[Federal Register Volume 85, Number 239 (Friday, December 11, 2020)]
[Notices]
[Pages 80472-80505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27091]



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Vol. 85

Friday,

No. 239

December 11, 2020

Part V





Securities and Exchange Commission





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Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of 
Filing of Proposed Rule Change To Adopt Listing Rules Related to Board 
Diversity; Notice

  Federal Register / Vol. 85 , No. 239 / Friday, December 11, 2020 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90574; File No. SR-NASDAQ-2020-081]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt Listing Rules Related 
to Board Diversity

December 4, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 1, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt listing rules related to board 
diversity, as described in more detail below:
    (i) To adopt Rule 5605(f) (Diverse Board Representation), which 
would require Nasdaq-listed companies, subject to certain exceptions, 
(A) to have at least one director who self-identifies as a female, and 
(B) to have at least one director who self-identifies as Black or 
African American, Hispanic or Latinx, Asian, Native American or Alaska 
Native, Native Hawaiian or Pacific Islander, two or more races or 
ethnicities, or as LGBTQ+, or (C) to explain why the company does not 
have at least two directors on its board who self-identify in the 
categories listed above;
    (ii) to adopt Rule 5606 (Board Diversity Disclosure), which would 
require Nasdaq-listed companies, subject to certain exceptions, to 
provide statistical information in a proposed uniform format on the 
company's board of directors related to a director's self-identified 
gender, race, and self-identification as LGBTQ+; and
    (iii) to update Rule 5615 and IM-5615-3 (Foreign Private Issuers) 
and Rule 5810(c) (Types of Deficiencies and Notifications) to 
incorporate references to proposed Rule 5605(f) and Rule 5606; and
    (iv) to make certain other non-substantive conforming changes.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
I. The Diversity Imperative for Corporate Boards
    Over the past year, the social justice movement has brought 
heightened attention to the commitment of public companies to diversity 
and inclusion. Controversies arising from corporate culture and human 
capital management challenges, as well as technology-driven changes to 
the business landscape, already underscored the need for enhanced board 
diversity--diversity in the boardroom is good corporate governance. The 
benefits to stakeholders of increased diversity are becoming more 
apparent and include an increased variety of fresh perspectives, 
improved decision making and oversight, and strengthened internal 
controls. Nasdaq believes that the heightened focus on corporate board 
diversity by companies,\3\ investors,\4\ corporate governance 
organizations,\5\ and legislators \6\ demonstrates that investor 
confidence is enhanced when boardrooms are comprised of more than one 
demographic group. Nasdaq has also observed recent calls from SEC 
commissioners \7\ and investors \8\ for

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companies to provide more transparency regarding board diversity.
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    \3\ See Deloitte and the Society for Corporate Governance, Board 
Practices Quarterly: Diversity, equity, and inclusion (Sept. 2020), 
available at: https://www2.deloitte.com/us/en/pages/center-for-board-effectiveness/articles/diversity-equity-and-inclusion.html 
(finding, in a survey of over 200 companies, that ``most companies 
and/or their boards have taken, or intend to take, actions in 
response to recent events surrounding racial inequality and 
inequity; 71% of public companies and 65% of private companies 
answered this question affirmatively'').
    \4\ See ISS Governance, 2020 Global Benchmark Policy Survey, 
Summary of Results 6 (Sept. 24, 2020), available at: https://www.issgovernance.com/wp-content/uploads/publications/2020-iss-policy-survey-results-report-1.pdf (finding that ``a significant 
majority of investors (61 percent) indicated that boards should aim 
to reflect the company's customer base and the broader societies in 
which they operate by including directors drawn from racial and 
ethnic minority groups'').
    \5\ See International Corporate Governance Network, ICGN 
Guidance on Diversity on Boards 5 (2016), available at: https://www.icgn.org/sites/default/files/ICGN%20Guidance%20on%20Diversity%20on%20Boards%20-%20Final.pdf 
(``The ICGN believes that diversity is a core attribute of a well-
functioning board which supports greater long-term value for 
shareholders and companies.'').
    \6\ See, e.g., John J. Cannon et al., Sherman & Sterling LLP, 
Washington State Becomes Next to Mandate Gender Diversity on Boards 
(May 28, 2020), available at: https://www.shearman.com/perspectives/2020/05/washington-state-becomes-next-to-mandate-gender-diversity-on-boards; Cal. S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30, 
2020) (California legislation requiring companies headquartered in 
the state to have at least one director who self-identifies as a 
Female and one from an Underrepresented Community).
    \7\ See Commissioner Allison Herren Lee, Regulation S-K and ESG 
Disclosures: An Unsustainable Silence (Aug. 26, 2020), available at: 
https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26#_ftnref15 (``There is ever-growing recognition of the 
importance of diversity from all types of investors . . . [a]nd 
large numbers of commenters on this [SEC] rule proposal emphasized 
the need for specific diversity disclosure requirements.''); see 
also Commissioner Caroline Crenshaw, Statement on the 
``Modernization'' of Regulation S-K Items 101, 103, and 105 (August 
26, 2020), available at: https://www.sec.gov/news/public-statement/crenshaw-statement-modernization-regulation-s-k (``As Commissioner 
Lee noted in her statement, the final [SEC] rule is also silent on 
diversity, an issue that is extremely important to investors and to 
the national conversation. The failure to grapple with these issues 
is, quite simply, a failure to modernize.''); Mary Jo White, Keynote 
Address, International Corporate Governance Network Annual 
Conference: Focusing the Lens of Disclosure to Set the Path Forward 
on Board Diversity, Non-GAAP, and Sustainability (June 27, 2016), 
available at: https://www.sec.gov/news/speech/chair-white-icgn-speech.html (``Companies' disclosures on board diversity in 
reporting under our current requirements have generally been vague 
and have changed little since the rule was adopted . . . Our lens of 
board diversity disclosure needs to be re-focused in order to better 
serve and inform investors.'').
    \8\ See Vanguard, Investment Stewardship 2019 Annual Report 
(2019), available at: https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2019_investment_stewardship_annual_report.pdf (``We want companies 
to disclose the diversity makeup of their boards on dimensions such 
as gender, age, race, ethnicity, and national origin, at least on an 
aggregate basis.''); see also State Street Global Advisors, 
Diversity Strategy, Goals & Disclosure: Our Expectations for Public 
Companies (Aug. 27, 2020) https://www.ssga.com/us/en/individual/etfs/insights/diversity-strategy-goals-disclosure-our-expectations-for-public-companies (announcing expectation that State Street's 
portfolio companies (including US companies ``and, to the greatest 
extent possible, non-US companies'') provide board level 
``[d]iversity characteristics, including racial and ethnic makeup, 
of the board of directors'').
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    Nasdaq conducted an internal study of the current state of board 
diversity among Nasdaq-listed companies based on public disclosures, 
and found that while some companies already have made laudable progress 
in diversifying their boardrooms, the national market system and the 
public interest would best be served by an additional regulatory 
impetus for companies to embrace meaningful and multi-dimensional 
diversification of their boards. It also found that current reporting 
of board diversity data was not provided in a consistent manner or on a 
sufficiently widespread basis. As such, investors are not able to 
readily compare board diversity statistics across companies.
    Accordingly, Nasdaq is proposing to require each of its listed 
companies, subject to certain exceptions, to: (i) Provide statistical 
information regarding diversity among the members of the company's 
board of directors under proposed Rule 5606; and (ii) have, or explain 
why it does not have, at least two ``Diverse'' directors on its board 
under proposed rule 5605(f)(2). ``Diverse'' means a director who self-
identifies as: (i) Female, (ii) an Underrepresented Minority, or (iii) 
LGBTQ+. Each listed company must have, or explain why it does not have, 
at least one Female director and at least one director who is either an 
Underrepresented Minority or LGBTQ+. Foreign Issuers (including Foreign 
Private Issuers) and Smaller Reporting Companies, by contrast, have 
more flexibility and may satisfy the requirement by having two Female 
directors. ``Female'' means an individual who self-identifies her 
gender as a woman, without regard to the individual's designated sex at 
birth. ``Underrepresented Minority'' means, consistent with the 
categories reported to the Equal Employment Opportunity Commission 
(``EEOC'') through the Employer Information Report EEO-1 Form (``EEO-1 
Report''), an individual who self-identifies as one or more of the 
following: 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. ``LGBTQ+'' means an individual who self-
identifies as any of the following: Lesbian, gay, bisexual, transgender 
or a member of the queer community.
    Under proposed Rule 5606, Nasdaq proposes to provide each company 
with one calendar year from the date that the Commission approves this 
proposal (the ``Approval Date'') to comply with the requirement for 
statistical information regarding diversity. Under proposed Rule 
5605(f)(2), no later than two calendar years after the Approval Date, 
each company must have, or explain why it does not have, one Diverse 
director. Further, each company must have, or explain why it does not 
have, two Diverse directors no later than: (i) Four calendar years 
after the Approval Date for companies listed on the Nasdaq Global 
Select or Global Market tiers; or (ii) five calendar years after the 
Approval Date for companies listed on the Nasdaq Capital Market tier.
    Nasdaq undertook extensive research and analysis and has concluded 
that the proposal will fulfill the objectives of the Act in that it is 
designed to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, to prevent fraudulent and 
manipulative acts and practices, and to protect investors and the 
public interest. In addition to conducting its own internal analysis as 
described above, Nasdaq reviewed a substantial body of third-party 
research and interviewed leaders representing a broad spectrum of 
market participants and other stakeholders to:
     Determine whether empirical evidence demonstrates an 
association between board diversity, shareholder value, investor 
protection and board decision-making;
     understand investors' interest in, and impediments to 
obtaining, information regarding the state of board diversity at public 
companies;
     review the current state of board diversity and 
disclosure, both among Nasdaq-listed companies and more broadly within 
the U.S.;
     gain a better understanding of the causes of 
underrepresentation on boards;
     obtain the views of leaders representing public companies, 
investment banks, corporate governance organizations, investors, 
regulators and civil rights groups on the value of more diverse 
corporate boards, and on various approaches to encouraging more 
diversity on corporate boards; and
     evaluate the success of approaches taken by exchanges, 
regulators, and governments in both the U.S. and foreign jurisdictions 
to remedy underrepresentation on boards.
    While gender diversity has improved among U.S. company boards in 
recent years, the pace of change has been gradual, and the U.S. still 
lags behind other jurisdictions that have imposed requirements related 
to board diversity. Moreover, progress toward bringing underrepresented 
racial and ethnic groups into the boardroom has been even slower. 
Nasdaq is unable to provide definitive estimates regarding the number 
of listed companies that will be affected by the proposal due to the 
inconsistent disclosures and definitions of diversity across companies 
and the extremely limited disclosure of race and ethnicity 
information--an information gap the proposed rule addresses. Based on 
the limited information that is available, Nasdaq believes a 
supermajority of listed companies have made notable strides to improve 
gender diversity in the boardroom and have at least one woman on the 
board. Nasdaq also believes that listed companies are diligently 
working to add directors with other diverse attributes, although 
consistent with other studies of U.S. companies, Nasdaq believes the 
pace of progress, in this regard, is happening more gradually. While 
studies suggest that current candidate selection processes may result 
in diverse candidates being overlooked, Nasdaq also believes that the 
lack of reliable and consistent data creates a barrier to measuring and 
improving diversity in the boardroom.
    Nasdaq reviewed dozens of empirical studies and found that an 
extensive body of academic research demonstrates that diverse boards 
are positively associated with improved corporate governance and 
financial performance. For example, as discussed in detail below in 
Section II, Academic Research: The Relationship between Diversity and 
Shareholder Value, Investor Protection and Decision Making, studies 
have found that companies with gender-diverse boards or audit 
committees are associated with: More transparent public disclosures and 
less information asymmetry; better reporting discipline by management; 
a lower likelihood of manipulated earnings through earnings management; 
an increased likelihood of voluntarily disclosing forward-looking 
information; a lower likelihood of receiving audit qualifications due 
to errors, non-compliance or omission of information; and a lower 
likelihood of securities fraud. In addition, studies found that having 
at least one woman on the board is associated with a lower likelihood 
of material weaknesses in internal control over financial reporting and 
a lower likelihood of material financial restatements. Studies also 
identified positive relationships between board diversity and commonly 
used financial metrics, including higher returns on invested capital, 
returns on equity, earnings per share, earnings before interest and 
taxation margin, asset valuation multiples and credit ratings.

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    Nasdaq believes there are additional compelling reasons to support 
the diversification of company boards beyond a link to improved 
corporate governance and financial performance:
     Investors are calling in greater numbers for 
diversification of boardrooms. Vanguard, State Street Advisors, 
BlackRock, and the NYC Comptroller's Office include board diversity 
expectations in their engagement and proxy voting guidelines.\9\ The 
heightened investor focus on corporate diversity and inclusion efforts 
demonstrates that investor confidence is undermined when a company's 
boardroom is homogenous and when transparency about such efforts is 
lacking. Investors frequently lack access to information about 
corporate board diversity that could be material to their decision 
making, and they might divest from companies that fail to take into 
consideration the demographics of their corporate stakeholders when 
they refresh their boards. Nasdaq explores these investor sentiments in 
Section III, Current State of Board Diversity and Causes of 
Underrepresentation on Boards.
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    \9\ Vanguard announced in 2020 it would begin asking companies 
about the race and ethnicity of directors. See Vanguard, Investment 
Stewardship 2020 Annual Report (2020), available at: https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2020_investment_stewardship_annual_report.pdf. Starting 
in 2020, State Street Global Advisors will vote against the entire 
nominating committee of companies that do not have at least one 
woman on their boards and have not addressed questions on gender 
diversity within the last three years. See State Street Global 
Advisors, Summary of Material Changes to State Street Global 
Advisors' 2020 Proxy Voting and Engagement Guidelines (2020), 
available at: https://www.ssga.com/library-content/pdfs/global/proxy-voting-and-engagement-guidelines.pdf. Beginning in 2018, 
BlackRock stated in proxy voting guidelines they ``would normally 
expect to see at least 2 women directors on every board.'' See 
BlackRock Investment Stewardship, Corporate governance and proxy 
voting guidelines for U.S. securities (Jan. 2020), available at: 
https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-us.pdf. The NYC Comptroller's 
Office in 2019 asked companies to adopt policies to ensure women and 
people of color are on the initial list for every open board seat. 
See Scott M. Stringer, Remarks at the Bureau of Asset Management 
`Emerging Managers and MWBE Managers Conference (Oct. 11, 2019), 
available at: https://comptroller.nyc.gov/wp-content/uploads/2019/10/10.11.19-SMS-BAM-remarks_distro.pdf.
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     Nasdaq believes, consistent with SEC disclosure 
requirements in other contexts,\10\ that management's vision on key 
issues impacting the company should be communicated with investors in a 
clear and straightforward manner. Indeed, transparency is the bedrock 
of federal securities laws regarding disclosure, and this sentiment is 
reflected in the broad-based support for uniform disclosure 
requirements regarding board diversity that Nasdaq observed during the 
course of its outreach to the industry. In addition, organizational 
leaders representing every category of corporate stakeholders Nasdaq 
spoke with (including business, investor, governance, regulatory and 
civil rights communities) were overwhelmingly in favor of diversifying 
boardrooms. Nasdaq summarizes the findings of its stakeholder outreach 
in Section IV, Stakeholder Perspectives.
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    \10\ See Commission Guidance Regarding Management's Discussion 
and Analysis of Financial Condition and Results of Operations, 68 FR 
75,056 (Dec. 29, 2003) (``We believe that management's most 
important responsibilities include communicating with investors in a 
clear and straightforward manner. MD&A is a critical component of 
that communication. The Commission has long sought through its 
rules, enforcement actions and interpretive processes to elicit MD&A 
that not only meets technical disclosure requirements but generally 
is informative and transparent.''); see also Management's Discussion 
and Analysis, Selected Financial Data, and Supplementary Financial 
Information, Release No. 33-10890 (Nov. 19, 2020) (citing the 2003 
MD&A Interpretative Release and stating that the purpose of the MD&A 
section is to enable investors to see a company ``through the eyes 
of management'').
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     Legislators at the federal and state level increasingly 
are taking action to encourage or mandate corporations to diversify 
their boards and improve diversity disclosures. Congress currently is 
considering legislation requiring each SEC-registered company to 
provide board diversity statistics and disclose whether it has a board 
diversity policy. To date, eleven states have passed or proposed 
legislation related to board diversity.\11\ SEC regulations require 
companies to disclose whether diversity is considered when identifying 
director nominees and, if so, how. Nasdaq explores various state and 
federal initiatives in Section V, U.S. Regulatory Framework and Section 
VI, Nasdaq Proposal.
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    \11\ See Michael Hatcher and Weldon Latham, States are Leading 
the Charge to Corporate Boards: Diversify!, Harv. L. Sch. Forum on 
Corp. Governance (May 12, 2020), available at: https://corpgov.law.harvard.edu/2020/05/12/states-are-leading-the-charge-to-corporate-boards-diversify/.
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    In considering the merits and shaping the substance of the proposed 
listing rule, Nasdaq also sought and received valuable input from 
corporate stakeholders. During those discussions, Nasdaq found 
consensus across every constituency in the inherent value of board 
diversity. Business leaders also expressed concern that companies--and 
particularly smaller companies--would prefer an approach that allows 
flexibility to comply in a manner that fits their unique circumstances 
and stakeholders. Nasdaq recognizes that the operations, size, and 
current board composition of each Nasdaq-listed company are unique, and 
Nasdaq therefore endeavored to provide a regulatory impetus to enhance 
board diversity that balances the need for flexibility with each 
company's particular circumstances.
    The Exchange also considered the experience of its parent company, 
Nasdaq, Inc., as a public company.12 In 2002, Nasdaq, Inc. 
met the milestone of welcoming its first woman, Mary Jo White, who 
later served as SEC Chair, to its board of directors. In her own words, 
``I was the first and only woman to serve on the board when I started, 
but, happily, I was joined by another woman during my tenure . . . And 
then there were two. Not enough, but better than one.'' \13\ In 2019, 
Nasdaq, Inc. also welcomed its first Black director. As a Charter 
Pledge Partner of The Board Challenge, Nasdaq supports The Board 
Challenge's goal of ``true and full representation on all boards of 
directors.'' \14\
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    \12\ While the Exchange recognizes that it is only one part of 
an ecosystem in which multiple stakeholders are advocating for board 
diversity, that part is meaningful: The United Nations Sustainable 
Stock Exchanges Initiative, of which Nasdaq, Inc., is an official 
supporter, recognized that ``[s]tock exchanges are uniquely 
positioned to influence their market in a way few other actors 
can.'' See United Nations Sustainable Stock Exchanges Initiative, 
How Stock Exchanges Can Advance Gender Equality 2 (2017), available 
at: https://sseinitiative.org/wp-content/uploads/2019/12/How-stock-exchanges-can-advance-gender-equality.pdf.
    \13\ See Mary Jo White, Completing the Journey: Women as 
Directors of Public Companies (Sept. 16, 2014), available at: 
https://www.sec.gov/news/speech/2014-spch091614-mjw#.VBiLMhaaXDo.
    \14\ See The Board Challenge, https://theboardchallenge.org/. 
See also Nasdaq, Inc., Notice of 2020 Annual Meeting of Shareholders 
and Proxy Statement 52 (Mar. 31, 2020), available at: https://ir.nasdaq.com/static-files/ce5519d4-3a0b-48ac-8441-5376ccbad4e5 
(Nasdaq, Inc. believes that ``[d]iverse backgrounds lead to diverse 
perspectives. We are committed to ensuring diverse backgrounds are 
represented on our board and throughout our organization to further 
the success of our business and best serve the diverse communities 
in which we operate.'').
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    As a self-regulatory organization, Nasdaq also is cognizant of its 
role in advancing diversity within the financial industry, as outlined 
in the Commission's diversity standards issued pursuant to Section 342 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (``Standards'').15 Authored jointly by the Commission 
and five other financial regulators, the Standards seek to provide a 
framework for exchanges and financial services organizations ``to 
create and strengthen

