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December 10, 2020

Nasdaq Proposes Board Diversity Disclosure Rules


On December 1, 2020, Nasdaq proposed new listing rules related to board diversity. The proposal was the culmination of Nasdaq's assessment of a number of factors, including: its engagement with organizational leaders in the business, investor, governance, regulatory and civil rights communities, who expressed overwhelming support for the diversification of boardrooms; its review of academic research demonstrating that diverse boards are positively associated with improved corporate governance and financial performance; and its recognition that legislators at the federal and state level are increasingly taking action to encourage or mandate corporations to diversify their boards and improve diversity disclosures. The proposal notes that notwithstanding recent progress made by some companies in diversifying their boardrooms, "the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional diversification of their boards," and that a listing rule designed to enhance transparency related to board diversity will increase consistency and comparability of information across Nasdaq-listed companies. A review recently conducted by Nasdaq indicated that less than a quarter of Nasdaq-listed companies would be in compliance with this new rules.

Nasdaq's proposal is subject to SEC review and public comment and, ultimately, approval of the Commissioners. The Commission will soon be led by a new SEC chair appointed by the Biden Administration, which may increase the odds that this proposal will receive SEC approval.

Proposed Rule 5605(f) - Diverse Board Representation

Proposed Rule 5605(f)(2) would require Nasdaq-listed companies (subject to certain exceptions described below), to have, or explain why they do not have, at least two members of its board of directors who are Diverse1, including: (A) at least one Female director, and (B) at least one director who self-identifies as an Underrepresented Minority or as LGBTQ+.2

Under proposed Rule 5605(f)(3), if a company satisfies the requirements of Rule 5605(f)(2) by explaining why it does not have two Diverse directors, it must: (i) specify the requirements of Rule 5605(f)(2) that are applicable (e.g., the applicable subparagraph, the applicable diversity objectives, and the timeframe applicable to the company's market tier); and (ii) explain the reasons why it does not have two Diverse directors.3 To the extent a company chooses not to meet the diversity objectives of Rule 5605(f)(2), Nasdaq believes that the proposal will provide investors with additional transparency through disclosure explaining the company's reasons for not doing so (for example, because it is subject to an alternative standard under state or foreign laws and has chosen to meet that standard instead, or has a board philosophy regarding diversity that differs from the diversity objectives set forth in the proposed rule). Nasdaq believes that such disclosure will improve the quality of information available to investors who rely on this information to make informed investment and voting decisions. This disclosure must be provided: (i) in the company's proxy or information statement for its annual meeting of shareholders; or (ii) on the company's website (in the case of website disclosure, the company must also notify Nasdaq of the information's location by submitting the URL link through the Nasdaq Listing Center no later than 15 calendar days after the company's annual shareholder meeting).

Nasdaq has also proposed to provide free access to a network of board-ready diverse candidates and a tool to support board evaluation, benchmarking and refreshment to assist listed companies that strive to meet the diversity objectives of Rule 5605(f)(2). Nasdaq also plans to publish FAQs on its Listing Center to provide guidance to companies on the application of the proposed rules, and to establish a dedicated mailbox for additional questions.

Foreign Issuers and Smaller Reporting Companies

Foreign Issuers4 would be permitted to satisfy proposed Rule 5605(f) by having: (i) two Female directors; or (ii) one Female director, and another who self- identifies as (a) LGBTQ+ or (b) an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company's home country jurisdiction. Alternatively, a Foreign Issuer could publicly explain its reasons for not meeting the diversity objectives of the rule. Smaller reporting companies may satisfy the two Diverse directors objective by having two Female directors.

Exempt Companies

The following types of companies would be exempted from the requirements of Rule 5605(f): acquisition companies listed under IM-5101-25; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non-voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 Series (collectively, Exempt Companies). These types of companies do not have boards, do not list equity securities, or are not operating companies.

Effective Dates/Transition Rules

Under proposed Rule 5605(f)(7), each listed company must have, or explain why it does not have, one Diverse director no later than two calendar years after SEC approval of the proposed rule (Approval Date), and two Diverse directors no later than (i) four calendar years after the Approval Date for companies listed on the Nasdaq Global Select or Global Market tiers, or (ii) five calendar years after the Approval Date for companies listed on the Nasdaq Capital Market tier. The proposal notes that all companies may choose to follow a timeframe applicable to a different market tier, provided they publicly describe their explanation for doing so. They also may construct their own timeframe for meeting the diversity objectives of Rule 5605(f), provided they publicly disclose their reasons for not abiding by Nasdaq's timeframe.

A newly listed company that was not previously subject to a substantially similar requirement of another national securities exchange will be allowed one year from the date of listing to satisfy the requirement described above.6 This phase-in period will apply after the end of the transition period provided in Rule 5605(f)(7).

The proposed rule also includes a cure period for non-compliant companies.

Proposed Rule 5606 (Board Diversity Disclosure)

This rule would require Nasdaq-listed companies, to the extent permitted by applicable law, to provide statistical information on each director's voluntary self-identified characteristics substantially in the form set forth below. 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 at the bottom of the table.

