The SEC approved two Nasdaq Stock Market LLC ("Nasdaq") rule proposals on board diversity: one requiring disclosure of diversity statistics ("Board Diversity Proposal") and one offering free access to a board recruiting service ("Board Recruiting Service Proposal"). The proposals are intended to promote diversity among the boards of Nasdaq-listed companies, and to increase transparency and accountability.

The Board Diversity Proposal requires that Nasdaq-listed companies (i) have at least one director who self-identifies as a female and at least one director who self-identifies as an underrepresented minority or LGBTQ+ or (ii) explain why the company cannot meet such a requirement (or have one Diverse director for a company with a Smaller Board; see previous coverage here). Foreign issuers will be permitted to satisfy the standard by having two women directors or by demonstrating that its second director is an underrepresented minority in the country in which the company's principal executive offices are located.

The Board Recruiting Service Proposal will provide certain listed companies with one year of complimentary access to a board recruiting service that will connect issuers with "board-ready diverse candidates."

SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw supported the proposals as a step towards consistent and comparable diversity metrics. They emphasized that further work remains to improve diversity in capital markets, including with respect to disability as a characteristic and diversity among senior management.

SEC Commissioner Hester M. Peirce opposed the Board Diversity Proposal, claiming that it is outside the scope of the Exchange Act and contrary to fundamental Constitutional principles. Ms. Peirce argued that the proposal:

  • does not satisfy the affirmative criteria of Section 6(b)(5) of the Exchange Act; instead, it relies on selective empirical evidence and stakeholder sentiment to bolster the proposal's approvability rather than on whether the type of disclosure in question is relevant to investors within the scope of the Exchange Act;
  • designates arbitrary demographic categories that together establish a "mandated diversity matrix" in which demographic characteristics, not individual experiences or skill sets, are disclosed to create "the impression of clarity for investors while actually serving to mislead them";
  • seeks to "micromanage the delicate process of composing a board"; and
  • relies on inappropriate stereotyping, treating individuals within the same diversity category as "interchangeable."

SEC Commissioner Elad L. Roisman voted to support the Board Recruiting Services Proposal, but dissented from the Board Diversity Proposal, which, he stated, does not meet the legal standards for SEC approval. Mr. Roisman argued that the Approval Order lacks a "reasoned analysis" by the SEC, but instead reiterates Nasdaq's assertions "and then in places summarily finds that the Proposal is consistent with the Exchange Act."

Both Ms. Peirce and Mr. Roisman questioned whether the Board Diversity Proposal could be considered a state action due to the delisting implications for companies. As the SEC is the adjudicating body for exchange delisting decisions, Ms. Peirce asserted that in the event of a delisting, the SEC would have to make determinations that a government agency "should not be able to - and, under our Constitutional order, cannot - make."

SEC Chair Gary Gensler observed that "a broad cross-section of commenters supported the proposed board diversity disclosure rule."

Commentary

Although there are material questions as to whether Nasdaq's proposal is consistent with the Exchange Act, no one really has an incentive to challenge the proposal in court. Issuers that believe Nasdaq's rulemaking is inappropriate will simply list elsewhere.

Primary Sources

  1. SEC Approval Order: Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Approving Proposed Rule Changes, as Modified by Amendments No. 1, to Adopt Listing Rules Related to Board Diversity and to Offer Certain Listed Companies Access ...
  2. SEC Statement, Elad L. Roisman: Statement on the Commission's Order Approving Exchange Rules Relating to Board Diversity
  3. SEC Statement, Gary Gensler: Statement on the Commission's Approval of Nasdaq's Proposal for Disclosure about Board Diversity and Proposal for Board Recruiting Service
  4. SEC Joint Statement, Allison Herren Lee and Caroline A. Crenshaw: Statement on Nasdaq's Diversity Proposals - A Positive First Step for Investors
  5. SEC Statement, Hester M. Peirce: Statement on the Commission's Order Approving Proposed Rule Changes, as Modified by Amendments No. 1, to Adopt Listing Rules Related to Board Diversity submitted by the Nasdaq Stock Market LLC

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