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[their] diversity policies and practices.'' Through these voluntary 
Standards, the Commission and other regulators ``encourage each entity 
to use the[ ] Standards in a manner appropriate to its unique 
characteristics.'' \16\ To that end, the proposed rule leverages the 
Exchange's unique ability to influence corporate governance in 
furtherance of the goal of Section 342, which is to address the lack of 
diversity in the financial services industry.\17\ Finally, while the 
Exchange recognizes the importance of maximizing shareholder value, its 
role as a listing venue is to establish and enforce substantive 
standards that promote investor protection. As a self-regulatory 
organization, the Exchange must demonstrate to the Commission that any 
proposed rule is consistent with Section 6(b) of the Act because, among 
other things, it is designed to protect investors, promote the public 
interest, prevent fraudulent and manipulative acts and practices, and 
remove impediments to the mechanism of a free and open market. The 
Exchange must also balance promoting capital formation, efficiency, and 
competition, among other things, alongside enhancing investor 
confidence.
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    \15\ See Final Interagency Policy Statement Establishing Joint 
Standards for Assessing the Diversity Policies and Practices of 
Entities Regulated by the Agencies, 80 FR 33,016 (June 10, 2015).
    \16\ Id. at 33,023.
    \17\ 156 Cong. Rec. H5233-61 (June 30, 2010).
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    With these objectives in mind, Nasdaq believes that a listing rule 
designed to enhance transparency related to board diversity will 
increase consistency and comparability of information across Nasdaq-
listed companies, thereby increasing transparency and decreasing 
information collection costs. Nasdaq further believes that a listing 
rule designed to encourage listed companies to increase diverse 
representation on their boards will result in improved corporate 
governance, thus strengthening the integrity of the market, enhancing 
capital formation, efficiency, and competition, and building investor 
confidence. To the extent a company chooses not to meet the diversity 
objectives of Rule 5605(f)(2), Nasdaq believes that the proposal will 
provide investors with additional transparency through disclosure 
explaining the company's reasons for not doing so. For example, the 
company may choose to disclose that it does not meet the diversity 
objectives of Rule 5605(f)(2) because it is subject to an alternative 
standard under state or foreign laws and has chosen to meet that 
standard instead, or has a board philosophy regarding diversity that 
differs from the diversity objectives set forth in Rule 5605(f)(2). 
Nasdaq believes that such disclosure will improve the quality of 
information available to investors who rely on this information to make 
informed investment and voting decisions, thereby promoting capital 
formation and efficiency.
    Nasdaq observed that studies suggest that certain groups may be 
underrepresented on boards because the traditional director nomination 
process is limited by directors looking within their own social 
networks for candidates with previous C-suite experience.18 
Leaders from across the spectrum of stakeholders with whom Nasdaq spoke 
reinforced the notion that if companies recruit by skill set and 
expertise rather than title, they will find there is more than enough 
diverse talent to satisfy demand. In order to assist companies that 
strive to meet the diversity objectives of Rule 5605(f)(2), Nasdaq is 
proposing to provide listed companies that have not yet met its 
diversity objectives with free access to a network of board-ready 
diverse candidates and a tool to support board evaluation, benchmarking 
and refreshment. Nasdaq is contemporaneously submitting a rule filing 
to the Commission regarding the provision of such services. Nasdaq also 
plans to publish FAQs on its Listing Center to provide guidance to 
companies on the application of the proposed rules, and to establish a 
dedicated mailbox for companies and their counsel to email additional 
questions to Nasdaq regarding the application of the proposed rule. 
Nasdaq believes that these services will help to ease the compliance 
burden on companies whether they choose to meet the listing rule's 
diversity objectives or provide an explanation for not doing so.
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    \18\ See infra Section III.
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II. Academic Research: The Relationship Between Diversity and 
Shareholder Value, Investor Protection and Decision Making

    A company's board of directors plays a critical role in formulating 
company strategy; appointing, advising and overseeing management; and 
protecting investors. Nasdaq has recognized the importance of varied 
perspectives on boards since 2003, when the Exchange adopted a listing 
rule intended to enhance investor confidence by requiring listed 
companies, subject to certain exceptions and cure periods, to have a 
majority independent board.\19\ Accompanying the rule are interpretive 
materials recognizing that independent directors ``play an important 
role in assuring investor confidence. Through the exercise of 
independent judgment, they act on behalf of investors to maximize 
shareholder value in the Companies they oversee and guard against 
conflicts of interest.'' \20\
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    \19\ See Nasdaq Stock Market Rulebook, Rules 5605(b), 5615(a), 
and 5605(b)(1)(A).
    \20\ Id., IM-5605-1 (emphasis added).
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a. Diversity and Shareholder Value
    There is a significant body of research suggesting a positive 
association between diversity and shareholder value.\21\ In the words 
of SEC Commissioner Allison Herren Lee: ``to the extent one seeks 
economic support for diversity and inclusion (instead of requiring 
economic support for the lack of diversity and exclusion), the evidence 
is in.'' \22\
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    \21\ Some companies recently have expressed the belief that a 
company must consider the impact of its activities on a broader 
group of stakeholders beyond shareholders. See Business Roundtable, 
Statement on the Purpose of a Corporation (Aug. 19, 2019), available 
at: https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020.pdf. Commentators 
articulated this view as early as 1932. See E. Merrick Dodd, Jr., 
For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 
1153 (1932).
    \22\ See Commissioner Allison Herren Lee, Diversity Matters, 
Disclosure Works, and the SEC Can Do More: Remarks at the Council of 
Institutional Investors Fall 2020 Conference (September 22, 2020), 
available at: https://www.sec.gov/news/speech/lee-cii-2020-conference-20200922.
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    The Carlyle Group (2020) found that its portfolio companies with 
two or more diverse directors had average earnings growth of 12.3% over 
the previous three years, compared to 0.5% among portfolio companies 
with no diverse directors, where diverse directors were defined as 
female, Black, Hispanic or Asian.\23\ ``After controlling for industry, 
fund, and vintage year, companies with diverse boards generate earnings 
growth that's five times faster, on average, with each diverse board 
member associated with a 5% increase in annualized earnings growth.'' 
\24\
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    \23\ See Jason M. Thomas and Megan Starr, The Carlyle Group, 
Global Insights: From Impact Investing to Investing for Impact 5 
(Feb. 24, 2020), available at: https://www.carlyle.com/sites/default/files2020-02/From%20Impact%20Investing%20to%20Investing%20for%20Impact_022420.pdf 
(analyzing Carlyle U.S. portfolio company data, February 2020).
    \24\ Id.
---------------------------------------------------------------------------

    Several other studies also found a positive association between 
diverse boards and company performance. FCLTGlobal (2019) found that 
``the most diverse boards (top 20 percent) added 3.3 percentage points 
to [return on invested capital], as compared to their least diverse 
peers (bottom 20 percent).'' \25\ McKinsey (2015) found

[[Page 80476]]

that ``companies in the top quartile for racial/ethnic diversity were 
35 percent more likely to have financial returns above their national 
industry median.'' \26\ Carter, Simkins and Simpson (2003) found among 
Fortune 1000 companies ``statistically significant positive 
relationships between the presence of women or minorities on the board 
and firm value.'' \27\ Bernile, Bhagwat and Yonker (2017) found that 
greater diversity on boards--including gender, ethnicity, educational 
background, age, financial expertise and board experience--is 
associated with increased operating performance, higher asset valuation 
multiples, lower stock return volatility, reduced financial leverage, 
increased dividend payouts to shareholders, higher investment in R&D 
and better innovation.\28\ The authors observed that ``[t]his is in 
line with the results in Carter, Simkins, and Simpson (2003), which 
show a positive association between local demographic diversity and 
firm value.'' \29\
---------------------------------------------------------------------------

    \25\ See FCLTGlobal, The Long-term Habits of a Highly Effective 
Corporate Board 11 (March 2019), available at: https://www.fcltglobal.org/wp-content/uploads/long-term-habits-of-highly-effective-corporate-boards.pdf (analyzing 2017 MSCI ACWI 
constituents from 2010 to 2017 using Bloomberg data).
    \26\ See Vivian Hunt et al., McKinsey & Company, Diversity 
Matters (February 2, 2015), available at: https://www.mckinsey.com/
~/media/mckinsey/business%20functions/organization/our%20insights/
why%20diversity%20matters/diversity%20matters.pdf (analyzing 366 
public companies in the United Kingdom, Canada, the United States, 
and Latin America in industries for the years 2010 to 2013, using 
the ethnic and racial categories African ancestry, European 
ancestry, Near Eastern, East Asian, South Asian, Latino, Native 
American, and other).
    \27\ See David A. Carter et al., Corporate Governance, Board 
Diversity, and Firm Value. 38(1) Fin. Rev. 33 (analyzing 638 Fortune 
1000 firms in 1997, measuring firm value by Tobin's Q, with board 
diversity defined as the percentage of women, African Americans, 
Asians and Hispanics on the board of directors).
    \28\ See Gennaro Bernile et al., Board Diversity, Firm Risk, and 
Corporate Policies (March 6, 2017), available at: https://ssrn.com/abstract=2733394 (analyzing 21,572 firm-year observations across 
non-financial, non-utility firms for the years 1996 to 2014, based 
on the ExecuComp, RiskMetrics, Compustat and CRSP databases).
    \29\ Id. at 32.
---------------------------------------------------------------------------

    Several studies have found a positive association between gender 
diversity and financial performance. Credit Suisse (2014) found 
companies with at least one woman on the board had an average sector-
adjusted return on equity (``ROE'') of 12.2%, compared to 10.1% for 
companies with no female directors, and average sector-adjusted ROEs of 
14.1% and 11.2%, respectively, for the previous nine years.\30\ MSCI 
(2016) found that U.S. companies with at least three women on the board 
in 2011 experienced median gains in ROE of 10% and earnings per share 
(``EPS'') of 37% over a five year period, whereas companies that had no 
female directors in 2011 showed median changes of -1% in ROE and -8% in 
EPS over the same five-year period.\31\ Catalyst (2011) found that the 
ROE of Fortune 500 companies with at least three women on the board (in 
at least four of five years) was 46% higher than companies with no 
women on the board, and return on sales and return on invested capital 
was 84% and 60% higher, respectively.\32\
---------------------------------------------------------------------------

    \30\ See Credit Suisse, The CS Gender 3000: Women in Senior 
Management 16 (Sept. 2014), available at: https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/the-cs-gender-3000-women-in-senior-management.pdf 
(analyzing 3,000 companies across 40 countries from the period from 
2005 to 2013).
    \31\ See Meggin Thwing Eastman et al., MSCI, The tipping point: 
Women on boards and financial performance 3 (December 2016), 
available at: https://www.msci.com/documents/10199/fd1f8228-cc07-4789-acee-3f9ed97ee8bb (analyzing of U.S. companies that were 
constituents of the MSCI World Index for the entire period from July 
1, 2011 to June 30, 2016).
    \32\ See Harvey M. Wagner, Catalyst, The Bottom Line: Corporate 
Performance and Women's Representation on Boards (2004-2008) (March 
1, 2011), available at: https://www.catalyst.org/research/the-bottom-line-corporate-performance-and-womens-representation-on-boards-2004-2008/ (analyzing gender diversity data from Catalyst's 
annual Fortune 500 Census of Women Board Directors report series for 
the years 2005 to 2009, and corresponding financial data from S&P's 
Compustat database for the years 2004 to 2008).
---------------------------------------------------------------------------

    Credit Suisse (2016) found an association between LGBTQ+ diversity 
and stock performance, finding that a basket of 270 companies 
``supporting and embracing LGBT employees'' outperformed the MSCI ACWI 
index by an average of 3.0% per year over the past 6 years.\33\ 
Further, ``[a]gainst a custom basket of companies in North America, 
Europe and Australia, the LGBT 270 has outperformed by 140 bps 
annually.'' \34\ Nasdaq acknowledges that this study focused on LGBTQ+ 
employees as opposed to directors, and that there is a lack of 
published research on the issue of LGBTQ+ representation on boards. 
However, Out Leadership (2019) suggests that the relationship between 
board gender diversity and corporate performance may extend to LGBTQ+ 
diversity:
---------------------------------------------------------------------------

    \33\ See Credit Suisse ESG Research, LGBT: The value of 
diversity 1 (April 15, 2016), available at: https://research-doc.credit-suisse.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=807075590&extdocid=807075590_1_eng_pdf&serialid=evu4wXNcHexx7kusNLaZQphUkT9naxi1PvptZQvPjr1k%3d.
    \34\ Id.

    While the precise reason for the positive correlation between 
gender diversity and better corporate performance is unknown, many 
of the reasons that gender diversity is considered beneficial are 
also applicable to LGBT+ diversity. LGBT+ diversity in the boardroom 
may create a dynamic that enables better decisionmaking, and it 
brings to the boardroom the perspective of a community that is a 
critical component of the company's consumer population and 
organizational talent.\35\
---------------------------------------------------------------------------

    \35\ See Quorum, Out Leadership's LGBT+ Board Diversity and 
Disclosure Guidelines 3 (2019), available at: https://outleadership.com/content/uploads/2019/01/OL-LGBT-Board-Diversity-Guidelines.pdf.

