The Securities and Exchange Commission is expected to give initial, and potentially binding, approval of a Nasdaq board diversity proposal by Aug. 8. The endorsement would be the SEC’s most substantial action to encourage diversity and inclusion since the agency made environmental, social, and governance matters a top priority under the Biden administration.
Nasdaq’s plan would be the most significant diversity requirements in the U.S. since California passed laws in 2018 and 2020 that mandated diverse boards for companies headquartered in the state. The proposal directs its listed companies to pursue board diversity—by having at least one female board member and at least one who identifies as an underrepresented minority or LGBTQ—or explain why they don’t.
There’s little doubt the SEC would permit Nasdaq to implement its proposal, as the agency is considering the need for its own regulations on board diversity, former agency Commissioner Annette Nazareth told Bloomberg Law.
It’s “a nice way to test the waters,” said Nazareth, a Davis Polk & Wardwell LLP senior counsel.
Representatives of the SEC and Nasdaq declined to comment.
Nasdaq has been waiting about eight months for a staff decision from the SEC’s Division of Trading and Markets. The division has up to 240 days to approve or disapprove the plan on behalf of the agency’s commissioners, with the deadline set at Aug. 8, according to the SEC.
If approved, Nasdaq would require companies to meet its diversity rules within four years of the SEC’s endorsement. Exceptions would apply to small or foreign boards, but they still must have some diversity.
“The fact is a lot of companies, in particular in the last two years, have made a lot of progress in this direction,” Hillary Sale, a Georgetown University Law Center professor, who teaches courses on women and leadership, told Bloomberg Law.
The only way companies could have boards that aren’t diverse is by explaining why they can’t meet Nasdaq’s objectives.
The exchange has received positive feedback about its diversity plans during the SEC review period, drawing support from the U.S. Chamber of Commerce and tech giants, including
Companies’ work to increase diversity on their boards has picked up speed in recent years.
On the S&P 500, at least 145 companies have added at least one Black director since June 2020, Bloomberg News reported in May. Women also hold about a third of all seats on the S&P 500.
Nasdaq faces opposition, notably from a Texas group headed by an activist who has fought laws involving race.
The Alliance for Fair Board Recruitment, which has sued over California’s diversity mandates, is considering challenging Nasdaq’s plan.
Nasdaq’s plan is unlawful because “it fails to advance any legitimate exchange purpose,” according to its letter urging the SEC to reject the proposal. The alliance also accused the plan of discriminatory treatment of board candidates based on their race, gender, or sexual orientation.
“If the SEC approves a rule for Nasdaq that is much like the California quota statute, it is very likely a number of lawsuits will be filed against Nasdaq including one from the Alliance for Fair Board Recruitment,” the board’s president Edward Blum, told Bloomberg Law.
SEC Repubican Commissioner Hester Peirce also has been a critic of board diversity mandates, speaking out in 2018 against California’s quota for state-based companies to have female board directors.
SEC rules let the agency’s commissioners weigh in on staff decisions, like the Nasdaq proposal, under certain conditions. An organization or a commissioner that objects to the staff decision can bring the matter before the agency’s commissioners for a final vote on the matter.
Peirce didn’t respond to a request for comment.
Challenging Nasdaq’s proposal wouldn’t be particularly fruitful, given the commission’s 3-2 Democratic majority and the comply-or-explain flexibility that the plan allows for companies, Nazareth said.
“I don’t think the standard would be that difficult to meet because it’s a transparency rule ultimately,” she said. “One couldn’t argue that by approving the rule it has an adverse impact on competition or anything like that. That just doesn’t make sense.”
Opponents of Nasdaq’s proposal are unlikely to deter the SEC from pushing companies to diversify their boards, even if they challenge the exchange’s plan.
SEC Chairman Gary Gensler has set an October deadline to propose rules requiring disclosures about the diversity of board members and nominees. If the agency doesn’t approve the regulations, Congress may require them. The House approved legislation in June mandating board diversity disclosures.
“The writing’s on the wall in lots of ways,” Sale said.