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Nasdaq has modified parts of the proposal that it submitted to the U.S. Securities and Exchange Commission (“SEC”) late last year, which –if approved – would refashion the public disclosure requirements for companies listed on the stock exchange. The New York-based stock exchange stated in December that the aim of the proposal is to “provide stakeholders with a better understanding of [a] company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors.” In accordance with its proposal, all Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics via Nasdaq’s proposed disclosure framework.

Specifically, the proposal that Nasdaq presented to the SEC in December would require all Nasdaq-listed companies to publicly disclose board-level diversity statistics via Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the rule. It additionally calls for most of those entities “to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female, and one who self-identifies as either an underrepresented minority” – which Nasdaq defines 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 as LGBTQ+.

Since its introduction, Nasdaq’s proposal has been the subject of mixed responses. Counsel for the stock exchange alerted the SEC in a letter on February 5 that 86 percent of the 162 substantive comment letters filed in connection with the proposal supported the adoption of the new rules, which aim to make up for a large-scale lack self-reporting by publicly-traded companies when it comes to diversity figures for C-suite executives and board members. 

“While many anticipated that the SEC’s approval of the proposed rules would be a ‘slam dunk’ given the current social climate,” according to Bryan Cave’s Katherine Ashton and Vicki Westerhaus, it has been met with at least some pushback. For instance, 12 Republican Senators on the U.S. Senate Banking Committee submitted a letter of their own to the SEC last month, urging the securities regulator to shootdown Nasdaq’s proposal on the basis that it would “interfere with boards’ duties to their shareholders, violate securities disclosure principles and could impose costs on companies.” In the letter, a dozen Senators “commend[ed] individual firms for the proactive efforts they have already made in recruiting, promoting, and maintaining diverse talent.” Nonetheless, they argued that “it is not the role of Nasdaq, as a self-regulatory organization, to act as an arbitrator of social policy or force a prescriptive one-size-fits-all solution upon markets and investors.” 

Not only does the exchange’s “narrow concept of mandated diversity, one that prioritizes race, gender, and sexual orientation, and pressured board diversity, miss the mark,” the Senators’ letter contends, it “interferes with a board’s duty to follow its legal obligations to govern in the best interest of the corporation and its shareholders,” while also “violat[ing] central principles of materiality that govern securities disclosures” and “harm[ing] economic growth by imposing costs on public corporations and discouraging private corporations from going public.” Ultimately, the Senators state that they “think America’s corporations benefit from boards that avoid groupthink and offer a diversity of perspectives and commend firms that look to increase diversity among their boards,” but Nasdaq should not be using “its quasi-regulatory authority to impose social policies.”

Fast forward a few weeks, and on February 26, Nasdaq submitted a revised proposal in which it amends some of its previously set-out points. The new filing proposes, for example, that companies with smaller boards – i.e., those with five or fewer directors – would need to include one diverse director, instead of the previously proposed two. Another change would allow for extra time for newly-listed companies to become complaint with the diversity rules; they would have an additional two-year period after the phase-in period to fully meet the diversity objective. Meanwhile, Nasdaq has added a one-year grace period in the event a vacancy on the board brings a company under the recommended diversity objective.

As for timing across the board, the diversity disclosure mandates included in the proposal, if approved by the SEC, would come into effect on the later of “one calendar year from the date of SEC approval of the revised proposal” or … “the date the proxy statement is filed for a company’s annual meeting during the calendar year of such SEC approval date.”

In an Op-Ed in the Wall Street Journal this week, Nasdaq President and CEO Adena Friedman revealed that the amendments come in light of critical response to its initial proposal and aim to “strengthen” the proposal and make “allowances for [companies’] needs and concerns.” She clarified that the proposal “is not a quota,” noting that “the only requirement for companies that do not meet this new objective is to provide an explanation to shareholders.” 

“Overall, our proposal seeks to demonstrate that, with proper disclosure and clear objectives, companies and investors can create momentum toward an approach to capitalism that offers more opportunity to more people,” Friedman stated in the article. “We believe this can be accomplished through a market-driven solution—rather than government intervention.” 

The SEC’s extended public comment period for the proposal is slated to end on March 11, at which point it is expected to decide on Nasdaq’s newly-fashioned rules. Nasdaq’s proposed requirements are the first of their kind, but the push for corporate diversity more generally has found favor among lawmakers in states like California, Illinois Massachusetts, and Pennsylvania, which have enacted laws governing board diversity for  publicly traded companies.