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11 August 202112 minute read

SEC adopts Nasdaq diversity listing standards: Key takeaways and action items

On August 6, 2021, by a 3-2 vote, the SEC approved Nasdaq’s board diversity listing standards, finding that the rule would improve investor access to transparent and consistent diversity data.  Our prior alert highlighted the impetus and substance of the original proposed rule.  This alert (i) summarizes the final rule requirements, (ii) discusses the dissents of two Commissioners and potential challenges to the rule, and (iii) provides compliance suggestions and key takeaways for Nasdaq issuers.

Summary of final rule

Pursuant to new Rules 5605 (diverse board representation) and 5606(f) (diversity disclosure), each Nasdaq-listed company, with certain exceptions described below, must:

  • Disclose standardized information on the voluntary self-identified gender, racial, ethnic, and LGBTQ+ status of the company’s board of directors and
  • Have, or explain why it does not have, at least two “Diverse” board members, including at least one director who self-identifies as female and at least one director who self-identifies as an “Underrepresented Minority” or “LGBTQ+.”
    • A Diverse individual is one who self-identifies in one or more of the following categories: (i) Female, (ii) Underrepresented Minority, or (iii) LGBTQ+.
    • An Underrepresented Minority is 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.
    • LGBTQ+ means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.

The diversity disclosures may be provided in a proxy statement, information statement, on the company’s website or, if a company does not file a proxy, in its Form 10-K or 20-F.  Issuers who provide the information on the company’s website must submit a URL link through the Nasdaq Listing Center within one business day after posting it and must provide the disclosure concurrently with its proxy statement, information statement or Form 10-K or 20-F.  Following the first year of disclosure, companies must disclose the current year and prior year’s board diversity data. 

Nasdaq will provide listed companies without at least one director who self-identifies as female and at least one director who self-identifies as an Underrepresented Minority or LGBTQ+ with one year of complimentary access to a variety of board recruiting services that provide a network of board-ready diverse candidates to identify and evaluate including Equilar’s BoardEdge Platform and Equilar Diversity Network, Athena Alliance’s community of women leaders and the Boardlist’s premium talent marketplace.

Format of disclosure

All Nasdaq listed companies subject to the rule must disclose board level diversity statistics in using Nasdaq’s matrices for US-listed companies or Foreign Issuers.  The first page of the linked form matrices detail the definitions of the various categories of Diverse board members. 

A company may not substantially alter the Nasdaq’s Board Diversity Matrices, but it may supplement its disclosure by providing additional information related to its directors, such as noting, underneath the matrix, that the board includes one or more directors with origins in the Middle East or North Africa (consistent with EEOC rules, such directors are considered “White” and would not be considered “Diverse” board members by virtue of their racial or ethnic identity) or other additional diversity characteristics.  Nasdaq provides examples of acceptable and unacceptable disclosures at this link.

Foreign Issuers

A “Foreign Issuer” is a (i) Foreign Private Issuer as defined in SEC Rule 3b-4(c) or (ii) company that is considered a “foreign issuer” under SEC Rule 3b-4(b) and has its principal executive offices located outside of the US.  Recognizing that diversity objectives may differ for issuers outside of the United States, the rules provide that each Foreign Issuer (other than a company with a Smaller Board, as described below) must have, or explain why it does not have, at least two directors who are Diverse, including at least one Diverse director who self-identifies as female and a second Diverse director who may include an individual who self-identifies as one or more of the following: female, LGBTQ+, or an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious, or linguistic identity in the country of the company’s principal executive offices. 

Companies with Smaller Boards and Smaller Reporting Companies

A company with a Smaller Board (defined as one with five or fewer members) may satisfy Rule 5605(f) by having, or explaining why the company does not have, one Diverse director.  Additionally, like Foreign Issuers, Smaller Reporting Companies, as defined by Rule 12b-2 of the Exchange Act of 1934, may satisfy Rule 5605(f) by having, or explaining why they do not have, two female directors.

Exempt Companies

Exempt Companies are generally companies that do not have boards, do not list equity securities, list only securities with no voting rights towards the election of directors, or are not operating companies, such as pre-business combination SPACs.  They will not be required to comply with the rules.

Transition periods and phase-in

As detailed on the chart available at this link, Nasdaq’s Rule 5000 Series diversity listing standards have different transition periods and phase-in periods for companies in different Nasdaq tiers and for newly listed companies. 

The earliest phase-in date for Rule 5606 diversity data disclosure compliance, for all non-exempt companies, is August 8, 2022, or, if later, the date the company files its proxy or information statement for that year.  The earliest phase-in date for Rule 5605(f) compliance is for non-exempt Nasdaq Global Market and Nasdaq Global Select Market companies, which must have, or explain why they do not have, (i) at least one Diverse director by August 7, 2023 (two years after the SEC approval date), or, if later, the date the company files its proxy or information statement for 2023 and (ii) two Diverse directors by August 6, 2025 (four years after the SEC approval date), or, if later, the date the company files its proxy or information statement for 2025. 

Additionally, a company that no longer meets the diversity objectives of Rule 5605(f) due to a vacancy on the board of directors has a grace period until the later of (i) one year from the date of vacancy; or (ii) the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) in the calendar year following the date of vacancy. 

Consequences of noncompliance

If a company fails to provide the Rule 5606 diversity data disclosure, Nasdaq will notify the company that it is not in compliance with a listing standard and allow the company 45 calendar days to submit a plan to regain compliance.  Upon reviewing the plan, Nasdaq may give the company up to 180 days to regain compliance. 

