Blog

By: Tuo Wang

On August 6, 2021, the SEC approved new disclosure rules regarding board diversity of Nasdaq listed companies. These diversity rules require that listed companies either (i) meet the minimum board diversity requirement and publicly disclose board-level diversity statistics using a standardized template or (ii) explain publicly why they do not have the minimum number of diverse directors. Subject to certain exceptions and exemptions, the effective date for compliance can be as early as August 2023. If a Nasdaq-listed company fails to comply with the set of rules, a Staff Delisting Determination Letter would be issued.

What are the Diversity Rules requirements?

Board Diversity Requirements:

1. Rule 5605(f) requires Nasdaq-listed companies to have:
   1. At least two diverse directors, including one self-identified female director and one director who self-identifies as an underrepresented minority or as LGBTQ+; OR
   2. Publicly disclose and explain why they do not meet such diverse representation requirements.

Exceptions to the Board Diversity Requirements:

1. Foreign private issuers, as defined in SEC rules, can satisfy Rule 5605(f) with two female directors, or with one female director and one director who is an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the company’s principal executive offices, or LGBTQ+.
2. Smaller Boards: Companies with a board of directors of five or fewer members may satisfy the rules by having least one diverse director who self-identifies as female, LGBTQ+, or an underrepresented minority.
3. Smaller reporting companies may satisfy such rules by having at least two directors who self-identify as female.

Disclosure and Publication:

1. If a company meets the board diversity requirement, the company must either publish the board diversity matrix in its annual meeting proxy statement or on the company’s website, provided that the company submits a link to the information through the Nasdaq Listing Center no later than 15 calendar days following the annual meeting. After the first year of publication, the company shall disclose the board diversity matrix for both the current and the immediately preceding year on an annual basis.
2. If a company does not meet the board diversity requirement within the prescribed timeframe, the company must publicly disclose the reasons they did not satisfy the requirement and include such explanation in its annual meeting proxy statement or post the explanation on the company’s website. A link to the website should be provided to Nasdaq timely. Nasdaq will not evaluate the explanation substantively, but will verify that the company actually provided an explanation.

What is the timeframe for compliance?

Currently Listed Companies:

1. For a company listed on Nasdaq Capital Market, it must have at least one diverse director by the later of August 7, 2023, or the filing date of the company’s proxy statement for its 2023 annual meeting. Further, the company must have two diverse directors by the later of August 7, 2026, or the filing date of the company’s proxy statement for its 2026 annual meeting.
2. For a company listed on Nasdaq Global/Global Select Market, it must have at least one diverse director by the later of August 7, 2023, or the filing date of the company’s proxy statement for its 2023 annual meeting. Further, the company must have two diverse directors by the later of August 7, 2025, or the filing date of the company’s proxy statement for its 2025 annual meeting.

Newly Listed Companies:

1. For a company to be listed on Nasdaq Capital Market, it must have at two diverse directors by the later of two years from listing or the filing date of the company’s proxy statement for its second annual meeting following listing.
2. For a company to be listed on Nasdaq Global/Global Select Market, it must have at least one diverse director by the later (i) one year from listing or (ii) the filing date of the company’s proxy statement for its first annual meeting following listing. Further, the company must have two diverse directors by the later of (i) two years from listing or (ii) the filing date of the company’s proxy statement for its second annual meeting following listing.

What are the consequences for non-compliance?

If a company fails to meet the requirement under the diversity rules within the prescribed timeframe or fails to provide an explanation for not meeting the diversity requirement, Nasdaq will notify the company that it has until the later of (i) its next annual shareholders meeting or (ii) 180 days from the event that caused the deficiency to cure the deficiency. If the company does not cure within the provided timeframe, a Staff Delisting Determination Letter would be issued.

However, if a company initially satisfied the diversity requirement but later failed to meet the diversity requirement due to vacancy of its board of directors, the company may satisfy the rules by 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 in the calendar year following the year of the date of vacancy.