    McKinsey (2020) found ``a positive, statistically significant 
correlation between company financial outperformance and [board] 
diversity, on the dimensions of both gender and ethnicity,'' with 
companies in the top quartile for board gender diversity ``28 percent 
more likely than their peers to outperform financially,'' and a 
statistically significant correlation between board gender diversity 
and outperformance on earnings before interest and taxation margin.\36\ 
Moody's (2019) found that greater board gender diversity is associated 
with higher credit ratings, with women accounting for an average of 28% 
of board seats at Aaa-rated companies but less than 5% of board seats 
at Ca-rated companies.\37\
---------------------------------------------------------------------------

    \36\ See McKinsey & Company, Diversity wins: How inclusion 
matters 13 (May 2020), available at: https://www.mckinsey.com/~/
media/McKinsey/Featured%20Insights/Diversity%20and%20Inclusion/
Diversity%20wins%20How%20inclusion%20matters/Diversity-wins-How-
inclusion-matters-vF.pdf (analyzing 1,039 companies across 15 
countries for the period from December 2018 to November 2019).
    \37\ See Moody's Investors Service, Gender diversity is 
correlated with higher ratings, but mandates pose short-term risk 2 
(Sept. 11, 2019), available at: https://www.moodys.com/research/Moodys-Corporate-board-gender-diversity-associated-with-higher-credit-ratingsPBC_1193768 (analyzing 1,109 publicly traded North 
American companies rated by Moody's).
---------------------------------------------------------------------------

    While the overwhelming majority of studies on the association 
between economic performance and board diversity, including gender 
diversity, present a compelling case that board diversity is positively 
associated with financial performance, the results of some other 
studies on gender diversity are mixed. For example, Pletzer et al. 
(2015) found that board gender diversity alone has a ``small and non-
significant'' relationship with a company's financial performance.\38\ 
Post and Byron (2014) found a ``near zero'' relationship with a 
company's market performance, but a positive relationship with a 
company's

[[Page 80477]]

accounting returns.\39\ Carter, D'Souza, Simkins and Simpson (2010) 
found that ``[w]hen Tobin's Q is used as the measure of financial 
performance, we find no relationship to gender diversity or ethnic 
minority diversity, neither positive nor negative.'' \40\ A study 
conducted by Campbell and Minguez-Vera (2007) ``suggests, at a minimum, 
that increased gender diversity can be achieved without destroying 
shareholder value.'' \41\ Adams and Ferreira (2009) found that ``gender 
diversity has beneficial effects in companies with weak shareholder 
rights, where additional board monitoring could enhance firm value, but 
detrimental effects in companies with strong shareholder rights.'' \42\ 
Carter et al. (2010) \43\ and the U.S. Government Accountability Office 
(``GAO'') (2015) \44\ concluded that the mixed nature of various 
academic studies may be due to differences in methodologies, data 
samples and time periods.
---------------------------------------------------------------------------

    \38\ See Jan Luca Pletzer et al., Does Gender Matter? Female 
Representation on Corporate Boards and Firm Financial Performance--A 
Meta-Analysis 1, PLOS One (June 18, 2015); see also Alice H. Eagly 
(2016), When Passionate Advocates Meet Research on Diversity, Does 
the Honest Broker Stand a Chance?, 72 J. Social Issues 199 (2016), 
available at https://doi.org/10.1111/josi.12163 (concluding that the 
``research findings are mixed, and repeated meta[hyphen]analyses 
have yielded average correlational findings that are null or 
extremely small'' with respect to board gender diversity and company 
performance).
    \39\ See Corinne Post and Kris Byron, Women on Boards and Firm 
Financial Performance: A Meta-Analysis 1 (2014). In 2016, the same 
authors, based on a review of the results for 87 studies, ``found 
that board gender diversity is weakly but significantly positively 
correlated with [corporate social responsibility],'' although they 
noted that ``a significant correlational relationship does not prove 
causality.'' See Corinne Post and Kris Byron, Women on Boards of 
Directors and Corporate Social Performance: A Meta[hyphen]Analysis, 
24(4) Corp. Governance: An Int'l Rev. 428 (July 2016), available at 
http://dx.doi.org/10.1111/corg.12165.
    \40\ See David A. Carter et al., The Gender and Ethnic Diversity 
of US Boards and Board Committees and Firm Financial Performance, 
18(5) Corp. Governance 396, 410 (2010) (analysis of 541 S&P 500 
companies for the years 1998-2002).
    \41\ See Kevin Campbell and Antonio Minguez-Vera, Gender 
Diversity in the Boardroom and Firm Financial Performance, 83(3) J. 
Bus. Ethics 13 (Feb. 2008) (analyzing 68 non-financial companies 
listed on the continuous market in Madrid during the period from 
January 1995 to December 2000, measuring firm value by an 
approximation of Tobin's Q defined as the sum of the market value of 
stock and the book value of debt divided by the book value of total 
assets).
    \42\ See Renee B. Adams and Daniel Ferreira, Women in the 
boardroom and their impact on governance and performance, 94 J. Fin. 
Econ. 291 (2009) (analyzing 1,939 S&P 500, S&P MidCaps, and S&P 
SmallCap companies for the period 1996 to 2003, measuring company 
performance by a proxy for Tobin's Q (the ratio of market value to 
book value) and return on assets).
    \43\ See Carter et al., supra note 40, at 400 (observing that 
the different ``statistical methods, data, and time periods 
investigated vary greatly so that the results are not easily 
comparable.'').
    \44\ See United States Government Accountability Office, Report 
to the Ranking Member, Subcommittee on Capital Markets and 
Government Sponsored Enterprises, Committee on Financial Services, 
House of Representatives, Corporate Boards: Strategies to Address 
Representation of Women Include Federal Disclosure Requirements 5 
(Dec. 2015) (the ``GAO Report''), available at: https://www.gao.gov/assets/680/674008.pdf (``Some research has found that gender diverse 
boards may have a positive impact on a company's financial 
performance, but other research has not. These mixed results depend, 
in part, on differences in how financial performance was defined and 
what methodologies were used'').
---------------------------------------------------------------------------

    While there are studies drawing different conclusions, Nasdaq 
believes that there is a compelling body of credible research on the 
association between economic performance and board diversity. At a 
minimum, Nasdaq believes that the academic studies support the 
conclusion that board diversity does not have adverse effects on 
company financial performance. This is not the first time Nasdaq has 
considered whether, on balance, various studies finding mixed results 
related to board composition and company performance are a sufficient 
rationale to propose a listing rule. For example, in 2003, 
notwithstanding the varying findings of studies at the time regarding 
the relationship between company performance and board 
independence,\45\ Nasdaq adopted listing rules requiring a majority 
independent board that were ``intended to enhance investor confidence 
in the companies that list on Nasdaq.'' \46\ In its Approval Order, the 
SEC stated that ``[t]he Commission has long encouraged exchanges to 
adopt and strengthen their corporate governance listing standards in 
order to, among other things, enhance investor confidence in the 
securities markets.'' \47\
---------------------------------------------------------------------------

    \45\ See, e.g., Benjamin E. Hermalin and Michael S. Weisbach, 
The Effects of Board Composition and Direct Incentives on Firm 
Performance, 20 Fin. Mgmt. 101, 111 (1991) (finding that ``there 
appears to be no relation between board composition and 
performance''); Sanjai Bhagat and Bernard Black, The Uncertain 
Relationship Between Board Composition and Firm Performance, 54(3) 
Bus. Law. 921, 950 (1999) (``At the very least, there is no 
convincing evidence that increasing board independence, relative to 
the norms that currently prevail among large American firms, will 
improve firm performance. And there is some evidence suggesting the 
opposite--that firms with supermajority-independent boards perform 
worse than other firms, and that firms with more inside than 
independent directors perform about as well as firms with majority- 
(but not supermajority-) independent boards.'').
    \46\ See Order Approving Proposed Rule Changes, 68 FR 64,154, 
64,161 (Nov. 12, 2003) (approving SR-NASD-2002-77, SR-NASD-2002-80, 
SR-NASD-2002-138, SR-NASD-2002-139, and SR-NASD-2002-141).
    \47\ Id. at 64,176.
---------------------------------------------------------------------------

    Along the same lines, even without clear consensus among studies 
related to board diversity and company performance, the heightened 
focus on corporate board diversity by investors demonstrates that 
investor confidence is undermined when data on board diversity is not 
readily available and when companies do not explain the reasons for the 
apparent absence of diversity on their boards. Therefore, Nasdaq 
believes that the proposal will enhance investor confidence that all 
listed companies are considering diversity in the context of selecting 
directors, either by including at least two Diverse directors on their 
boards or by explaining their rationale for not meeting that objective. 
Further, Nasdaq believes that the proposal is consistent with the Act 
because it will not negatively impact capital formation, competition or 
efficiency among its public companies, and will promote investor 
protection and the public interest.\48\
---------------------------------------------------------------------------

    \48\ See also Lee, supra note 22 (``I could never quite buy in 
to the view that some 40 percent of the population in our country 
(if we're talking about minorities) or over half the country (if 
we're talking about women) must rationalize their inclusion in 
corporate boardrooms and elsewhere in economic terms instead of the 
reverse. How can one possibly justify--in economic terms--the 
systematic exclusion of a major portion of our talent base from the 
corporate pool?'').
---------------------------------------------------------------------------

b. Diversity and Investor Protection
    There is substantial evidence that board diversity enhances the 
quality of a company's financial reporting, internal controls, public 
disclosures and management oversight. In reaching this conclusion, 
Nasdaq evaluated the results of more than a dozen studies spanning more 
than two decades that found a positive association between gender 
diversity and important investor protections, and the assertions by 
some academics that such findings may extend to other forms of 
diversity, including racial and ethnic diversity. The findings of the 
studies reviewed by Nasdaq are summarized below.
    Adams and Ferreira (2009) found that women are ``more likely to sit 
on'' the audit committee,\49\ and a subsequent study by Srinidhi, Gul 
and Tsui (2011) found that companies with women on the audit committee 
are associated with ``higher earnings quality'' and ``better reporting 
discipline by managers,'' \50\ leading the authors to conclude that 
``including female directors on the board and the audit committee are 
plausible ways of improving the firm's reporting discipline and 
increasing

[[Page 80478]]

investor confidence in financial statements.'' \51\
---------------------------------------------------------------------------

    \49\ See Adams and Ferreira, supra note 42, at 292.
    \50\ See Bin Srinidhi et al., Female Directors and Earnings 
Quality, 28(5) Contemporary Accounting Research 1610, 1612-16 
(Winter 2011) (analyzing 3,132 firm years during the period from 
2001 to 2007 based on S&P COMPUSTAT, Corporate Library's Board 
Analyst, and IRRC databases; ``choos[ing] the accruals quality as 
the metric that best reflects the ability of current earnings to 
reflect future cash flows'' (noting that it ``best predicts the 
incidence and magnitude of fraud relative to other commonly used 
measures of earnings quality'') and analyzing surprise earnings 
results that exceeded previous earnings or analyst forecasts, 
because ``managers of firms whose unmanaged earnings fall marginally 
below the benchmarks have [an] incentive to manage earnings upwards 
so as to meet or beat previous earnings'').
    \51\ Id. at 1612.
---------------------------------------------------------------------------

    A study conducted in 2016 by Pucheta[hyphen]Mart[iacute]nez et al. 
concluded that gender diversity on the audit committee ``improves the 
quality of financial information.'' \52\ They found that ``the 
percentage of females on [audit committees] reduces the probability of 
[audit] qualifications due to errors, non-compliance or the omission of 
information,'' \53\ and found a positive association between gender 
diverse audit committees and disclosing audit reports with 
uncertainties and scope limitations. This suggests that gender diverse 
audit committees ``ensure that managers do not seek to pressure 
auditors into issuing a clean opinion instead of a qualified opinion'' 
when any uncertainties or scope limitations are identified.\54\
---------------------------------------------------------------------------

    \52\ See Maria Consuelo Pucheta[hyphen]Mart[iacute]nez et al., 
Corporate governance, female directors and quality of financial 
information. 25(4) Bus. Ethics: A European Rev. 363, 378 (2016) 
(analyzing a sample of non-financial companies listed on the Madrid 
Stock Exchange during 2004-2011).
    \53\ Id. at 363.
    \54\ Id. at 368.
---------------------------------------------------------------------------

    More recently, a study by Gull in 2018 found that the presence of 
female audit committee members with business expertise is associated 
with a lower magnitude of earnings management,\55\ and a study 
conducted in 2019 by Bravo and Alcaide-Ruiz found a positive 
association between women on the audit committee with financial or 
accounting expertise and the voluntary disclosure of forward-looking 
information.\56\ Bravo and Alcaide-Ruiz concluded that ``female [audit 
committee] members with financial expertise play an important role in 
influencing disclosure strategies that provide forward-looking 
information containing projections and financial data useful for 
investors.'' \57\
---------------------------------------------------------------------------

    \55\ See Ammar Gull et al., Beyond gender diversity: How 
specific attributes of female directors affect earnings management, 
50(3) British Acct. Rev. 255 (Sept. 2017), available at: https://ideas.repec.org/a/eee/bracre/v50y2018i3p255-274.html (analyzing 394 
French companies belonging to the CAC All-Shares index listed on 
Euronext Paris from 2001 to 2010, prior to the implementation of 
France's gender mandate law that required women to comprise 20% of a 
company's board of directors by 2014 and 40% by 2016).
    \56\ See Francisco Bravo and Maria Dolores Alcaide-Ruiz, The 
disclosure of financial forward-looking information, 34(2) Gender in 
Mgmt. 140, 142-44 (2019) (analyzing companies included in the S&P 
100 Index in 2016, ``focus[ing] on the disclosure of financial 
forward-looking information (which is likely to require financial 
expertise), such as earnings forecasts, expected revenues, 
anticipated cash flows or any other financial indicator'').
    \57\ Id. at 150.
---------------------------------------------------------------------------

    While the above studies demonstrate a positive association between 
gender diverse audit committees and the quality of a company's 
earnings, financial information and public disclosures, other studies 
found a positive association between board gender diversity and 
important investor protections regardless of whether or not women are 
on the audit committee.
    Abbott, Parker & Persley (2012) found, within a sample of non-
Fortune 1000 companies, ``a significant association between the 
presence of at least one woman on the board and a lower likelihood of 
[a material financial] restatement.'' \58\ Their findings are 
consistent with a subsequent study by Wahid (2017), which concluded 
that ``gender-diverse boards commit fewer financial reporting mistakes 
and engage in less fraud.'' \59\ Specifically, companies with female 
directors have ``fewer irregularity-type [financial] restatements, 
which tend to be indicative of financial manipulation.'' \60\ Wahid 
suggested that the implications of her study extend beyond gender 
diversity:
---------------------------------------------------------------------------

    \58\ See Lawrence J. Abbott et al., Female Board Presence and 
the Likelihood of Financial Restatement, 26(4) Accounting Horizons 
607, 626 (2012) (analyzing a sample of 278 pre-SOX annual financial 
restatements and 187 pre-SOX quarterly financial restatements of 
U.S. companies from January 1, 1997 through June 30, 2002 identified 
by the U.S. General Accounting Office restatement report 03-138 
(which only included ``material misstatements of financial 
results''), and 75 post-SOX annual financial restatements from July 
1, 2002, to September 30, 2005 identified by U.S. General Accounting 
Office restatement report 06-678 (which only included ``restatements 
that were being made to correct material misstatements of previously 
reported financial information''), consisting almost exclusively of 
non-Fortune 1000 companies).
    \59\ See Aida Sijamic Wahid, The Effects and the Mechanisms of 
Board Gender Diversity: Evidence from Financial Manipulation, J. 
Bus. Ethics (forthcoming) (Dec. 2017) Rotman School of Management 
Working Paper No. 2930132 at 1, available at: https://ssrn.com/abstract=2930132 (analyzing 6,132 U.S. public companies during the 
period from 2000 to 2010, for a total of 38,273 firm-year 
observations).
    \60\ Id. at 23.

    If you're going to introduce perspectives, those perspectives 
might be coming not just from male versus female. They could be 
coming from people of different ages, from different racial 
backgrounds . . . [and] [i]f we just focus on one, we could be 
essentially taking away from other dimensions of diversity and 
decreasing perspective.\61\
---------------------------------------------------------------------------

    \61\ See Barbara Shecter, Diverse boards tied to fewer financial 
`irregularities,' Canadian study finds. Financial Post (Feb. 5, 
2020), https://business.financialpost.com/news/fp-street/diverse-boards-tied-to-fewer-financial-irregularities-canadian-study-finds 
(last accessed Nov. 27, 2020).

    Cumming, Leung and Rui (2015) also examined the relationship 
between gender diversity and fraud, and found that the presence of 
women on boards is associated with a lower likelihood of securities 
fraud; indeed, they found ``strong evidence of a negative and 
diminishing effect of women on boards and the probability of being in 
our fraud sample.'' \62\ The authors suggested that ``other forms of 
board diversity, including but not limited to gender diversity, may 
likewise reduce fraud.'' \63\
---------------------------------------------------------------------------

    \62\ See Douglas J. Cumming et al., Gender Diversity and 
Securities Fraud, Academy of Management Journal 34 (forthcoming) 
(Feb. 2, 2015), available at https://ssrn.com/abstract=2562399 
(analyzing China Securities Regulatory Commission data from 2001 to 
2010, including 742 companies with enforcement actions for fraud, 
and 742 non-fraudulent companies for a control group).
    \63\ Id. at 33.
---------------------------------------------------------------------------

    Chen, Eshleman and Soileau (2016) suggested that the relationship 
between gender diversity and higher earnings quality observed by 
Srinidhi, Gul and Tsui (2011) is ultimately driven by reduced 
weaknesses in internal control over financial reporting, noting that 
``prior literature has established a negative relationship between 
internal control weaknesses and earnings quality.'' \64\ The authors 
found that having at least one woman on the board (regardless of 
whether or not she is on the audit committee) ``may lead to [a] reduced 
likelihood of material weaknesses [in internal control over financial 
reporting].'' \65\
---------------------------------------------------------------------------

    \64\ See Yu Chen et al., Board Gender Diversity and Internal 
Control Weaknesses, 33 Advances in Acct. 11 (2016) (analyzing a 
sample of 4267 [filig]rm-year observations during the period from 
2004 to 2013, beginning ``the first year internal control weaknesses 
were required to be disclosed under section 404 of SOX'').
    \65\ Id. at 18.
---------------------------------------------------------------------------

    Board gender diversity also was found to be positively associated 
with more transparent public disclosures. Gul, Srinidhi & Ng (2011) 
concluded that ``gender diversity improves stock price informativeness 
by increasing voluntary public disclosures in large firms and 
increasing the incentives for private information collection in small 
firms.'' \66\ Abad et al. (2017) concluded that companies with gender 
diverse boards are associated with lower levels of information 
asymmetry, suggesting that increasing board gender diversity is 
associated with ``reducing the risk of

[[Page 80479]]

informed trading and enhancing stock liquidity.'' \67\
---------------------------------------------------------------------------

    \66\ See Ferdinand A. Gul et al., Does board gender diversity 
improve the informativeness of stock prices?, 51(3) J. Acct. & Econ. 
314 (April 2011) (analyzing 4,084 firm years during the period from 
2002 to 2007, excluding companies in the utilities and financial 
industries, measuring public information disclosure using 
``voluntary continuous disclosure of `other' events in 8K reports'' 
and measuring stock price informativeness by ``idiosyncratic 
volatility,'' or volatility that cannot be explained to systematic 
factors and can be diversified away).
    \67\ See David Abad et al., Does Gender Diversity on Corporate 
Boards Reduce Information Asymmetry in Equity Markets? 20(3) BRQ 
Business Research Quarterly 192, 202 (July 2017) (analyzing 531 
company-year observations from 2004 to 2009 of non-financial 
companies traded on the electronic trading platform of the Spanish 
Stock Exchange (SIBE)).
---------------------------------------------------------------------------

    Other studies have found that diverse boards are better at 
overseeing management. Adams and Ferreira (2009) found ``direct 
evidence that more diverse boards are more likely to hold CEOs 
accountable for poor stock price performance; CEO turnover is more 
sensitive to stock return performance in firms with relatively more 
women on boards.'' \68\ Lucas-Perez et al. (2014) found that board 
gender diversity is positively associated with linking executive 
compensation plans to company performance,\69\ which may be an 
effective mechanism to deter opportunistic behavior by management and 
align their interests with shareholders.\70\ A lack of diversity has 
been found to have the opposite effect. Westphal and Zajac (1995) found 
that ``increased demographic similarity between CEOs and the board is 
likely to result in more generous CEO compensation contracts.'' \71\
---------------------------------------------------------------------------

    \68\ See Adams and Ferreira, supra note 42, at 292.
    \69\ See Maria Encarnacion Lucas-Perez et al., Women on the 
Board and Managers' Pay: Evidence from Spain, 129 J. Bus. Ethics 285 
(April 2014).
    \70\ Id.
    \71\ See James D. Westphal and Edward J. Zajac, Who Shall 
Govern? CEO/Board Power, Demographic Similarity, and New Director 
Selection, 40(1) Admin. Sci. Q. 60, 77 (March 1995).
---------------------------------------------------------------------------

c. Diversity and Decision Making
    Wahid (2017) suggests that ``at a minimum, gender diversity on 
corporate boards has a neutral effect on governance quality, and at 
best, it has positive consequences for boards' ability to monitor firm 
management.'' \72\ Nasdaq reviewed studies suggesting that board 
diversity can indeed enhance a company's ability to monitor management 
by reducing ``groupthink'' and improving decision making.
---------------------------------------------------------------------------

    \72\ See Wahid, supra note 59, at 5.
---------------------------------------------------------------------------

    In 2009, the Commission, in adopting rules requiring proxy 
disclosure describing whether a company considers diversity in 
identifying director nominees, recognized the impact of diversity on 
decision making and corporate governance:

    A board may determine, in connection with preparing its 
disclosure, that it is beneficial to disclose and follow a policy of 
seeking diversity. Such a policy may encourage boards to conduct 
broader director searches, evaluating a wider range of candidates 
and potentially improving board quality. To the extent that boards 
branch out from the set of candidates they would ordinarily 
consider, they may nominate directors who have fewer existing ties 
to the board or management and are, consequently, more independent. 
To the extent that a more independent board is desirable at a 
particular company, the resulting increase in board independence 
could potentially improve governance. In addition, in some companies 
a policy of increasing board diversity may also improve the board's 
decision making process by encouraging consideration of a broader 
range of views.\73\
---------------------------------------------------------------------------

    \73\ See Proxy Disclosure Enhancements, 74 FR 68,334, 68,355 
(Dec. 23, 2009).