If a company does not meetor does not disclose why it does not meetthe Rule 5605 diversity objectives, Nasdaq will promptly notify the company, and the company will have until the later of its next annual shareholders meeting or 180 days from the date of the deficiency to cure it. 

In each case, if the company does not submit a plan or regain compliance within the applicable periods, it would receive a Staff Delisting Determination. The company could appeal the Determination to a Hearings Panel in accordance with Rule 5815. 

Controversy and potential challenges to the rule

Two SEC Commissioners voted against the rule.  Commissioner Hester Peirce issued a statement  criticizing the SEC’s approval of the rule, arguing that the proposal is inconsistent with and outside of the scope of the Securities Exchange Act of 1934.  She argued that the rule offends Constitutional principles by violating privacy concerns and promoting “essentialist conceptions of race and sex that are now broadly considered offensive.”  Commissioner Elad Roisman issued his own statement, claiming that the SEC failed to conduct an independent, reasoned analysis of the proposal. He also questioned whether the SEC’s approval and enforcement of the proposal could implicate a state action.

These dissents could provide a blueprint for a challenge by a company or other stakeholder, although the likelihood of a challenge succeeding is uncertain.

Key takeaways and other considerations

Nasdaq listed companies now have a set deadline for complying with the new rules and should promptly commence compliance efforts.  These companies may also want to consider the following:

  • State laws may have different requirements.  Understand disclosure requirements that may be required by the state where the company is incorporated or headquartered.  California, Illinois, Maryland, New York and Washington have all adopted board diversity disclosure laws, and several other states are considering similar laws.  See our prior alert on California SB 826 and our prior alert on California AB 979.
  • Major shareholders, proxy advisory firms, and other key stakeholders, such as employees, may have their own diversity goals and expectations on different timelines.  For example, some major institutional shareholders and shareholders who follow proxy advisory firm guidance will vote against directors, particularly the chair or other members of the Nominating and Corporate Governance Committee, if the company lacks board diversity or diversity-related disclosures. See our prior alert for a discussion of diversity-related proxy advisory firm voting guidelines.  Some companies may thus want to consider voluntarily providing diversity data in their 2022 proxy statement (if filed prior to the Nasdaq rule’s effective date of August 8, 2022).-Please contact any of the authors of this article or your DLA Piper relationship lawyer for more information on voting guidelines and practices that may impact your next annual meeting.
  • Consider the consequences of the comply or disclose options.  We anticipate that many companies will choose to comply with Nasdaq’s rule via disclosure.  Companies that choose instead to explain why they do not meet Nasdaq diversity objectives may want to consider the potential for “withhold” or “against” votes for board members, negative attention and boycotts, and shareholder litigation.
  • Consider the company’s available tools for compliance.  Companies may want to:
    • Review their D&O questionnaires to confirm that they contain a voluntary “self-report” related to diversity.  Please contact any of the authors of this article or your DLA Piper relationship lawyer for a D&O questionnaire “voluntary self-report” insert.
    • Amend the company’s nominating and corporate governance committee charter, policies and corporate governance guidelines to comply with Nasdaq and state rules.
    • Review the company’s policies and practices related to board diversity to confirm that directors are not compelled to disclose personal information and that the company complies with applicable antidiscrimination laws.
    • Consider adopting a board retirement policy to provide additional opportunities for Board refreshment and diversity.  According to the 2020 Spencer Stuart Board Index, 70 percent of S&P 500 companies have a mandatory retirement age – generally 72 or 75.
    • Consider adopting a “Rooney Rule.”  According to a recent survey by DLA Piper Corporate Data Analytics, approximately 7 percent of S&P 500 companies have disclosed adoption of the “Rooney Rule” or a similar policy, which requires a company to consider at least one diverse candidate for each vacancy.
    • Develop and/or review board and management succession plans to ensure consideration of diversity initiatives.
    • Consider development of recruiting program, or partner with third-party recruiting services, such as one of Nasdaq’s board recruiting services, if eligible, to develop a robust pipeline for board and other leadership roles.
  • Define “diversity.”  Apart from Nasdaq’s requirements, consider whether, given the company’s stakeholders and other considerations, it should independently define “diversity.”  A survey of public companies by DLA Piper Corporate Data Analytics[1] found that companies are most likely to consider diversity of gender (67 percent), race and ethnicity (62 percent) and background, skills or perspectives (61 percent), with fewer companies considering age (22 percent), LGBTQ+ status (10 percent), geography (9 percent) disability (3 percent), veteran status (3 percent) or religion (1 percent).  These definitions have been generally consistent since 2019, except in 2021 we saw moderate (5 percent) gains among companies including racial and ethnic diversity and LGBTQ+ status in their diversity definition.
  • Board skills matrix and other diversity disclosures. Consider augmenting required disclosures, such as providing a board “skills matrix” in the format recommended by the New York City Comptroller, or highlighting other diversity characteristics deemed important to the company, such as disability or veteran status, or a map of the world indicating geographic diversity of the company’s directors.

Additional resources for Nasdaq-listed companies

Nasdaq is providing a myriad of resources for companies related to these new rules.  It will host a series of webinars beginning August 17 (link to register) to help companies understand the new rules and ask questions.  Additionally, Nasdaq published a summary publication “Nasdaq’s Board Diversity Rule: What Nasdaq-Listed Companies Should Know” and a list of “Frequently Asked Questions” on its Listing Center website.  It has also established a dedicated mailbox for questions at


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Learn more about the implications of the new Nasdaq diversity listing standards for your company by contacting any of the authors or your DLA Piper relationship lawyer. 

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[1] Survey sample included over 150 publicly traded clients and client peer companies in various sectors, including large, mid and small cap companies.