April 22, 2021
Authored by: Katherine Ashton and Vicki Westerhaus
The House Committee on Financial Services met virtually on April 20, 2021 to consider legislation that, among other things, would require public companies to annually disclose the voluntarily, self-identified gender, race, ethnicity and veteran status of their board directors. The Committee cited a 2017 board diversity survey finding that increased board diversity improves companies’ ability to innovate and enhances overall business performance.
In the meantime, the wait continues for an SEC decision on Nasdaq’s proposed “comply or explain why not” mandate that would require public disclosure of board diversity statistics for most Nasdaq-listed companies, initially proposed in December 2020. The SEC most recently acted on these rules on March 10, 2021, when it issued an “Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Changes, as Modified by Amendment No. 1” (the “Order”). The Order postponed the date, which had already been extended, by which the SEC is required to make its decision regarding the proposed rules, as amended, until possibly as late as August 2021.
Some speculated that the delay was, at least in part, to allow time for Gary Gensler to be named SEC Chair. The Senate confirmed Gensler’s nomination on April 14, 2021, and he was sworn in as a member of the SEC on April 17, 2021, so many expect movement on the Order this summer. Comments continue to trickle in to the SEC website, and the SEC Office of the Investor Advocate continues to meet by telephone and virtually with interested members of the public who wish to share their comments. While a substantial number of the comment letters submitted to date support the proposal, others communicate fervent opposition.
In the Order, the SEC explains that it is initiating proceedings because of the issues raised by the proposed rules and to “allow for additional analysis of, and input from commenters with respect to, the consistency of the proposed rule changes with the requirements of the [Exchange] Act.” As required, the Order sets out possible grounds for disapproval, namely (1) any SEC determination that the rules are inconsistent with the Exchange Act requirement that listing rules “be designed to, among other things, protect investors and the public interest and not be designed to regulate matters not related to the purposes of the Exchange Act or the administration of the exchange” and (2) with respect to the rules that would provide for diversity-related recruiting benefits, would include any SEC determination that the rules are inconsistent with the Exchange Act’s requirement that listing rules provide for the equitable allocation of dues, fees and other charges among its members, issuers and certain others.
Proposed Rule Changes. Under the proposed rules, as amended, most Nasdaq-listed companies would – within a two-to-four year phase-in period – be required to have two diverse directors on their boards, provided that companies with five or fewer directors would only be required to have one diverse director. Companies not meeting the applicable diversity “requirement” could avoid delisting by explaining “why not” in their public filings. The proposed rules would also require companies to include in their SEC governance filings a specified form of “diversity matrix” setting out certain anonymous aggregate data regarding the diversity of their directors. Finally, the rules would provide eligible listed companies with one year of free access to a board recruiting resource. We provided additional information regarding the rules as originally proposed in our December 2, 2020 post and, as amended, in our March 1, 2021 post.