    Nasdaq agrees with the Commission's suggestion that board diversity 
improves board quality, governance and decision making. Nasdaq is 
concerned that boards lacking diversity can inadvertently suffer from 
``groupthink,'' which is ``a dysfunctional mode of group decision 
making characterized by a reduction in independent critical thinking 
and a relentless striving for unanimity among members.'' \74\ The 
catastrophic financial consequences of groupthink became evident in the 
2008 global financial crisis, after which the IMF's Independent 
Evaluation Office concluded that ``[t]he IMF's ability to correctly 
identify the mounting risks [as the crisis developed] was hindered by a 
high degree of groupthink.'' \75\
---------------------------------------------------------------------------

    \74\ See Daniel P. Forbes and Frances J. Milliken, Cognition and 
Corporate Governance: Understanding Boards of Directors as Strategic 
Decision-Making Groups, 24(3) Acad. Mgmt. Rev. 489, 496 (Jul. 1999).
    \75\ See International Monetary Fund, IMF Performance in the 
Run-Up to the Financial and Economic Crisis (August 2011), available 
at: https://www.elibrary.imf.org/view/IMF017/11570-9781616350789/11570-9781616350789/ch04.xml?language=en&redirect=true (``The 
evaluation found that incentives were not well aligned to foster the 
candid exchange of ideas that is needed for good surveillance--many 
staff reported concerns about the consequences of expressing views 
contrary to those of supervisors, [m]anagement, and country 
authorities.'').
---------------------------------------------------------------------------

    Other studies suggest that increased diversity reduces groupthink 
and leads to robust dialogue and better decision making. Dallas (2002) 
observed that ``heterogeneous groups share conflicting opinions, 
knowledge, and perspectives that result in a more thorough 
consideration of a wide range of interpretations, alternatives, and 
consequences.'' \76\ Bernile et al. (2017) found that ``diversity in 
the board of directors reduces stock return volatility, which is 
consistent with diverse backgrounds working as a governance mechanism, 
moderating decisions, and alleviating problems associated with 
`groupthink.''' \77\ Dhir (2015) concluded that gender diversity may 
``promote cognitive diversity and constructive conflict in the 
boardroom.'' \78\ After interviewing 23 directors about their 
experience with Norway's board gender mandate, he observed:
---------------------------------------------------------------------------

    \76\ See Lynne L. Dallas, Does Corporate Law Protect the 
Interests of Shareholders and Other Stakeholders?: The New 
Managerialism and Diversity on Corporate Boards of Directors, 76 
Tul. L. Rev. 1363, 1391 (June 2002).
    \77\ See Bernile et al., supra note 28, at 38.
    \78\ See Aaron A. Dhir, Challenging Boardroom Diversity: 
Corporate Law, Governance, and Diversity 150 (2015) (emphasis 
removed) (sample included 23 directors of Norwegian corporate 
boards, representing an aggregate of 95 board appointments at more 
than 70 corporations).

    First, many respondents contended that gender diversity promotes 
enhanced dialogue. Interviewees frequently spoke of their belief 
that heterogeneity has resulted in: (1) Higher quality boardroom 
discussions; (2) broader discussions that consider a wide range of 
angles or viewpoints; (3) deeper or more thorough discussions; (4) 
more frequent and lengthier discussions; (5) better informed 
discussions; (6) discussions that are more frequently brought inside 
the boardroom (as opposed to being held in spaces outside the 
boardroom, either exclusively or in addition to inside the 
boardroom); or (7) discussions in which items that directors 
previously took for granted are drawn out and addressed--where the 
implicit becomes explicit. Second, and intimately related, many 
interviewees indicated that diversification has led to (or has the 
potential to lead to) better decision making processes and/or final 
decisions.\79\
---------------------------------------------------------------------------

    \79\ Id. at 124 (emphasis removed).

    Investors also have emphasized the importance of diversity in 
decision making. A group of institutional investors charged with 
overseeing state investments and the retirement savings of public 
employees asserted that ``board members who possess a variety of 
viewpoints may raise different ideas and encourage a full airing of 
dissenting views. Such a broad pool of talent can be assembled when 
potential board candidates are not limited by gender, race, or 
ethnicity.'' \80\
---------------------------------------------------------------------------

    \80\ See Petition for Amendment of Proxy Rule (March 31, 2015), 
available at: https://www.sec.gov/rules/petitions/2015/petn4-682.pdf.
---------------------------------------------------------------------------

    Nasdaq believes that cognitive diversity is particularly important 
on boards because in their advisory role, especially related to 
corporate strategy, ``the `output' that boards produce is entirely 
cognitive in nature.'' \81\ While in 1999, Forbes and Milliken 
characterized boards as ``large, elite, and episodic decision making 
groups that face complex tasks pertaining to strategic-issue 
processing,'' \82\ over the past two decades, their role has evolved; 
boards are now more active, frequent advisors on areas such as 
cybersecurity, social media, and environmental, social and governance 
(``ESG'') issues such as climate change and racial and gender

[[Page 80480]]

inequality. Nasdaq believes that boards comprised of directors from 
diverse backgrounds enhance investor confidence by ensuring that board 
deliberations include the perspectives of more than one demographic 
group, leading to more robust dialogue and better decision making.
---------------------------------------------------------------------------

    \81\ See Forbes and Milliken, supra note 74, at 492.
    \82\ Id.
---------------------------------------------------------------------------

III. Current State of Board Diversity and Causes of Underrepresentation 
on Boards

    While the above studies suggest a positive association between 
board diversity, company performance, investor protections, and 
decision making, there is a noticeable lack of diversity among U.S. 
public companies. Nasdaq is a global organization and operates in many 
countries around the world that already have implemented diversity-
focused directives. In fact, Nasdaq-listed companies in Europe already 
are subject to diversity requirements.\83\ This first-hand experience 
provides Nasdaq with a unique perspective to incorporate global best 
practices into its proposal to advance diversity on U.S. corporate 
boards. Given that the U.S. ranks 53rd in board gender diversity, 
according to the World Economic Forum in its 2020 Global Gender Gap 
Report, Nasdaq believes advancing board diversity in the U.S. is a 
critical business and market imperative. This same report also found 
that ``American women still struggle to enter the very top business 
positions: only 21.7% of corporate managing board members are women.'' 
\84\ As of 2019, women directors held 19% of Russell 3000 seats (up 
from 16% in 2018).\85\ In comparison, women hold more than 30% of board 
seats in Norway, France, Sweden and Finland.\86\ At the current pace, 
the U.S. GAO estimates that it could take up to 34 years for U.S. 
companies to achieve gender parity on their boards.\87\
---------------------------------------------------------------------------

    \83\ On Nasdaq's Nordic and Baltic exchanges, large companies 
must comply with EU Directive 2014/95/EU (the ``EU Directive''), as 
implemented by each member state, which requires companies to 
disclose a board diversity policy with measurable objectives 
(including gender), or explain why they do not have such a policy. 
On Nasdaq Vilnius, companies are also required to comply with the 
Nasdaq Corporate Governance Code for Listed Companies or explain why 
they do not, which requires companies to consider diversity and seek 
gender equality on the board. Similarly, on Nasdaq Copenhagen, 
companies are required to comply with the Danish Corporate 
Governance Recommendations or explain why they do not, which 
requires companies to adopt and disclose a diversity policy that 
considers gender, age and international experience. On Nasdaq 
Iceland, listed companies must have at least 40% women on their 
board (a government requirement) and comply with the EU Directive.
    \84\ See World Economic Forum, Global Gender Gap Report 2020 33 
(2019), available at: http://www3.weforum.org/docs/WEF_GGGR_2020.pdf.
    \85\ See Kosmas Papadopoulos, ISS Analytics, U.S. Board 
Diversity Trends in 2019 4-5 (May 31, 2019), available at: https://www.issgovernance.com/file/publications/ISS_US-Board-Diversity-Trends-2019.pdf.
    \86\ See Deloitte, Women in the Boardroom: A global perspective 
(6th ed. 2019), available at: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Risk/gx-risk-women-in-the-boardroom-sixth-edition.pdf.
    \87\ See GAO Report, supra note 44.
---------------------------------------------------------------------------

    Progress toward greater racial and ethnic diversity in U.S. company 
boardrooms has been even slower. Over the past ten years, the 
percentage of African American/Black directors at Fortune 500 companies 
has remained between 7 and 9%, while the percentage of women directors 
has grown from 16 to 23%.\88\ In 2019, only 10% of board seats at 
Russell 3000 companies were held by racial minorities, reflecting an 
incremental increase from 8% in 2008.\89\ Among Fortune 500 companies 
in 2018, there were fewer than 20 directors who publicly self-
identified as LGBT+, and only nine companies reported considering 
sexual orientation and/or gender identity when identifying director 
nominees.\90\
---------------------------------------------------------------------------

    \88\ See Russell Reynolds, Ethnic & Gender Diversity on US 
Public Company Boards 6 (September 8, 2020).
    \89\ See Papadopoulous, supra note 85, at 5.
    \90\ See Out Leadership, supra note 35.
---------------------------------------------------------------------------

    Women and minority directors combined accounted for 34% of Fortune 
500 board seats in 2018.\91\ While women of color represent 18% of the 
U.S. population, they held only 4.6% of Fortune 500 board seats in 
2018.\92\ Male underrepresented minorities held 11.5% of board seats at 
Fortune 500 companies in 2018, compared to 66% of board seats held by 
Caucasian/White men. Overall in 2018, 83.9% of board seats among 
Fortune 500 companies were held by Caucasian/White individuals (who 
represent 60.1% of the U.S. population), 8.6% by African American/Black 
individuals (who represent 13% of the U.S. population), 3.8% by 
Hispanic/Latino(a) individuals (who represent 19% of the U.S. 
population) and 3.7% by Asian/Pacific Islander individuals (who 
represent 6% of the U.S. population).\93\ In its analysis of Russell 
3000 companies, 2020 Women on Boards concluded that ``larger companies 
do better with their diversity efforts than smaller companies.'' \94\
---------------------------------------------------------------------------

    \91\ See Deloitte, Missing Pieces Report: The 2018 Board 
Diversity Census of Women and Minorities on Fortune 500 Boards 9 
(2018), available at: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/center-for-board-effectiveness/us-cbe-missing-pieces-report-2018-board-diversity-census.pdf.
    \92\ See Catalyst, Too Few Women of Color on Boards: Statistics 
and Solutions (Jan. 31, 2020), https://www.catalyst.org/research/women-minorities-corporate-boards/.
    \93\ See Deloitte, Missing Pieces Report, supra note 91; United 
States Census Bureau, QuickFacts, available at: https://www.census.gov/quickfacts/fact/table/US/PST045219.
    \94\ See 2020 Women On Boards Gender Diversity Index 4 (2019), 
available at: https://2020wob.com/wp-content/uploads/2019/10/2020WOB_Gender_Diversity_Index_Report_Oct2019.pdf.
---------------------------------------------------------------------------

    Based on the limited information that is available, Nasdaq believes 
a supermajority of listed companies have made notable strides to 
improve gender diversity in the boardroom and have at least one woman 
on the board. Nasdaq also believes that listed companies are diligently 
working to add directors with other diverse attributes, although 
consistent with other studies of U.S. companies, Nasdaq believes the 
pace of progress, in this regard, is happening more gradually. Thus, 
and for the reasons discussed in this Section II.A.1.III, Nasdaq has 
concluded that a regulatory approach to encouraging greater diversity 
and data transparency would be beneficial.
    Nasdaq reviewed academic studies on the causes of 
underrepresentation on boards and the approaches taken by other 
jurisdictions to remedy underrepresentation. Those studies suggest that 
the traditional director candidate selection process may create 
barriers to considering qualified diverse candidates for board 
positions. Dhir (2015) explains that ``[t]he presence of unconscious 
bias in the board appointment process, coupled with closed social 
networks, generates a complex set of barriers for diverse directors; 
these are the `phantoms' that prevent entry.'' \95\ In 2011, the Davies 
Review found that ``informal networks influential in board 
appointments'' contribute to the underrepresentation of women in the 
boardrooms of U.K. listed companies.\96\ In 2017, the Parker Review 
acknowledged that ``as is the case with gender, people of colour within 
the UK have historically not had the same opportunities as many 
mainstream candidates to develop the skills, networks and senior 
leadership experience desired in a FTSE Boardroom.'' \97\ In 2020, the 
United Kingdom Financial Reporting Council commissioned a report to 
analyze barriers to LGBTQ+ inclusion and promotion in the workplace. 
Leaders who self-identified as LGBTQ+ expressed concerns about the 
current

[[Page 80481]]

board nomination process, which includes ``relying on personal 
recommendations without transparent competition or due process [and] 
informal `interviewing' outside the selection process.'' \98\
---------------------------------------------------------------------------

    \95\ See Dhir, supra note 78, at 47.
    \96\ See Women on Boards 17 (Feb. 2011), available at: https://ftsewomenleaders.com/wp-content/uploads/2015/08/women-on-boards-review.pdf.
    \97\ See Sir John Parker, A Report into the Ethnic Diversity of 
UK Boards 38 (Oct. 12, 2017), available at: https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-parker-review-2017-report-final.pdf.
    \98\ See Catriona Hay et al., The Financial Reporting Council, 
Building more open business 25 (2020), available at: https://www.frc.org.uk/getattachment/19f3b216-bd45-4d46-af2f-f191f5bf4a07/The-Good-Side-x-Financial-Reporting-Council-1811-AMENDED.pdf.
---------------------------------------------------------------------------

    These concerns are not unique to the United Kingdom. The U.S. GAO 
(2015) found that women's representation on corporate boards may be 
hindered by directors' tendencies to ``rely on their personal networks 
to identify new board candidates.'' \99\ Vell (2017) found that ``92% 
of board seats [of public U.S. and Canadian technology companies] are 
filled through networking, and women have less access to these 
networks.'' \100\ Deloitte and the Society for Corporate Governance 
(2019) found that this is also common in other industries including 
media, communications, energy, consumer products, financial services 
and life sciences.\101\ They observed that although 94% of companies 
surveyed were looking to increase diversity among their boards, 77% of 
those boards looked to referrals from current directors when 
identifying diverse director candidates, suggesting that ``networking 
is still key to board succession.'' \102\ Dhir (2015), in a qualitative 
study of Norwegian directors, observed that ``[b]oard seats tend to be 
filled by directors engaging their networks, and the resulting 
appointees tend to be of the same socio-demographic background.'' \103\
---------------------------------------------------------------------------

    \99\ See GAO Report, supra note 44, at 15.
    \100\ See Vell Executive Search, Women Board Members in Tech 
Companies: Strategies for Building High Performing Diverse Boards 6 
(2017), available at: https://www.vell.com/images/pdf/VELL%20Report%20Women%20Board%20Members%20on%20Tech%20Boards%202017%203%2029.pdf.
    \101\ See Deloitte and the Society of Corporate Governance, 
Board Practices Report: Common threads across boardrooms 5 (2019), 
available at: https://higherlogicdownload.s3.amazonaws.com/GOVERNANCEPROFESSIONALS/a8892c7c-6297-4149-b9fc-378577d0b150/UploadedImages/1202241_2018_Board_Practices_Report_FINAL.pdf.
    \102\ Id. at 6.
    \103\ See Dhir, supra note 78, at 52.
---------------------------------------------------------------------------

    Another contributing factor may be the traditional experience 
sought in director nominees. Rhode & Packel (2014) observed that:

    One of the most common reasons for the underrepresentation of 
women and minorities on corporate boards is their 
underrepresentation in the traditional pipeline to board service. 
The primary route to board directorship has long been through 
experience as a CEO of a public corporation. . . . Given the low 
representation of women and minorities in top executive positions, 
their talents are likely to be underutilized if selection criteria 
are not broadened.\104\
---------------------------------------------------------------------------

    \104\ See Deborah Rhode and Amanda K. Packel, Diversity on 
Corporate Boards: How Much Difference Does Difference Make?, 39(2) 
Del. J. Corp. L. 377, 402-403 (2014); see also Dhir, supra note 78, 
at 39 (``[T]here is an apparent preference for either CEOs (whether 
current or retired) or senior management who have experience at the 
helm of a particular business stream or unit. . . . The fact that 
far fewer women than men have been CEOs has a potentially 
devastating effect on access to the boardroom, which in turn can 
have an effect on the number of women who rise to the level of CEO 
and to the executive suite.'').

