SEC approves new NASDAQ diversity rules
Last year, NASDAQ proposed new diversity rules to address widespread concerns about diversity and inclusion on its listed companies’ boards of directors. This past month, the Securities and Exchange Commission (SEC) approved these rules. The following Q&A examines the general requirements of these diversity rules:
What are the requirements of the new NASDAQ diversity rules?
The diversity rules require each listed company to have, or explain why it does not have, at least two diverse board members, including one member that identifies as female and one member that identifies an underrepresented minority or as a member of LGBTQ+ community. Modified, more flexible requirements apply to listed companies that are Foreign Issuers or Smaller Reporting Companies, and to listed companies with a board of directors of five or fewer members. If a listed company complies with the diversity rules by explaining why it does not meet the applicable diversity requirements, it must disclose this explanation in the manner and at the time specified in the diversity rules.
In addition, the diversity rules require each listed company to report annually certain information on each director’s voluntary, self-identified characteristics, in a manner substantially similar to the format provided in the diversity rules.
To promote compliance with the new diversity rules, NASDAQ has offered to provide to listed companies complimentary, voluntary access to a recruiting resource. Generally, any listed company that is not currently compliant with the new diversity rules is eligible for these services. Specific eligibility requirements are provided in the rules.
When do the NASDAQ diversity rules go into effect?
The SEC approved the diversity rules on August 6, 2021 (the Approval Date). However, listed companies are not required to comply with the rules immediately.
Generally, a listed company must have, or explain why it does not have, at least one diverse director within two years after the Approval Date. Thereafter, a listed company must have, or explain why it does not have, at least two diverse directors within four or five years after the Approval Date, depending on which exchange the company is listed. A listed company is not required to comply with these deadlines, however, prior to the end of certain phase-in periods, if such phase-in periods apply to the company. These phase-in periods generally delay the time by which newly listing or previously exempt companies must comply with the diversity rules.
Additionally, the reporting requirements become effective one year after the Approval Date, subject to a phase-in period applicable to newly listing companies.
Who do the NASDAQ diversity rules apply to, and what are the penalties for non-compliance?
The diversity rules apply generally to all listed companies. However, there are exemptions for a variety of companies. Notably these exemptions include acquisition companies listed under IM-5101-2 (i.e. special purpose acquisition companies).
If a listed does not comply with the diversity rules, the SEC may issue a notification of deficiency, and the company may submit a plan of compliance for staff review. Failure to regain compliance could result in the issuance of a delisting determination letter. This process is generally provided in and governed by separate rule (i.e. NASDAQ 5800 series). However, the diversity rules provide cure and grace periods, during which times the company may submit a plan to regain compliance with the rules.