Nasdaq Diversity Plan Must Clear SEC Hurdles, Even Under Biden

Nasdaq Inc.’s plan to require greater diversity on corporate boards will require an extensive SEC review that will likely take several months to complete, even if the agency ultimately grants approval.

The Securities and Exchange Commission has until summer 2021 to reach an initial, and possibly binding, decision on the Dec. 1 proposal to require Nasdaq-listed companies to have at least one director who identifies as female and one who identifies as an underrepresented minority or LGBTQ—or explain why they don’t. An appeal of the initial ruling could push a final decision past next summer.

Nasdaq-listed companies would have one year to start fulfilling some of the stock exchange’s new requirements, possibly by mid-2022, but only if things go well during the commission’s initial eight-month review. The review won’t officially start until the proposal is published in the Federal Register in the coming days or weeks.

“If there’s anything really innovative, new, or controversial, it’s typical for the commission to take the full 240 days,” said James Burns, a former deputy director of the Division of Trading and Markets and a partner at Willkie Farr & Gallagher LLP.

Staff in the SEC’s Division of Trading and Markets, who effectively work under the direction of the SEC Chairman Jay Clayton, could approve or disapprove the plan on behalf of the agency’s commissioners at any point during the 240-day period, which will include an opportunity for the public to comment.

But with Clayton leaving at the end of the year, SEC watchers expect a decision likely will come under an acting or permanent chairman designated by the Biden administration. The president-elect said during his campaign that he will require companies to report the racial and gender composition of their boards.

“The staff has to have enough time to look at the comments,” said Holly Smith, an Eversheds Sutherland (US) LLP partner and a former associate director in the SEC’s Division of Market Regulation, now known as the Division of Trading and Markets.

Full Commission Vote?

But SEC staff might not have the final say on the proposal, regardless of whether the agency’s leader supports it.

SEC rules allow the agency’s commissioners to decide whether to approve or disapprove the proposal in certain circumstances. An aggrieved company or a single commissioner, for example, can bring the matter before the agency’s members for a vote, potentially delaying final action.

It’s not unusual for the agency’s commissioners to decide whether to approve a proposal. The full SEC denied proposals by exchanges to list bitcoin exchanged-traded funds backed by Tyler and Cameron Winklevoss in 2018 and Wilshire Phoenix Funds LLC in 2020, with only Republican Commissioner Hester Peirce voting to approve them.

Peirce has spoken out against California’s first-in-the-nation requirement for women on boards, calling such diversity mandates “offensive” as a woman. Peirce, who declined to comment for this story, is expected to serve as acting chairman in the weeks after Clayton leaves and before President-elect Joe Biden designates a replacement. Peirce can remain on the commission until at least 2025.

‘Hard to Argue’

Nasdaq-listed companies would have to disclose board diversity statistics within a year of SEC authorization, according to the proposal.

They also would need to have at least one board member who self-identifies as a woman or as an underrepresented minority or LGBTQ within two years of commission approval. Companies would need at least two diverse board directors, including a woman, within four to five years of the agency’s endorsement, depending on the company. An exception for foreign and smaller companies would allow compliance by having two women on their boards.

Companies that don’t meet these obligations would have to explain why they don’t have diverse board members or face de-listing.

Nasdaq’s plan to require board diversity disclosures—but not actual director diversity—would make it difficult for a commissioner to say the exchange can’t make the obligations a part of its listing requirements, said Marlon Paz, who was a senior counsel in the Division of Trading and Markets.

“It’s hard to argue against disclosure,” said Paz, now a Mayer Brown LLP partner. “It’s easier to argue against mandates of diversity.”

First Steps

As the Nasadaq review begins, SEC staff will have to give periodic progress updates. Agency rules require staff to approve or disapprove a proposal at various points during the eight months, or say they need more time for evalution.

The first decision deadline comes 45 days after the proposal is published in the Federal Register. The staff then can file a notice saying they need another 45 days to evaluate the plan if they haven’t approved or disapproved it by then. The staff also will have to file notices at 90 and 180 days after publication if they haven’t yet reached a decision.

The staff will use the time to review the more than 250-page proposal and any comment letters. They also likely will meet with Nasdaq officials and other people about the plan.

Nasdaq may need to make changes to the proposal based on the feedback the SEC gets, Smith said.

“It will be important to see who comments and what they’re saying,” she said.