    Hillman et al. (2002) found that while white male directors of 
public companies were more likely to have current or former experience 
as a CEO, senior manager or director, African-American and white women 
directors were more likely to have specialized expertise in law, 
finance, banking, public relations or marketing, or community influence 
from positions in politics, academia or clergy.\105\ Dhir (2015) 
suggests that ``[c]onsidering persons from other, non-management pools, 
such as academia, legal and accounting practice, the not-for-profit 
sector and politics, may help create a broader pool of diverse 
candidates.'' \106\ Directors surveyed by the U.S. GAO also 
``suggested, for example, that boards recruit high performing women in 
other senior executive level positions, or look for qualified female 
candidates in academia or the nonprofit and government sectors. . . . 
[I]f boards were to expand their director searches beyond CEOs more 
women might be included in the candidate pool.'' \107\
---------------------------------------------------------------------------

    \105\ See Amy J. Hillman et al., Women and Racial Minorities in 
the Boardroom: How Do Directors Differ?, 28(6) J. Mgmt. 747, 749, 
754 (2002).
    \106\ See Dhir, supra note 78, at 42.
    \107\ See GAO Report supra note 44, at 18.
---------------------------------------------------------------------------

    Investors have begun calling for greater transparency surrounding 
ethnic diversity on company boards, and in the past several months as 
the U.S. has seen an uprising in the racial justice movement, there has 
been an increase in the number of African Americans appointed to 
Russell 3000 corporate boards.\108\ In a five-month span, 130 directors 
appointed were African American, in comparison to the 38 African 
American directors who were appointed in the preceding five 
months.\109\ Although tracking the acceleration in board diversity is 
feasible for some Russell 3000 companies, many of the companies do not 
disclose the racial makeup of the board, making it impossible to more 
broadly assess the impact of recent events on board diversity.
---------------------------------------------------------------------------

    \108\ See Leslie P. Norton, The Number of Black Board Members 
Surged After George Floyd's Death, Barron's, Oct. 27, 2020, 
available at: https://www.barrons.com/articles/after-george-floyds-death-the-number-of-black-board-members-surges-51603809011.
    \109\ Id.
---------------------------------------------------------------------------

IV. Stakeholder Perspectives

    To gain a better understanding of the current state of board 
diversity, benefits of diversity, causes of underrepresentation on 
boards and potential remedies to address underrepresentation, Nasdaq 
spoke with leaders representing a broad spectrum of market participants 
and other stakeholders. Nasdaq sought their perspectives to inform its 
analysis of whether the proposed rule changes would promote the public 
interest and protection of investors without unduly burdening 
competition or conflicting with existing securities laws. The group 
included representatives from the investor, regulatory, investment 
banking, venture capital and legal communities. Nasdaq also spoke with 
leaders of civil rights and corporate governance organizations, and 
organizations representing the interests of private and public 
companies, including Nasdaq-listed companies. Specifically, Nasdaq 
obtained their views on:
     The current state of board diversity in the U.S.;
     the inherent value of board diversity;
     increasing pressure from legislators and investors to 
improve diverse representation on boards and board diversity 
disclosure;
     whether a listing rule related to board diversity is in 
the public interest;
     how to define a ``diverse'' director; and
     the benefits and challenges of various approaches to 
improving board diversity disclosures and increasing diverse 
representation on boards, including mandates and disclosure-based 
models.
    The discussions revealed strong support for disclosure requirements 
that would standardize the reporting of board diversity statistics. The 
majority of organizations also were in agreement that companies would 
benefit from a regulatory impetus to drive meaningful and systemic 
change in board diversity, and that a disclosure-based approach would 
be more palatable to the U.S. business community than a mandate. While 
many organizations recognized that mandates can accelerate the rate of 
change, they expressed that a disclosure-based approach is less 
controversial and would spur companies to take action and achieve the 
same results. Business leaders also

[[Page 80482]]

expressed concern that smaller companies would require flexibility and 
support to comply with any time-sensitive requirements to add diverse 
directors. Some stakeholders highlighted additional challenges that 
smaller companies, and companies in certain industries, may face 
finding diverse board members. Leaders from across the spectrum of 
stakeholders that Nasdaq surveyed reinforced the notion that if 
companies recruit by skill set and expertise rather than title, then 
they will find there is more than enough diverse talent to satisfy 
demand. Leaders from the legal community emphasized that any proposed 
rule that imposed additional burdens beyond, or is inconsistent with, 
existing securities laws--by, for example, requiring companies to adopt 
a diversity policy or include disclosure solely in their proxy 
statements--would present an additional burden and potentially more 
legal liability for listed companies.

V. U.S. Regulatory Framework

    As detailed above, diversity has been the topic of a growing number 
of studies over the past decade and, in recent years, some investors 
have been increasingly advocating for greater diversity among directors 
of public companies.\110\ Over the past year, the social justice 
movement has underscored the importance of having diverse perspectives 
and representation at all levels of decision-making, including on 
public company boards. In recent years, diversity has become 
increasingly important to the public, including institutional 
investors, pension funds and other stakeholders who believe that board 
diversity enhances board performance and is an important factor in the 
voting decisions of some investors.\111\ Legislators increasingly are 
taking action to encourage corporations to diversify their boards and 
improve diversity disclosures.\112\
---------------------------------------------------------------------------

    \110\ In 2009, when the Commission proposed enhancements to 
proxy disclosures, including addressing board diversity disclosures, 
the Commission received over 130 comment letters related to its 
proposal, including from corporations, pension funds, professional 
associations, trade unions, accounting firms, law firms, 
consultants, academics, individual investors and other interested 
parties. See Proxy Disclosure Enhancements, 74 FR at 68,335; see 
also David A. Katz and Laura McIntosh, Raising the Stakes for Board 
Diversity, Law.com (July 22, 2020), available at: https://www.law.com/newyorklawjournal/2020/07/22/raising-the-stakes-for-board-diversity/?slreturn=20201017021522; Office of the Illinois 
State Treasurer, The Investment Case For Board Diversity: A Review 
of the Academic and Practitioner Research on the Value of Gender and 
Racial/Ethnic Board Diversity for Investors 7 (Oct. 2020), available 
at: https://illinoistreasurergovprod.blob.core.usgovcloudapi.net/twocms/media/doc/il%20treasurer%20white%20paper%20-%20the%20investment%20case%20for%20board%20diversity%20(oct%202020).p
df.
    \111\ See Comments on Proposed Rule: Proxy Disclosure and 
Solicitation Enhancements, available at: https://www.sec.gov/comments/s7-13-09/s71309.shtml. See also CGLytics, Diversity on the 
Board? Metrics Used by Fortune 100 Companies (June 29, 2020), 
available at: https://www.cglytics.com/diversity-on-the-board-metrics-of-fortune-100-companies/; Office of the Illinois State 
Treasurer, supra note 110.
    \112\ For example, California requires companies headquartered 
in the state to have at least one director who self-identifies as a 
Female and one director from an Underrepresented Community. See Cal. 
S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30, 2020). 
Washington requires companies headquartered in the state to have at 
least 25% women on the board by 2022 or provide certain disclosures. 
See Wash. Subst. S.B. 6037 (June 11, 2020). At least eleven states 
have proposed diversity-related requirements. See Hatcher and 
Latham, supra note 11.
---------------------------------------------------------------------------

a. SEC Diversity Disclosure Requirements--Background

    In 2009, the Commission sought comment on whether to amend Item 
407(c)(2)(vi) of Regulation S-K to require disclosure of whether a 
nominating committee considers diversity when selecting a director for 
a position on the board.\113\ The Commission received more than 130 
comment letters on its proposal. According to a University of Dayton 
Law Review analysis of those comment letters, most were submitted by 
groups with a specific interest in diversity, or by institutional 
investors, including mutual funds, pension funds, and socially 
responsible investment funds.\114\ Further, the analysis showed that 56 
commenters addressed the issue of diversity disclosures, and only 5 of 
those 56 commenters did not favor such disclosure.\115\ Twenty-seven of 
the 56 mentioned gender diversity, 18 mentioned racial diversity, and 
13 mentioned ethnic diversity. However, neither the proposed rule nor 
the final rule defined diversity.\116\
---------------------------------------------------------------------------

    \113\ See Proxy Disclosure and Solicitation Enhancements, 74 FR 
35,076, 35,084 (July 17, 2009) (proposed rule).
    \114\ See Thomas Lee Hazen and Lissa Lamkin Broome, Board 
Diversity and Proxy Disclosure, 37:1 Univ. Dayton L. Review 41, 51, 
n. 82 (citing the comment letters).
    \115\ In the five comments that opposed diversity disclosure, 
three stated that diversity was an important value. See Comments on 
Proposed Rule, supra note 111; see also Hazen and Broome, supra note 
114, at 54 n.88 (citing the 56 comment letters).
    \116\ See Hazen and Broome, supra note 114, at 53 n. 84-86.
---------------------------------------------------------------------------

    Ten years after its adoption of board diversity disclosure rules, 
the Commission revisited the rules by establishing new Compliance and 
Disclosure Interpretations (``C&DI''). However, the Commission did not 
provide a definition of diversity, and therefore issuers currently are 
not required to disclose the race, ethnicity or gender of their 
directors or nominees.
    Currently, Item 401(e)(1) of Regulation S-K requires a company to 
``briefly discuss the specific experience, qualifications, attributes 
or skills that led to the conclusion that the person should serve as a 
director.'' \117\ The C&DI clarifies that if a board considered a 
director's self-identified diversity characteristics (e.g., race, 
gender, ethnicity, religion, nationality, disability, sexual 
orientation or cultural background) during the nomination process, and 
the individual consents to disclose those diverse characteristics, the 
Commission ``would expect that the company's discussion required by 
Item 401 would include, but not necessarily be limited to, identifying 
those characteristics and how they were considered.'' \118\
---------------------------------------------------------------------------

    \117\ See 17 CFR 229.401(e)(1).
    \118\ See Securities and Exchange Commission, Regulation S-K 
Compliance & Disclosure Interpretations (Sept. 21, 2020), available 
at: https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
---------------------------------------------------------------------------

    Rather than providing a specific definition of diversity, the C&DI 
provides a non-exhaustive list of examples of diverse characteristics 
that a company could consider for purposes of Item 401(e)(1), including 
``race, gender, ethnicity, religion, nationality, disability, sexual 
orientation, or cultural background.'' \119\ Additionally, the 
Commission stated that any description of a company's diversity policy 
would be expected to include ``a discussion of how the company 
considers the self-identified diversity attributes of nominees as well 
as any other qualifications its diversity policy takes into account, 
such as diverse work experiences, military service, or socio-economic 
or demographic characteristics.'' \120\
---------------------------------------------------------------------------

    \119\ Id.
    \120\ Id.
---------------------------------------------------------------------------

    Item 407(c)(2)(vi) of Regulation S-K requires proxy disclosure 
regarding whether diversity is considered when identifying director 
nominees and, if so, how. In addition, if the board or nominations 
committee has adopted a diversity policy, the company must describe how 
the policy is implemented and its effectiveness is assessed.\121\ When 
adopting Item 407(c)(2)(vi), the Commission explained:
---------------------------------------------------------------------------

    \121\ See 17 CFR 229.407(c)(2)(vi).

    We recognize that companies may define diversity in various 
ways, reflecting different perspectives. For instance, some 
companies may conceptualize diversity expansively to

[[Page 80483]]

include differences of viewpoint, professional experience, 
education, skill and other individual qualities and attributes that 
contribute to board heterogeneity, while others may focus on 
diversity concepts such as race, gender and national origin. We 
believe that for purposes of this disclosure requirement, companies 
should be allowed to define diversity in ways that they consider 
appropriate. As a result we have not defined diversity in the 
amendments.\122\
---------------------------------------------------------------------------

    \122\ See Proxy Disclosure Enhancements, 74 FR at 68,344.
---------------------------------------------------------------------------

    Moreover, Item 407(c)(2)(vi) does not require companies to adopt a 
formal policy and does not require them to explain why they have not. 
It also does not require public disclosure of board-level diversity 
statistics.

b. Complaints Surrounding Current Diversity Disclosure Requirements

    Given the broad latitude afforded to companies by the Commission's 
rules related to board diversity and proxy disclosure, current 
reporting of board-level diversity statistics has been significantly 
unreliable and unusable to investors. This has been due to myriad data 
collection challenges, including the scarcity of reported information, 
the lack of uniformity in the information that is disclosed and 
inconsistencies in the definitions of diversity characteristics across 
companies.\123\ The heightened national discourse around diversity and 
mounting grievances from investors surrounding transparency on board 
diversity prompted Nasdaq to examine the state of board diversity among 
its listed companies. While conducting that research, Nasdaq identified 
a number of key challenges, such as: (1) Inconsistent disclosure and 
definitions of diversity across companies; (2) limited data on diverse 
characteristics outside of gender; (3) inconsistent or no disclosure of 
a director's race, ethnicity, or other diversity attributes (e.g., 
nationality); (4) difficult-to-extract data because statistics are 
often embedded in graphics; and (5) aggregation of information, making 
it difficult to separate gender from other categories of diversity. 
Investors and data analysts have raised similar criticisms.
---------------------------------------------------------------------------

    \123\ See Petition for Rulemaking (July 6, 2017), available at: 
https://www.sec.gov/rules/petitions/2017/petn4-711.pdf.
---------------------------------------------------------------------------

    As the Illinois Treasurer observed, the paucity of data on race and 
ethnicity creates barriers to investment analysis, due diligence and 
academic study.\124\ For example, the scarcity of such data is an 
impediment to academics who want to study the performance impact of 
racially diverse boards.\125\ Nasdaq is concerned that investors also 
face the many data collection challenges Nasdaq encountered, rendering 
current diversity disclosures unreliable, unusable, and insufficient to 
inform investment and voting decisions. Commissioner Allison Herren Lee 
expressed similar concerns, stating that the current SEC disclosure 
requirements have ``led to spotty information that is not standardized, 
not consistent period to period, not comparable across companies, and 
not necessarily reliable. . . . And the current state of disclosure 
reveals the shortcomings of a principles-based materiality regime in 
this area.'' \126\
---------------------------------------------------------------------------

    \124\ See Press Release, Illinois State Treasurer Frerichs Calls 
on Russell 3000 Companies to Disclose Diversity Data (Oct. 28, 
2020), available at https://illinoistreasurergovprod.blob.core.usgovcloudapi.net/twocms/media/doc/october2020_russell3000.pdf.
    \125\ See Office of Illinois State Treasurer, supra note 110, at 
3-4.
    \126\ See Lee, supra note 22.
---------------------------------------------------------------------------

    Some stakeholders believe there is a correlation between companies 
that disclose the gender, racial and ethnic composition of their board 
and the number of diverse directors on those companies' boards.\127\ 
Currently, the lack of reliable and consistent data makes it difficult 
to measure diversity in the boardroom, and a common set of standards 
for diversity definitions and disclosure format is greatly needed. At 
present, U.S. companies must navigate a complex patchwork of federal 
and state regulations and disclosure requirements. The limited 
disclosure currently provided voluntarily, which is primarily focused 
on gender (due in part to that data being the most readily available), 
fails to provide the full scope of a board's diverse 
characteristics.\128\ It is difficult to improve what one cannot 
accurately measure. This lack of transparency is impacting investors 
who are increasingly basing public advocacy, proxy voting and direct 
shareholder-company engagement decisions on board diversity 
considerations.\129\
---------------------------------------------------------------------------

    \127\ See Proxy Disclosure Enhancements, 74 FR at 68,355 
(``Although the[se] amendments are not intended to steer behavior, 
diversity policy disclosure may also induce beneficial changes in 
board composition. A board may determine, in connection with 
preparing its disclosure, that it is beneficial to disclose and 
follow a policy of seeking diversity.''); see also Office of 
Illinois State Treasurer, supra note 110, at 3.
    \128\ See, e.g., CGLytics, supra note 111, at https://www.cglytics.com/diversity-on-the-board-metrics-of-fortune-100-companies/; Petition for Amendment of Proxy Rule, supra note 80; 
Office of Illinois State Treasurer, supra note 110.
    \129\ See Office of the Illinois State Treasurer, Russell 3000 
Board Diversity Disclosure Initiative, https://www.illinoistreasurer.gov/Financial_Institutions/Equity,_Diversity__Inclusion/Russell_3000_Board_Diversity_Disclosure_Initiative (last accessed 
Nov. 25, 2020).
---------------------------------------------------------------------------

c. Support for Updating Diversity Disclosure Requirements

    Nasdaq's surveys of investors and reviews of their disclosed 
policies and actions show that board diversity is a priority when 
assessing companies, and investors report, in some cases, relying on 
intuition when there is a lack of empirical, evidenced-based data. 
Furthermore, the continued growth of ESG investing raises the 
importance of quality data, given the data-driven nature of investment 
products such as diversity-specific indices and broader ESG funds.
    Investors have a unique platform from which to engage and influence 
a company's position on important topics like diversity. Similarly, 
Nasdaq, like other self-regulatory organizations, is uniquely 
positioned to establish practices that will assist in carrying out 
Nasdaq's mandate to protect investors and remove impediments from the 
market. Various stakeholders, including Nasdaq, believe that clear and 
concise annual disclosure of board diversity information that 
disaggregates the data by race, ethnicity, gender identity and sexual 
orientation will provide the public, including key stakeholders, with a 
better sense of a company's approach to improving corporate diversity 
and the support needed to effectuate any changes. Required disclosures 
also would eliminate the number of shareholder proposals asking for 
these key metrics and the need for companies to respond to multiple 
investor requests for information.\130\ Moreover, companies manage 
issues more closely and demonstrate greater progress when data is 
available.\131\
---------------------------------------------------------------------------