Board Diversity Matrix (As of [DATE])
Board Size:
Total Number of Directors #
Gender: Male  Female Non-Binary Gender Undisclosed
Number of directors based on gender identity
# # # #
Number of directors who identify in any of the categories below:
African American or Black #  #  #
Alaskan Native or American Indian #  #  # #
Asian # # # #
Hispanic or Latinx # # # #
Native Hawaiian or Pacific Islander
# # # #
White # # # #
Two or More Races or Ethnicities
# # # #
Undisclosed #


Some Foreign Issuers, including Foreign Private Issuers as defined by the Exchange Act, may have their principal executive offices in jurisdictions that impose laws limiting or prohibiting self-identification questionnaires, particularly as they relate to race, ethnicity or LGBTQ+ status. In such countries, a Foreign Issuer may be precluded by law from requesting diversity data from its directors. As a result, a Foreign Issuer may elect to use the following separate Board Diversity Matrix for Foreign Issuers:

Board Diversity Matrix (As of [DATE])
Foreign Issuer under Rule 5605(f)(1)
Country of Incorporation: [Insert Country Name]
Board Size:
Total Number of Directors #
Gender: Male Female Non-Binary Gender Undisclosed
Number of directors based on gender identity
# # # #
Number of directors who identify in any of the categories below:
Underrepresented Individual in Home Country Jurisdiction
Undisclosed #


All Nasdaq-listed companies that are subject to proposed Rule 5605(f), whether they choose to meet the diversity objectives of proposed Rule 5605(f)(2) or to explain why they do not, would be required to make the proposed Rule 5606 disclosure in either the company's proxy or information statement for its annual meeting for shareholders, or on the company's website (in the case of website disclosure, the company must also submit such disclosure along with a URL link to the information through the Nasdaq Listing Center within 15 calendar days of the company's annual shareholder meeting). The proposal emphasizes that disclosure of this statistical data is not in lieu of any SEC requirements under Regulation S-K or any other federal, state or foreign laws or regulations. Each year following the first year that a company publishes its annual Board Diversity Matrix, the company would be required to publish its data for the current year and the immediately prior year.

Proposed Rule 5606 would become operative one year after the Approval Date, and would not apply to Exempt Companies. A company newly listing on Nasdaq, including a company listing in connection with a business combination under IM-5101-2, may satisfy the requirements of Rule 5606 within one year of listing. Cure provisions consistent with procedures for other deficiencies would apply.

Conforming Changes

Rule 5615 and IM-5615-3, which currently permit a Foreign Private Issuer to follow home country practices in lieu of the requirements set forth in the Rule 5600 Series, subject to several exclusions, would be revised to add Rules 5605(f) and 5606 to the list of excluded corporate governance rules. As a result, Foreign Private Issuers must satisfy the requirements of Rule 5605(f) and 5606 and may not follow home country practices in lieu of such requirements. However, Foreign Private Issuers that elect to follow an alternative diversity objective in accordance with home country practices, or are located in jurisdictions that restrict the collection of personal data, may satisfy the requirements of Rule 5605(f) by explaining their reasons for doing so instead of meeting the diversity objectives of the rule.7

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. "Diverse" means an individual who self-identifies in one or more of the following categories: Female (an individual who self-identifies her gender as a woman, without regard to designated sex at birth), Underrepresented Minority (an individual who self-identifies as 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) or LGBTQ+ (an individual who self-identifies as: lesbian, gay, bisexual, transgender or a member of the queer community).

  2. Emeritus directors, retired directors and members of an advisory board would not qualify for this purpose.

  3. The Proposal includes the following example: "As a Smaller Reporting Company listed on the Nasdaq Capital Market tier, the Company is subject to Nasdaq Rule 5605(f)(2)(C), which requires the company to have, or explain why it does not have, at least two Diverse directors, including at least one director who self-identifies as Female. Under Rule 5605(f)(7), the Company is required to have at least one Diverse director by March 10, 2023, and a second Diverse director by March 10, 2026. The Company has chosen to satisfy Rule 5605(f)(2)(C) by explaining its reasons for not meeting the diversity objectives of Rule 5605(f)(2)(C), which the Company has set forth below."

  4. "Foreign Issuer" means (a) a Foreign Private Issuer (as defined in Rule 5005(a)(19)) or (b) a company that (i) is considered a "foreign issuer" under Rule 3b-4(b) under the Exchange Act and (ii) has its principal executive offices located outside of the United States. This definition recognizes that companies that are not Foreign Private Issuers but are headquartered outside of the United States are foreign companies notwithstanding the fact that they file domestic SEC reports.

  5. Companies whose business plan is to complete an IPO and engage in a merger or acquisition with one or more unidentified companies within a specific period of time.

  6. This "phase-in" period applies to companies listing in connection with an initial public offering, a direct listing, a transfer from another exchange or the over-the-counter market, or through a business combination with an acquisition company listed under IM-5101-2, such that the company is no longer subject to IM-5101-2 after the combination.

  7.  For example, the company may publicly disclose pursuant to Rule 5605(f)(3) that "due to privacy laws in the company’s home country jurisdiction limiting its ability to collect information regarding a director’s self-identified Diverse attributes, the company is not able to determine that it has two Diverse directors as set forth under Rule 5605(f)(2)(B)(ii)."