Contested Nasdaq Board Diversity Rules Take Effect: Explained

Nasdaq Inc. will start requiring thousands of companies to have diverse boards or explain why they don’t by Dec. 31, more than two years after the SEC gave the stock exchange the green light to implement the regulations.

The rules, approved by the Securities and Exchange Commission in 2021, survived a legal challenge from two conservative groups in the US Court of Appeals for the Fifth Circuit in October. The Alliance for Fair Board Recruitment and National Center for Public Policy Research had argued the regulations exceeded the SEC’s powers, but a three-judge panel ruled that the SEC acted within its authority. “A ‘reasonable investor’ could find board diversity information ‘important,’” the panel ruled.

Both conservative groups have asked the full court to review the decision. The Fifth Circuit hasn’t put the regulations on hold, though. Nasdaq-listed companies have had to make disclosures about the gender and racial makeup of their boards since 2022 as a first step. The next set of requirements kick in by the end of this year.

1. What does Nasdaq need from companies by Dec. 31?

Companies must have a woman, “underrepresented minority” or LGBTQ+ board member or report in their proxy statements or on their websites why they’re unable to comply. Underrepresented minorities are individuals who are “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,” according to Nasdaq.

There are exceptions for recently listed companies, which have until 2024 and beyond to meet the requirement.

Companies listed on Nasdaq’s Global or Global Select market tiers, which are geared toward large and midsize firms, have one year from the date of their listing to comply if they joined Nasdaq in January 2023 or later. Companies with five or fewer board members have two years from their listing date to fulfill the requirement if they started trading on the exchange in January 2022 or later.

2. What else will the rules require in the future?

Companies that list on Nasdaq’s Global or Global Select market tiers need to have at least two diverse directors by Dec. 31, 2025, or say why not. One board member must be a woman; the other must identify as an underrepresented minority or LGBTQ+ and can be a man. Companies that list on Nasdaq’s Capital Market tier, which is focused on smaller firms, have until Dec. 31, 2026, to have two diverse directors.

Small companies with a public float of less than $250 million or annual revenues of below $100 million with a public float under $700 million could satisfy the requirement with two women; the directors need not identify as a minority or LGBTQ+. The float is the amount of outstanding stock that’s held by the investing public.

Foreign companies also can have two women who aren’t from underrepresented communities to comply with Nasdaq’s regulations.

Companies with five or fewer board members are exempt from having two diverse directors. They only need one.

3. What are companies reporting under the regulations already?

Companies have had to disclose the demographics of their boards since 2022. Nasdaq has a diversity matrix template for reporting how many board members are of various races and ethnicities, as well as the number of LGBTQ+ and women directors.

A Bloomberg Law analysis of diversity disclosures under Nasdaq’s rules comparing the period from Oct. 18 to Nov. 8 in 2022 and 2023 found a drop in boards with women. Of the 82 companies that provided usable diversity data in 2023, 76% had boards with at least one woman. In 2022, 82% of the 70 companies supplying usable diversity data reported at least one woman on their boards.

The percentage of boards with minority or LGBTQ+ directors fell slightly from 74% in 2022 to 71% in 2023, according to the Bloomberg Law analysis.

4. Can the rules still be overturned?

The Fifth Circuit still can toss the rules. For that to happen, the full court first must decide to review the three-judge panel’s decision upholding the regulations. That decision on whether to rehear the case is pending.

The three judges who upheld the SEC’s decision to back the Nasdaq rule—Stephen Higginson, Carl Stewart, and James Dennis—were all appointed by Democratic presidents. Judges installed by Republicans hold the majority on the full court, however.

5. What if a company doesn’t have a diverse board or explain itself?

Nasdaq’s Listing Qualifications Department will give a company that it finds isn’t following the rules a grace period. That period runs until a company’s next annual meeting or 180 days after it became noncompliant, whichever is later.

A company that still fails to comply will receive a letter from Nasdaq saying the exchange has decided to delist it. The company could then appeal the decision to a Nasdaq hearings panel for review.

To Learn More:

• Red States Urge Fifth Circuit to Rethink Board Diversity Support
• Nasdaq’s Board Diversity Court Win Draws New Conservative Appeal
• ANALYSIS: Companies Slow to Check the Boxes for Board Diversity
• Nasdaq Board Diversity Opinion Appealed by Conservative Group
• Nasdaq Board Diversity Regulations Win Fifth Circuit Support (1)