    \130\ See Petition for Rulemaking, supra note 123, at 2.
    \131\ See, e.g., Gwen Le Berre, Parametric, Investors Need Data 
to Make Diversity a Reality (Aug. 24, 2020), https://www.parametricportfolio.com/blog/investors-need-data-to-make-diversity-a-reality.
---------------------------------------------------------------------------

    In 2015, nine large public pension funds who collectively 
supervised $1.12 trillion in assets at the time petitioned the 
Commission to require registrants to disclose information related to, 
among other things, the gender, racial, and ethnic diversity of the 
registrant's board nominees.\132\ In 2017, Human Capital Management 
Coalition, which described itself as a group of institutional investors 
with $2.8 trillion in assets at the time, made a similar petition to 
the Commission.\133\ More recently, in October 2020, the Illinois 
Treasurer spearheaded an initiative along with twenty other investor 
organizations, asking for all companies in the Russell

[[Page 80484]]

3000 Index to disclose the composition of their board, including each 
board member's gender, race and ethnicity.\134\
---------------------------------------------------------------------------

    \132\ See Petition for Amendment of Proxy Rule, supra note 80.
    \133\ See Petition for Rulemaking, supra note 123.
    \134\ See Press Release, supra note 124.
---------------------------------------------------------------------------

    The largest proxy advisory firms have aligned their voting policies 
to encourage increased board diversity disclosure. Institutional 
Shareholder Services (``ISS''), recently adopted a new voting policy 
under which it will identify boards of companies in the Russell 3000 or 
S&P 1500 that ``lack racial and ethnic diversity (or lack disclosure of 
such)'' in 2021 and, beginning in 2022, will recommend voting against 
the chair of the nominating committee of such companies. The stated 
goal of the policy is ``helping investors identify companies with which 
they may wish to engage and to foster dialogue between investors and 
companies on this topic.'' \135\ In 2017, proxy advisory firm Glass 
Lewis announced a policy regarding board gender diversity that took 
effect in 2019. Glass Lewis generally recommends voting against the 
nominating committee chair of a board that has no female members, and 
when making such a recommendation, the firm closely examines the 
company's disclosure of its board diversity considerations and other 
relevant contextual factors.\136\ On November 24, 2020, Glass Lewis 
announced the publication of its 2021 Proxy Voting Policy Guidelines, 
which expand its board gender diversity policy to vote against 
nominating chairs if there are fewer than two female directors, 
beginning in 2022.\137\ Most notably, beginning with the 2021 proxy 
season, the company will include an assessment report of company proxy 
disclosures relating to board diversity, skills and the director 
nomination process for companies in the S&P 500 index. According to 
Glass Lewis, it ``will reflect how a company's proxy statement 
presents: (i) The board's current percentage of racial/ethnic 
diversity; (ii) whether the board's definition of diversity explicitly 
includes gender and/or race/ethnicity; (iii) whether the board has 
adopted a policy requiring women and minorities to be included in the 
initial pool of candidates when selecting new director nominees (aka 
`Rooney Rule'); and (iv) board skills disclosure.'' \138\
---------------------------------------------------------------------------

    \135\ See ISS Governance, ISS Announces 2021 Benchmark Policy 
Updates (November 12, 2020), available at: https://www.issgovernance.com/iss-announces-2021-benchmark-policy-updates/.
    \136\ See Glass Lewis, 2019 Policy Guideline Updates (Oct. 24, 
2018), available at: https://www.glasslewis.com/2019-policy-guideline-updates-united-states-canada-shareholder-initiatives-israel/.
    \137\ See Glass Lewis, 2021 Proxy Paper Guidelines: An Overview 
of the Glass Lewis Approach to Proxy Advice--United States (2020), 
available at: https://www.glasslewis.com/wp-content/uploads/2020/11/US-Voting-Guidelines-GL.pdf?hsCtaTracking=7c712e31-24fb-4a3a-b396-9e8568fa0685%7C86255695-f1f4-47cb-8dc0-e919a9a5cf5b.
    \138\ Id.
---------------------------------------------------------------------------

    Congress and members of the Commission also have weighed in on the 
importance of improving board transparency. In 2017, Representative 
Carolyn Maloney introduced the ``Gender Diversity in Corporate 
Leadership Act of 2017,'' which proposed requiring public companies to 
provide proxy disclosure regarding the gender diversity of the board of 
directors and nominees.\139\ In November 2019, the U.S. House of 
Representatives, with bipartisan support, passed the ``Corporate 
Governance Through Diversity Act of 2019,'' which requires certain 
registrants annually to disclose the racial, ethnic, and gender 
composition of their boards and executive officers, as well as the 
veteran status of any of those directors and officers, in their proxy 
statements.\140\ The bill also requires the disclosure of any policy, 
plan or strategy to promote racial, ethnic, and gender diversity among 
these groups. Legislators have proposed a companion bill in the U.S. 
Senate.\141\
---------------------------------------------------------------------------

    \139\ Gender Diversity in Corporate Leadership Act of 2017, H.R. 
1611, 115th Cong. (2017).
    \140\ Improving Corporate Governance Through Diversity Act of 
2019, H.R. 5084, 116th Cong. (2019).
    \141\ Improving Corporate Governance Through Diversity Act of 
2019, S. 360, 116th Cong. (2019).
---------------------------------------------------------------------------

    The Council of Institutional Investors (``CII''), U.S. Chamber of 
Commerce,\142\ National Urban League, Office of New York State 
Comptroller and the National Association for the Advancement of Colored 
People praised the House of Representatives' for passing the 2019 
legislation. According to the U.S. Chamber of Commerce's members and 
associations, it has become increasingly important to see improvements 
in board diversity.\143\ Additionally, CII's General Counsel stated 
that the proxy statement disclosure requirement in the legislation 
``could contribute to enhancing U.S. public company board consideration 
of diversity.'' \144\
---------------------------------------------------------------------------

    \142\ See Letter from Various U.S. Chamber of Commerce 
Associations and Members to Chairman Mike Crapo and Ranking Member 
Sherrod Brown, U.S. House Committee on Banking, Housing, and Urban 
Affairs (July 27, 2020), available at: https://www.uschamber.com/sites/default/files/200727_coalition_h.r._5084_senatesmallbusiness.pdf.
    \143\ Id.
    \144\ See Joe Mont, SEC, Congress seek better diversity 
disclosures, Compliance Week (Feb. 20, 2019), https://www.complianceweek.com/sec-congress-seek-better-diversity-disclosures/24802.article.
---------------------------------------------------------------------------

    More recently, SEC Commissioners have called for greater 
transparency surrounding ethnic diversity on company boards. In a 
September 2020 speech titled ``Diversity Matters, Disclosure Works, and 
the SEC Can Do More'' given at the CII Fall Conference, Commissioner 
Lee advocated advancing corporate diversity and for various approaches 
by which the Commission could promote diversity, including among other 
things, strengthening the C&DI's guidance related to disclosure of 
board candidate diversity characteristics.\145\ Commissioner Lee 
stated:
---------------------------------------------------------------------------

    \145\ See Lee, supra note 22.

    [The SEC has] largely declined to require diversity-related 
disclosure. In 2009, we adopted a requirement for companies to 
disclose if and how diversity is considered as a factor in the 
process for considering candidates for board positions, including 
any policies related to the consideration of diversity. In 2018, we 
issued guidance encouraging the disclosure of self-identified 
characteristics of board candidates. While I appreciate these 
measures, given that women of color hold just 4.6% of Fortune 500 
board seats and less than one percent of Fortune 500 CEOs are Black, 
it's time to consider how to get investors the diversity information 
they need to allocate their capital wisely.\146\
---------------------------------------------------------------------------

    \146\ Id. Commissioner Crenshaw also expressed disappointment 
with the Commission's silence on diversity. See Crenshaw, supra note 
7.

VI. Nasdaq Proposal

a. Overview of Disclosure Requirements

    Disclosure of information material to an investor's voting and 
investment decision is the bedrock of federal securities laws. The 
Exchange's listing rules require companies to comply with federal 
securities laws, including the registration requirements under the 
Securities Act of 1933. Once listed, companies are obligated to solicit 
proxies and file all annual and periodic reports with the Commission 
under the Act at the prescribed times.\147\ In discharging its 
obligation to protect investors, Nasdaq monitors listed companies for 
compliance with those disclosure obligations, and the failure to do so 
results in a notice of deficiency or delisting.
---------------------------------------------------------------------------

    \147\ See Nasdaq Stock Market Rulebook, Rules 5250(c) and (d).
---------------------------------------------------------------------------

    Nasdaq believes it is well within the Exchange's delegated 
regulatory authority to propose listing rules designed to enhance 
transparency so long as they do not conflict with existing federal 
securities laws. For example, Nasdaq requires listed companies to 
publicly disclose compensation or other payments by third parties to a 
company's directors or

[[Page 80485]]

nominees, notwithstanding that such disclosure is not required by 
federal securities laws. In approving that proposed rule, the 
---------------------------------------------------------------------------
Commission noted:

    To the extent there are certain factual scenarios that would 
require disclosure not otherwise required under Commission rules, we 
believe that it is within the purview of a national securities 
exchange to impose heightened governance requirements, consistent 
with the Act, that are designed to improve transparency and 
accountability into corporate decision making and promote investor 
confidence in the integrity of the securities markets.\148\
---------------------------------------------------------------------------

    \148\ See Order Granting Accelerated Approval of a Proposed Rule 
Change, 81 FR 44,400, 44,403 (July 7, 2016).

    Nasdaq is concerned that while investors have increasingly 
emphasized that they consider board diversity information to be 
material, the current lack of transparency and consistency makes it 
difficult for Nasdaq and investors to determine the state of diversity 
among listed companies as well as each board's philosophy regarding 
diversity. Investors also have voiced dissatisfaction about having to 
independently collect board-level data about race, ethnicity and gender 
identity because such investigations can be time consuming, expensive, 
and fraught with inaccuracies.\149\ Moreover, in some instances, based 
on Nasdaq's own investigation, such information is either unavailable, 
or, if available, not comparable across companies. To the extent 
investors must obtain this information on their own through an 
imperfect process, Nasdaq is concerned that it increases information 
asymmetries between larger stakeholders, who are able to collect this 
data directly from companies, and smaller investors, who must rely on 
incomplete public disclosures. For all investors who take on the burden 
of independently obtaining the current information, there is a cost and 
time burden related to the data collection.
---------------------------------------------------------------------------

    \149\ See Petition for Amendment of Proxy Rule, supra note 80, 
at 2.
---------------------------------------------------------------------------

    Nasdaq believes that additional disclosure regarding a board's 
composition and philosophy related to board diversity will improve 
transparency and accountability into corporate decision making. Nasdaq 
proposes to improve transparency regarding board diversity by requiring 
all listed companies to publicly disclose unbundled, consistent data 
utilizing a uniform, transparent framework on their website or in their 
proxy statement under Rule 5606. Similarly, Nasdaq proposes to promote 
accountability in corporate decision-making by requiring companies who 
do not have at least two Diverse directors on their board to provide 
investors with a public explanation of the board's reasons for not 
doing so under Rule 5605(f)(3). Nasdaq designed the proposal to avoid a 
conflict with existing disclosure requirements under Regulation S-K and 
to mitigate additional burdens for companies by providing them with 
flexibility to provide such disclosure on their website or in their 
proxy statement, and not requiring them to adopt a formal diversity 
policy.
    Nasdaq proposes to foster consistency in board diversity data 
disclosure by defining ``Diverse'' under Rule 5605(f)(1) as ``an 
individual who self-identifies in one or more of the following 
categories: Female, Underrepresented Minority or LGBTQ+,'' and by 
adopting the following definitions under Rule 5605(f)(1):
     ``Female'' means an individual who self-identifies her 
gender as a woman, without regard to the individual's designated sex at 
birth.
     ``LGBTQ+'' means an individual who self-identifies as any 
of the following: lesbian, gay, bisexual, transgender or a member of 
the queer community.
     ``Underrepresented Minority'' means an individual who 
self-identifies as one or more of the following: 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.
    The terms in the proposed definition of ``Underrepresented 
Minority'' reflect the EEOC's categories and are construed in 
accordance with the EEOC's definitions.\150\ The terms in the proposed 
definition of LGBTQ+ are similar to the identities defined in 
California's A.B. 979, described below, but have been expanded to 
include the queer community based on Nasdaq's consultation with 
stakeholders, including human rights organizations.\151\
---------------------------------------------------------------------------

    \150\ While the EEO-1 report refers to ``Hispanic or Latino'' 
rather than Latinx, Nasdaq proposes to use the term Latinx to apply 
broadly to all gendered and gender-neutral forms that may be used by 
individuals of Latin American heritage, including individuals who 
self-identify as Latino/a/e.
    \151\ Further, Nasdaq agrees with the United Kingdom Financial 
Reporting Council that the acronym LGBTQ+ ``does not attempt to 
exclude other groups, nor does it imply that the experiences of 
people under its umbrella are the same.'' See Hay et al., supra note 
98, at 14.
---------------------------------------------------------------------------

    In constructing its proposed definition of ``Diverse,'' Nasdaq 
considered various state and federal legislation, stakeholder 
sentiments and academic studies. For example, California requires 
public companies headquartered in the state to have at least one 
individual who self-identifies as a female on the board by 2019 under 
S.B. 826 \152\ and at least one director who is a member of an 
``underrepresented community'' by 2021 under A.B. 979.\153\ S.B. 826 
defines ``Female'' as ``an individual who self-identifies her gender as 
a woman, without regard to the individual's designated sex at birth,'' 
consistent with legislation proposed by New Jersey, Michigan and Hawaii 
related to board gender diversity.\154\ A.B. 979 considers directors 
from underrepresented communities to be individuals who self-identify 
as Black, African American, Hispanic, Latino, Asian, Pacific Islander, 
Native American, Native Hawaiian or Alaska Native, or as gay, lesbian, 
bisexual or transgender. Since S.B. 826 was passed, 669 women have 
joined public company boards in the state and the number of public 
companies with all male boards has declined from 30% in 2018 to 3% in 
2020.\155\
---------------------------------------------------------------------------

    \152\ See Cal. S.B. 826, supra note 112.
    \153\ See Cal. A.B. 979, supra note 112.
    \154\ See Cal. S.B. 826, supra note 112. See also N.J. Senate 
No. 3469, Sec.  3(b)(2) (2019); Mich. S.B. 115, Sec.  505a(2)(b) 
(2019); Haw. H.B. 2720, Sec.  414-1(b)(2) (2020).
    \155\ See California Partners Project, Claim Your Seat: A 
Progress Report on Women's Representation on California Corporate 
Boards 4 (2020), available at: https://www.calpartnersproject.org/claimyourseat.
---------------------------------------------------------------------------

    The state of Washington requires public companies whose boards are 
not comprised of at least 25% directors who self-identify as women by 
January 1, 2022 to provide public disclosures related to the board's 
consideration of ``diverse groups'' during the director nomination 
process. The state considers ``diverse groups'' to include ``women, 
racial minorities, and historically underrepresented groups.'' \156\
---------------------------------------------------------------------------

    \156\ See Wash. Subst. S.B. 6037, supra note 112. At least 11 
states have proposed diversity-related requirements. See Hatcher and 
Latham, supra note 11.
---------------------------------------------------------------------------

    As discussed above, Congress has proposed legislation relating to 
disclosure of racial, ethnic, gender and veteran status among the 
company's directors. Section 342 of the Dodd-Frank Act defines 
``minority'' as ``Black American, Native American, Hispanic American, 
and Asian American,'' \157\ and the Diversity Assessment Report for 
Entities Regulated by the SEC requires the Exchange to report workforce 
composition data to the SEC based on

[[Page 80486]]

the EEOC's categories.\158\ Most companies are required by law to 
provide similar workforce data to the EEOC through the EEO-1 Report, 
which requires employers to report statistical data related to race, 
ethnicity and gender to the EEOC.\159\
---------------------------------------------------------------------------

    \157\ See 12 U.S.C. 5452(g)(3) and Public Law 101-73 Sec.  
1204(c)(3).
    \158\ See Securities and Exchange Commission, Diversity 
Assessment Report for Entities Regulated by the SEC, available at: 
https://www.sec.gov/files/OMWI-DAR-FORM.pdf.
    \159\ All companies with 100 or more employees are required to 
complete the EEO-1 Report. See U.S. Equal Employment Opportunity 
Commission, EEO-1: Who Must File, https://www.eeoc.gov/employers/eeo-1-survey/eeo-1-who-must-file (last accessed Nov. 27, 2020).
---------------------------------------------------------------------------

    Nasdaq has designed the proposed rule to require all companies to 
provide consistent, comparable data under Rule 5606 by utilizing the 
existing EEO-1 reporting categories that companies are already familiar 
with, and by requiring companies to have, or publicly explain why they 
do not have, at least two directors who are diverse in terms of race, 
ethnicity, sexual orientation or gender identity under Rule 5605(f)(2). 
While the EEO-1 report does not currently include sexual orientation or 
gender identity, Nasdaq believes it is reasonable and in the public 
interest to include a reporting category for LGBTQ+ status in 
recognition of the U.S. Supreme Court's recent decision in Bostock v. 
Clayton County that sexual orientation and gender identity are 
``inextricably'' intertwined with sex.\160\
---------------------------------------------------------------------------

