet the proposed diversity requirements.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.