    \160\ See Bostock v. Clayton Cty., 140 S. Ct. 1731, 1742 (2020) 
(``But unlike any of these other traits or actions, homosexuality 
and transgender status are inextricably bound up with sex. Not 
because homosexuality or transgender status are related to sex in 
some vague sense or because discrimination on these bases has some 
disparate impact on one sex or another, but because to discriminate 
on these grounds requires an employer to intentionally treat 
individual employees differently because of their sex.'').
---------------------------------------------------------------------------

    The proposal does not preclude companies from considering 
additional diverse attributes, such as nationality, disability, or 
veteran status in selecting board members; however, the company would 
still have to provide the required disclosure under Rule 5605(f)(3) if 
the company does not also have at least two directors who are otherwise 
considered Diverse under Rule 5605(f)(1). Nor would the proposal 
prevent companies from disclosing information related to other diverse 
attributes of board members beyond those highlighted in the rule if 
they felt such disclosure would benefit investors. Nasdaq believes such 
disclosure would provide investors with additional information about 
the company's philosophy regarding broader diversity characteristics.
    Overall, Nasdaq believes the proposal will enhance investor 
confidence that all listed companies are considering diversity of race, 
ethnicity, sexual orientation and gender identity in the context of 
selecting directors. Investors will be confident that board discussions 
at listed companies with at least two Diverse directors include the 
perspectives of more than one demographic group. They will also be 
confident that boardrooms without at least two Diverse directors are 
having a thoughtful discussion about their reasons for not doing so and 
publicly explaining those reasons. On balance, the proposal will 
advance the public interest and enhance investor confidence in the 
integrity of the securities markets by ensuring investors that Nasdaq 
is monitoring all listed companies to verify that they have at least 
two Diverse directors or explain why they do not, and by requiring all 
listed companies to provide consistent, comparable diversity 
disclosures.

b. Board Statistical Disclosure

    Given the increased interest in, and advocacy for, improvements in 
board transparency related to diversity disclosure information, the 
Exchange is proposing to adopt new Rule 5606(a), which would require 
each company to publicly disclose, to the extent permitted by 
applicable law, information on each director's voluntary self-
identified gender and racial characteristics and LGBTQ+ status.
    All Nasdaq-listed companies that are subject to proposed Rule 
5605(f), whether they choose to meet the diversity objectives of 
proposed Rule 5605(f)(2) or to explain why they do not, would be 
required to make the proposed Rule 5606 disclosure. This proposed rule 
also will assist the Exchange in assessing whether companies meet the 
diversity objectives of proposed Rule 5605(f). Under Rule 5606(e), 
Nasdaq proposes to make proposed Rule 5606 operative for listed 
companies one year after the SEC Approval Date of this proposal.
    Pursuant to proposed Rule 5606(a), each company would be instructed 
to annually provide its board-level diversity data in a format 
substantially similar to the Board Diversity Matrix in proposed Rule 
5606(a) and attached [sic] as Exhibit 3. The company would be required 
to provide the total number of directors on its board. If a director 
voluntarily self-identifies, each company, other than a Foreign Issuer 
(as defined under Rule 5605(f)(1)), would include the following in a 
table titled ``Board Diversity Matrix,'' in accordance with the 
instructions accompanying the proposed disclosure format: (1) the 
number of directors based on gender identity (male, female or non-
binary \161\); (2) the number of directors based on race and ethnicity 
(African American or Black, Alaskan Native or American Indian, Asian, 
Hispanic or Latinx, Native Hawaiian or Pacific Islander, White, or Two 
or More Races or Ethnicities); and (3) the number of directors who 
self-identify as LGBTQ+.
---------------------------------------------------------------------------

    \161\ Although non-binary is included as a category in the 
proposed Board Diversity Matrix, a company would not satisfy the 
diversity requirement proposed by Rule 5605(f)(2) if a director 
self-identifies solely as non-binary.
---------------------------------------------------------------------------

    Any director who chooses not to disclose a gender would be included 
under ``Gender Undisclosed'' and any director who chooses not to 
identify as any race or not to identify as LGBTQ+ would be included in 
the ``Undisclosed'' category at the bottom of the table. The defined 
terms for the race and ethnicity categories in the instructions to the 
Board Diversity Matrix disclosure format are substantially similar to 
the terms and definitions used in the EEO-1 Report.\162\ LGTBQ+ is 
defined similarly to proposed Rule 5605(f)(1) as a person who 
identifies as any of the following: lesbian, gay, bisexual, transgender 
or a member of the queer community.
---------------------------------------------------------------------------

    \162\ See supra note 159. Additionally, the EEOC does not 
categorize LGBTQ+ or any other sexual orientation identifier on its 
EEO-1 Report. The definitions of the EEO-1 race and ethnicity 
categories may be found in the appendix to the EEO-1 Report 
instructional booklet, available at https://www.eeoc.gov/employers/eeo-1-survey/eeo-1-instruction-booklet.
---------------------------------------------------------------------------

    Below is an example of a Board Diversity Matrix that companies may 
use, which is also attached [sic] as Exhibit 3:

[[Page 80487]]



                                             Board Diversity Matrix
                                                 [As of [DATE]]
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Board Size:
----------------------------------------------------------------------------------------------------------------
    Total Number of Directors...............                                   #
----------------------------------------------------------------------------------------------------------------
Gender:                                                 Male           Female       Non-Binary           Gender
                                                                                                    undisclosed
    Number of directors based on gender                    #                #                #                #
     identity...............................
Number of directors who identify in any of
 the categories below:
    African American or Black...............               #                #                #                #
    Alaskan Native or American Indian.......               #                #                #                #
    Asian...................................               #                #                #                #
    Hispanic or Latinx......................               #                #                #                #
    Native Hawaiian or Pacific Islander.....               #                #                #                #
    White...................................               #                #                #                #
    Two or More Races or Ethnicities........               #                #                #                #
----------------------------------------------------------------------------------------------------------------
    LGBTQ+..................................                                   #
----------------------------------------------------------------------------------------------------------------
Undisclosed.................................                                   #
----------------------------------------------------------------------------------------------------------------

    Nasdaq recognizes that some Foreign Issuers, including Foreign 
Private Issuers as defined by the Act,\163\ may have their principal 
executive offices located outside of the United States and in 
jurisdictions that may impose laws limiting or prohibiting self-
identification questionnaires, particularly as they relate to race, 
ethnicity or LGBTQ+ status. In such countries, a Foreign Issuer may be 
precluded by law from requesting diversity data from its directors. 
Moreover, Nasdaq's definition of Underrepresented Minority proposed in 
Rule 5606(f)(1) may be inapplicable to a Foreign Issuer, making this 
Board Matrix data less relevant for such companies and not useful for 
investors.
---------------------------------------------------------------------------

    \163\ See 17 CFR 240.3b-4.
---------------------------------------------------------------------------

    As a result of these limitations, Nasdaq is proposing the option of 
a separate Board Diversity Matrix for Foreign Issuers. Similar to other 
companies, a Foreign Issuer would be required to provide the total 
number of directors on its board. If a director voluntarily self-
identifies, the company would include the following in a table titled 
``Board Diversity Matrix'': (1) The number of directors based on gender 
identity (male, female or non-binary \164\); (2) the number of 
directors who are considered underrepresented in the company's home 
country jurisdiction;\165\ and (3) the number of directors who self-
identify as LGBTQ+. An ``Underrepresented Individual in Home Country 
Jurisdiction'' is defined in the instructions to the Board Diversity 
Matrix as a person who self-identifies as an underrepresented 
individual based on national, racial, ethnic, indigenous, cultural, 
religious or linguistic identity in a Foreign Issuer's home country 
jurisdiction. Rule 5605(f)(2)(B)(i) also proposes the same definition 
for Diverse directors of Foreign Issuers.
---------------------------------------------------------------------------

    \164\ Although non-binary is included as a category in the 
proposed Board Diversity Matrix, a company would not satisfy any 
aspect of the diversity requirement proposed by Rule 5605(f)(2) if a 
director self-identifies solely as non-binary.
    \165\ To clarify, although a Foreign Issuer may disclose 
directors that meet the requirement of Underrepresented Minority 
pursuant to new Rule 5605(f)(1), such disclosure may not meet the 
diversity objectives of new Rule 5605(f)(2)(B)(ii).
---------------------------------------------------------------------------

    Nasdaq is also proposing new Rule 5606(b), which would require each 
company to provide the disclosure required under Rule 5606(a) in either 
the company's proxy statement or information statement for its annual 
meeting for shareholders, or on the company's website. If the company 
elects to disclose the information on its website, the company must 
also submit such disclosure along with a URL link to the information 
through the Nasdaq Listing Center within 15 calendar days of the 
company's annual shareholder meeting. The proposed time period to 
submit the information to the Nasdaq Listing Center is aligned with the 
time period provided in proposed Rule 5605(f)(3) for a company to 
submit its explanation for why it does not have at least two Diverse 
directors. Disclosure of the statistical data is not in lieu of any SEC 
requirements for a company to disclose any required information 
pursuant to Regulation S-K or any other federal, state or foreign laws 
or regulations. As described in the instructions to the Board Diversity 
Matrix and Rule 5606(a), each year following the first year that a 
company publishes its annual Board Diversity Matrix, the company would 
be required to publish its data for the current and immediately prior 
years.
    Additionally, Nasdaq is proposing Rule 5606(c), which exempts the 
following types of companies from proposed Rule 5606(a): acquisition 
companies listed under IM-5101-2; asset-backed issuers and other 
passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set 
forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 
5615(a)(4)); management investment companies (as set forth in Rule 
5615(a)(5)); issuers of non-voting preferred securities, debt 
securities and Derivative Securities (as set forth in Rule 5615(a)(6)); 
and issuers of securities listed under the Rule 5700 Series. The 
exemption of these companies is consistent with the approach taken by 
Nasdaq in Rule 5615 as it relates to certain Nasdaq corporate 
governance standards for board composition.
    Nasdaq is also proposing Rule 5606(d) to allow for a company newly 
listing on Nasdaq, including a company listing in connection with a 
business combination under IM-5101-2, to satisfy the requirement of 
Rule 5606 within one year of listing on Nasdaq. The disclosure required 
by proposed Rule 5606(d) would be required to be included in the 
company's annual proxy statement or information statement for its 
annual meeting of shareholders or on the company's website. If the 
company provides such disclosure on its website, the company must also 
submit the disclosure and a URL link to the disclosure through the 
Nasdaq Listing Center no later than 15 calendar days after the 
company's annual shareholder meeting.
    When a company does not timely provide the required disclosure, 
Nasdaq will notify the company that it is not in compliance with a 
listing requirement

[[Page 80488]]

and allow the company to provide a plan to regain compliance. 
Consistent with deficiencies from most other rules that allow a company 
to submit a plan to regain compliance,\166\ Nasdaq proposes to allow 
companies deficient under proposed Rule 5606 45 calendar days to submit 
a plan in accordance with Rule 5810(c)(2) to regain compliance and, 
based on that plan, Nasdaq can provide the company with up to 180 days 
to regain compliance. If the company does not do so, it would be issued 
a Staff Delisting Determination, which the company could appeal to a 
Hearings Panel pursuant to Rule 5815. Although proposed Rule 5606 is 
not identical to the current Commission requirements, it is similar to, 
and does not deviate from, the Commission's CD&I related to Items 
401(e)(1) and 407(c)(2)(vi) of Regulation S-K. Moreover, the proposed 
rule strengthens the Commission's requirements by providing clarity to 
the definition of diversity and streamlining investors' desire for 
clear, complete and consistent disclosures. Nasdaq believes that the 
format of the Board Diversity Matrix and the information that it will 
provide offers greater transparency into a company's board composition 
and will enable the data to be easily aggregated across issuers.\167\ 
Nasdaq also believes that requiring annual disclosure of the data will 
ensure that the information remains current and easy for investors, 
data analysts and other parties to track.
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    \166\ Pursuant to Nasdaq Rule 5810(c)(2)(A)(iii), a company is 
provided 45 days to submit a plan to regain compliance with Rules 
5620(a) (Meetings of Shareholders), 5620(c) (Quorum), 5630 (Review 
of Related Party Transactions), 5635 (Shareholder Approval), 
5250(c)(3) (Auditor Registration), 5255(a) (Direct Registration 
Program), 5610 (Code of Conduct), 5615(a)(4)(D) (Partner Meetings of 
Limited Partnerships), 5615(a)(4)(E) (Quorum of Limited 
Partnerships), 5615(a)(4)(G) (Related Party Transactions of Limited 
Partnerships), and 5640 (Voting Rights). Pursuant to Nasdaq Rule 
5810(c)(2)(A)(iv), a company is also provided 45 days to submit a 
plan to regain compliance with Rule 5250(b)(3)(Disclosure of Third 
Party Director and Nominee Compensation). A company is generally 
provided 60 days to submit a plan to regain compliance with the 
requirement to timely file periodic reports contained in Rule 
5250(c)(1).
    \167\ Various stakeholders have requested easier aggregation. 
See Petition for Amendment of Proxy Rule, supra note 80, at 1.
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c. Diverse Board Representation or Explanation

    Nasdaq is proposing to adopt new Rule 5605(f)(2) to require each 
listed company to have, or explain why it does not have, at least two 
members of its board of directors who are Diverse, including at least 
one who self-identifies as Female and one who self-identifies as an 
Underrepresented Minority or LGBTQ+.\168\ A company does not need to 
provide additional public disclosures if the company discloses under 
Rule 5606 that it has at least two Diverse directors satisfying this 
requirement. The terms in the proposed definition of ``Underrepresented 
Minority'' reflect the EEOC's categories and are construed in 
accordance with the EEOC's definitions. Nasdaq has provided additional 
flexibility for Smaller Reporting Companies and Foreign Issuers 
(including Foreign Private Issuers).
---------------------------------------------------------------------------

    \168\ Nasdaq plans to publish an FAQ on the Listing Center 
clarifying that ``two members of its board of directors who are 
Diverse'' would exclude emeritus directors, retired directors and 
members of an advisory board.
---------------------------------------------------------------------------

    Under proposed Rule 5605(f)(3), if a company satisfies the 
requirements of Rule 5605(f)(2) by explaining why it does not have two 
Diverse directors, the company must: (i) Specify the requirements of 
Rule 5605(f)(2) that are applicable (e.g., the applicable subparagraph, 
the applicable diversity objectives, and the timeframe applicable to 
the company's market tier); and (ii) explain the reasons why it does 
not have two Diverse directors. Such disclosure must be provided: (i) 
In the company's proxy statement or information statement for its 
annual meeting of shareholders; or (ii) on the company's website. If 
the company provides such disclosure on its website, the company must 
also notify Nasdaq of the location where the information is available 
by submitting the URL link through the Nasdaq Listing Center no later 
than 15 calendar days after the company's annual shareholder meeting.
    Nasdaq would not assess the substance of the company's explanation, 
but would verify that the company has provided one. If the company has 
not provided any explanation, or has provided an explanation that does 
not satisfy subparagraphs (i) and (ii) of Rule 5605(f)(3), the 
explanation will not satisfy the requirements of Rule 5605(f)(3). For 
example, it would not satisfy Rule 5605(f)(3) merely to state that 
``the Company does not comply with Nasdaq's diversity rule.'' As 
described above, the company must specify the requirements of Rule 
5605(f)(2) that are applicable and explain the reasons why it does not 
have two Diverse directors. For example, a company could disclose the 
following to satisfy subparagraph (i) of Rule 5605(f)(3): ``As a 
Smaller Reporting Company listed on the Nasdaq Capital Market tier, the 
Company is subject to Nasdaq Rule 5605(f)(2)(C), which requires the 
company to have, or explain why it does not have, at least two Diverse 
directors, including at least one director who self-identifies as 
Female. Under Rule 5605(f)(7), the Company is required to have at least 
one Diverse director by March 10, 2023, and a second Diverse director 
by March 10, 2026. The Company has chosen to satisfy Rule 5605(f)(2)(C) 
by explaining its reasons for not meeting the diversity objectives of 
Rule 5605(f)(2)(C), which the Company has set forth below.''
i. Effective Dates and Phase-in Period
    Proposed Rule 5605(f)(7) provides a transition period before 
companies must fully satisfy the requirement to have two Diverse 
directors or explain why they do not upon the initial implementation of 
the rule. Under this transition rule, each company must have, or 
explain why it does not have, one Diverse director no later than two 
calendar years after SEC approval of the proposed rule (the ``Approval 
Date''), and two Diverse directors no later than (i) four calendar 
years after the Approval Date for companies listed on the Nasdaq Global 
Select (``NGS'') or Global Market (``NGM'') tiers, or (ii) five 
calendar years after the Approval Date for companies listed on the 
Nasdaq Capital Market (``NCM'') tier. For example, if the Approval Date 
is March 10, 2021, all companies would be required to have, or explain 
why they do not have, one Diverse director by March 10, 2023 and two 
Diverse directors by March 10, 2025 (for NGS/NGM companies) or March 
10, 2026 (for NCM companies).
    Under proposed Rule 5605(f)(5)(A), a newly listed company that was 
not previously subject to a substantially similar requirement of 
another national securities exchange will be allowed one year from the 
date of listing to satisfy the requirement described above. This 
``phase-in'' period applies to companies listing in connection with an 
initial public offering, a direct listing, a transfer from another 
exchange or the over-the-counter market, or through a business 
combination with an acquisition company listed under IM-5101-2, such 
that the company is no longer subject to IM-5101-2 after the 
combination. This phase-in period will apply after the end of the 
transition period provided in Rule 5605(f)(7). As a result, companies 
listing after the expiration of the phase-in periods provided by Rule 
5605(f)(7) would be provided with one year from the date of listing to 
satisfy the applicable requirement of Rule 5605(f)(2) to have, or 
explain why they do not have, at least two Diverse directors. Companies 
listing after the Approval Date, but prior to the expiration of the 
phase-in periods provided by Rule 5605(f)(7), would be

[[Page 80489]]

provided with the latter of the periods set forth in Rule5605(f)(7) or 
one year from the date of listing.
    Nasdaq believes this proposed period is consistent with the phase-
in periods granted to companies for Nasdaq's other board composition 
requirements. For example, Rule 5615(b)(1) provides a company listing 
in connection with its initial public offering one year to fully comply 
with the compensation and nomination committee requirements of Rules 
5605(d) and (e), and with the majority independent board requirement of 
Rule 5605(b). Similarly, SEC Rule 10A-3(b)(1)(iv)(A) allows a company 
up to one year from the date its registration statement is effective to 
fully comply with the applicable audit committee composition 
requirements. Nasdaq Rule 5615(b)(3) provides a one-year timeframe for 
compliance with the board composition requirements for companies 
transferring from other listed markets that do not have a substantially 
similar requirement.
ii. Foreign Issuers
    Nasdaq recognizes that the EEOC categories of race and ethnicity 
may not extend to all countries globally because each country has its 
own unique demographic composition. However, Nasdaq observed that on 
average, women tend to be underrepresented in boardrooms across the 
globe, holding an estimated 16.9% of board seats in 2018.\169\ As an 
official supporter of the United Nations Sustainable Stock Exchanges 
Initiative, Nasdaq recognizes that ensuring women have equal 
opportunities for leadership in economic decision making is one of the 
United Nations Sustainable Development Goals to be accomplished by 
2030.\170\ However, studies estimate that at current rates, it could 
take 18 \171\ to 34 years \172\ for U.S. companies to achieve gender 
parity on their boards.
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    \169\ See Deloitte, Women in the Boardroom, supra note 86.
    \170\ See United Nations Sustainable Stock Exchanges Initiative, 
Gender Equality, https://www.un.org/sustainabledevelopment/gender-equality/ (last accessed Nov. 24, 2020).
    \171\ See McKinsey & Company, supra note 36, at 17.
    \172\ See GAO Report, supra note 44, at 9 (estimating ``it could 
take about 10 years from 2014 for women to comprise 30 percent of 
board directors and more than 40 years for the representation of 
women on boards to match that of men'').
---------------------------------------------------------------------------

    Accordingly, under proposed Rule 5605(f)(2)(B), each Foreign Issuer 
must have, or explain why it does not have, at least two Diverse 
directors on its board, including at least one Female. Nasdaq proposes 
to provide Foreign Issuers with additional flexibility in that Foreign 
Issuers may satisfy the diversity requirement by having two Female 
directors. In addition, Foreign Issuers may also satisfy the diversity 
requirement by having one Female director, and an individual who self 
identifies as (i) LGBTQ+ or (ii) an underrepresented individual based 
on national, racial, ethnic, indigenous, cultural, religious or 
linguistic identity in the company's home country jurisdiction. 
Alternatively, a company could satisfy Rule 5605(f)(2)(B) by publicly 
explaining the company's reasons for not meeting the diversity 
objectives of the rule.
    Nasdaq proposes to define a Foreign Issuer under Rule 5605(f)(1) as 
(a) a Foreign Private Issuer (as defined in Rule 5005(a)(19)) or (b) a 
company that: (i) Is considered a ``foreign issuer'' under Rule 3b-4(b) 
under the Act; \173\ and (ii) has its principal executive offices 
located outside of the United States. This definition will include all 
Foreign Private Issuers (as defined in Rule 5005(a)(19)),\174\ and any 
foreign issuers that are not foreign private issuers so long as they 
are also headquartered outside of the United States. This is designed 
to recognize that companies that are not Foreign Private Issuers but 
are headquartered outside of the United States are foreign companies 
notwithstanding the fact that they file domestic SEC reports. It is 
also designed to exclude companies that are domiciled in a foreign 
jurisdiction without having a physical presence in that country. 
Proposed Rule 5605(f)(5)(B) will allow any company that ceases to be a 
Foreign Issuer one year from the date that the company no longer 
qualifies as a Foreign Issuer to satisfy the requirements of Rule 
5605(f).
---------------------------------------------------------------------------

    \173\ See 17 CFR 240.3b-4(b) (``The term foreign issuer means 
any issuer which is a foreign government, a national of any foreign 
country or a corporation or other organization incorporated or 
organized under the laws of any foreign country.'').
    \174\ Under Nasdaq Rule 5005(a)(19), the term Foreign Private 
Issuer has ``the same meaning as under Rule 3b-4 under the Act.''
---------------------------------------------------------------------------

    Nasdaq also proposes to revise Rule 5615 and IM-5615-3, which 
currently permit a Foreign Private Issuer to follow home country 
practices in lieu of the requirements set forth in the Rule 5600 
Series, subject to several exclusions. Nasdaq proposes to revise Rule 
5615 and IM-5615-3 to add Rules 5605(f) and 5606 to the list of 
excluded corporate governance rules. As a result, Foreign Private 
Issuers must satisfy the requirements of Rule 5605(f) and 5606 and may 
not follow home country practices in lieu of such requirements. 
However, Foreign Private Issuers that elect to follow an alternative 
diversity objective in accordance with home country practices, or are 
located in jurisdictions that restrict the collection of personal data, 
may satisfy the requirements of Rule 5605(f) by explaining their 
reasons for doing so instead of meeting the diversity objectives of the 
rule.
iii. Smaller Reporting Companies
    Nasdaq also recognizes that smaller companies, especially pre-
revenue companies that depend on the capital markets to fund ground-
breaking research and technological advancements, may not have the 
resources necessary to compensate an additional director or engage a 
search firm to search outside of directors' networks. In recognition of 
the resource constraints faced by smaller companies, Nasdaq proposes to 
provide each Smaller Reporting Company with additional flexibility. 
Specifically, these companies could satisfy the two Diverse directors 
objective under Rule 5605(f)(2)(C) by having two Female directors.
    Like other companies, Smaller Reporting Companies could also 
satisfy the two Diverse directors by having one Female director and one 
director who self-identifies as either (i) an Underrepresented 
Minority, or (ii) a member of the LGBTQ+ community. Alternatively, a 
company could satisfy Rule 5605(f)(2)(C) by publicly explaining the 
company's reasons for not meeting the diversity objectives of the rule. 
Under Rule 5605(f)(1), Nasdaq proposes to define a Smaller Reporting 
Company as set forth in Rule 12b-2 under the Act.\175\ Proposed Rule 
5605(f)(5)(B) will allow any company that ceases to be a Smaller 
Reporting Company one year from the date that the company no longer 
qualifies as a Smaller Reporting Company to satisfy the requirements of 
Rule 5605(f).
---------------------------------------------------------------------------

    \175\ Under 12b-2 of the Act, a Smaller Reporting Company 
``means an issuer that is not an investment company, an asset-backed 
issuer (as defined in Sec.  229.1101 of this chapter), or a 
majority-owned subsidiary of a parent that is not a smaller 
reporting company and that: (1) Had a public float of less than $250 
million; or (2) Had annual revenues of less than $100 million and 
either: (i) No public float; or (ii) A public float of less than 
$700 million.'' See 17 CFR 240.12b-2.
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iv. Cure Period
    Nasdaq proposes to adopt Rule 5605(f)(6) and a new Rule 
5810(c)(3)(F) to specify what happens if a company does not have at 
least two Diverse directors as set forth under Rule 5605(f)(2) and 
fails to provide the disclosure required by Rule

[[Page 80490]]

5605(f)(3).\176\ Under those provisions, the Listing Qualifications 
Department will promptly notify the company that it has until the 
latter of its next annual shareholders meeting, or 180 days from the 
event that caused the deficiency, to cure the deficiency. The company 
can cure the deficiency either by nominating additional directors so 
that it satisfies the Diversity requirement of Rule 5605(f)(2) or by 
providing the disclosure required by Rule 5605(f)(3). If a company does 
not regain compliance within the applicable cure period, the Listings 
Qualifications Department would issue a Staff Delisting Determination 
Letter. A company that receives a Staff Delisting Determination can 
appeal the determination to the Hearings Panel through the process set 
forth in Rule 5815. Nasdaq also proposes revising Rule 
5810(c)(2)(A)(iv) to make a non-substantive change clarifying that Rule 
5250(b)(3) is related to ``Disclosure of Third Party Director and 
Nominee Compensation.''
---------------------------------------------------------------------------

    \176\ Nasdaq proposes that existing Rules 5810(c)(3)(F) and (G) 
be renumbered as Rules 5810(c)(3)(G) and (H) respectively.
---------------------------------------------------------------------------

v. Exempt Companies
    Under proposed Rule 5605(f)(4), Nasdaq proposes to exempt the 
following types of companies from the requirements of Rule 5605(f) 
(``Exempt Companies''): acquisition companies listed under IM-5101-2; 
asset-backed issuers and other passive issuers (as set forth in Rule 
5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited 
partnerships (as set forth in Rule 5615(a)(4)); management investment 
companies (as set forth in Rule 5615(a)(5)); issuers of non-voting 
preferred securities, debt securities and Derivative Securities (as set 
forth in Rule 5615(a)(6)); and issuers of securities listed under the 
Rule 5700 Series. Proposed Rule 5605(f)(5)(B) will allow any company 
that ceases to be an Exempt Company one year from the date that the 
company no longer qualifies as an Exempt Company to satisfy the 
requirements of Rule 5605(f).
    Nasdaq believes it is appropriate to exempt these types of 
companies from the proposed rule because such companies do not have 
boards, do not list equity securities, or are not operating companies. 
These companies are already exempt from certain of Nasdaq's corporate 
governance standards related to board composition, as described in Rule 
5615.
d. Alternatives Considered
    Nasdaq considered whether requiring listed companies to have, or 
explain why they do not have, two Diverse directors would better 
promote the public interest than an alternative threshold or approach. 
Nasdaq's reasoned decision-making process included considering: (i) 
Mandate and disclosure-based approaches; (ii) higher and lower 
diversity objectives; (iii) longer and shorter timeframes; and (iv) 
broader and narrower definitions of ``Diverse.''
i. Mandate vs. Disclosure Based Approach
    Globally, gender mandates range from requiring at least one woman 
on the board,\177\ requiring two or more women based on board 
size,\178\ or requiring 30 to 50% women on the board.\179\ Some 
mandates vary by board size--for example, Norway imposes different 
standards for boards of two to three directors, four to five directors, 
six to eight directors, nine directors and ten or more directors.\180\ 
California imposes a higher standard for gender diversity that boards 
with five directors or six or more directors must satisfy by the end of 
2021 under S.B. 826, and a higher standard for underrepresented 
communities that boards with five to eight directors and nine or more 
directors must satisfy by the end of 2022 under A.B. 979. Nasdaq did 
not observe a common denominator among the mandates applicable to 
varying board sizes. However, Nasdaq considered criticism that a model 
based on various board sizes could subject companies to a higher 
threshold by virtue of adding directors.\181\ Based on Nasdaq data, the 
average board size of its listed companies is eight directors.
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    \177\ For example, the Securities and Exchange Board of India 
requires public companies to have at least one woman on the board. 
See Securities and Exchange Board of India (Listing Obligations and 
Disclosure Requirements) Regulations, Regulation 17(1)(a) (2015), 
available at: https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-january-10-2020-_37269.html. Similarly, the Israeli Companies Law requires 
public companies to have at least one woman on the board. See Paul 
Hastings, Breaking the Glass Ceiling: Women in the Boardroom 139 
(2018), available at: https://www.paulhastings.com/genderparity/. In 
the United States, California's S.B. 826 requires public companies 
headquartered in California to have at least one woman on the board. 
See Cal. S.B. 826, supra note 112, at Sec.  301.3(b)(3).
    \178\ For example, California's S.B. 826 requires public 
companies headquartered in California to have at least two women on 
the board if their board is comprised of five directors, and at 
least three women on the board if their board is comprised of six or 
more directors. See Cal. S.B. 826, supra note 112, at Sec.  
301.3(b)(1) and (2). Similar legislation has been proposed in New 
Jersey, Michigan and Hawaii. See N.J. Senate No. 3469, Sec.  3(b)(2) 
(2019); Mich. S.B. 115, Sec.  505a(2)(b) (2019); Haw. H.B. 2720, 
Sec.  414-1(b)(2) (2020).
    \179\ For example, Norway imposes a gender quota ranging from 
33%-50% depending on board size. See Paul Hastings, supra note 177, 
at 103. Portugal requires listed companies to have at least 33.3% 
women on boards by 2020. See Deloitte, Women in the Boardroom, supra 
note 86, at 143. Germany requires public companies with co-
determined boards (at least 50% employee representation) to have at 
least 30% women, and all other listed companies to establish a 
company-defined target. See Ulrike Binder and Guido Zeppenfeld, 
Mayer Brown, Germany Introduces Rules on Female Quota for 
Supervisory Boards and Leadership Positions (March 13, 2015), 
available at https://www.mayerbrown.com/en/perspectives-events/publications/2015/03/germany-introduces-rules-on-female-quota-for-super. Belgium requires listed companies to have at least 33% women 
on the board. See Deloitte, Women in the Boardroom, supra note 86, 
at 85. Austria requires listed companies with more than 1,000 
employees to have at least 30% women on the board. See id. at 81. 
Iceland requires public companies with more than 50 employees to 
have at least 40% women on the board. See Act respecting Public 
Limited Companies No. 2/199, Article 63, available at: https://www.government.is/publications/legislation/lex/2018/02/06/TRANSLATION-OF-RECENT-AMENDMENTS-OF-ICELANDIC-PUBLIC-AND-PRIVATE-LIMITED-COMPANIES-LEGISLATION-2008-2010-including-Acts-13-2010-sex-ratios-and-68-2010-minority-protection-remuneration/. France and 
Italy both require public companies to have at least 40% women on 
their boards. See Paul Hastings, supra note 177, at 91; White & 
Case, Italy increases gender quotas in corporate boards of listed 
companies (Jan. 29, 2020), available at: https://www.whitecase.com/publications/alert/italy-increases-gender-quotas-corporate-boards-listed-companies).
    \180\ See Paul Hastings, supra note 177, at 103.
    \181\ See David A. Katz and Laura A. McIntosh, Wachtell, Lipton, 
Rosen & Katz, Gender Diversity and Board Quotas, New York Law 
Journal (July 25, 2018), available at: https://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.26150.18.pdf (``California legislators 
dispute that the bill requires men to be displaced by women, noting 
that boards can simply increase their size. This may be easier said 
than done, however: Because the required quota increases with board 
size, a company with a four-man board that did not wish to force out 
a current director would need to add three women to accommodate the 
requirements of the law by 2021.'').
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    Soft targets ranging from 25% to 40% women on boards have been 
suggested by various corporate governance codes and corporate 
governance organizations. For example, Rule 4.1 of the Swedish 
Corporate Governance Code (the ``Code'') provides that listed companies 
are to ``strive for gender balance on the board.'' \182\ Each company's 
nominations committee is to publish a statement on its website at the 
time it issues notice of its shareholders meeting ``with regard to the 
requirement in rule 4.1, that the proposed composition of the board is 
appropriate according to the criteria set out in the Code and that the 
company is to strive for gender balance.'' \183\ Companies are not

[[Page 80491]]

required to comply with the Code, ``but are allowed the freedom to 
choose alternative solutions which they feel are better suited to their 
particular circumstances, as long as they openly report every 
deviation, describe the alternative solution they have chosen and 
explain their reasons for doing so.'' \184\ Signifying progress, in 
2019, 7% of nominations committees did not issue a statement on board 
gender balance, compared to 58% in 2013.\185\
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    \182\ See Swedish Corporate Governance Board, The Swedish 
Corporate Governance Code Sec.  4.1 17 (eff. Jan. 1, 2020), 
available at: http://www.bolagsstyrning.se/UserFiles/Koden/The_Swedish_Corporate_Governance_Code_1_January_2020.pdf.
    \183\ See Swedish Corporate Governance Board, Annual Report 2020 
22 (August 2020), available at: http://www.bolagsstyrning.se/userfiles/archive/3930/kodkoll_arsrapport-2020_eng.pdf.
    \184\ See Swedish Corporate Governance Board, Gender balance on 
boards of listed companies: The Swedish Corporate Governance Board 
assesses the situation ahead of this year's AGMs (February 3, 2015), 
available at: http://www.bolagsstyrning.se/userfiles/archive/3856/pressrelease_gender_2014-02-03.pdf.
    \185\ See Swedish Corporate Governance Board, Annual Report 
2020, supra note 183, at 22.
---------------------------------------------------------------------------

    In 2015, the Swedish Corporate Governance Board, which is 
responsible for administering the Code, established a goal to achieve 
representation of women on boards of small/mid cap (and Swedish 
companies listed on NGM Equity) and large cap companies of 30% and 35%, 
respectively, by 2017. Further, the Board aimed to achieve 40% 
representation of women on boards of all listed Swedish companies by 
2020.\186\ Based on data as of June 30, 2020, among listed companies, 
women accounted for 32.7% of board seats on small/mid cap companies and 
NGM Equity, 38.6% of large cap companies and 34.7% of all listed 
companies.\187\
---------------------------------------------------------------------------

    \186\ See Swedish Corporate Governance Board, Gender balance, 
supra note 184.
    \187\ See Swedish Corporate Governance Board, Statistics 
regarding gender balance (July 15, 2020), available at: http://www.bolagsstyrning.se/userfiles/archive/3922/200715_gender_balance_on_boards.pdf; see also Sammanfattning, 
available at http://www.bolagsstyrning.se/userfiles/archive/3922/statistik_konsfordelning_2020.pdf.
---------------------------------------------------------------------------

    In the United Kingdom, the Financial Conduct Authority requires 
companies with a premium listing on the London Stock Exchange to 
publicly disclose whether or not they comply with the Financial 
Reporting Council's U.K. Corporate Governance Code (the ``U.K. Code''), 
and if not, to explain their reasons for non-compliance.\188\ Provision 
23 of the U.K. Code requires each company to publicly describe ``the 
work of the nomination committee, including . . . the policy on 
diversity and inclusion, its objectives and linkage to company 
strategy, how it has been implemented and progress on achieving the 
objectives,'' \189\ and Principle J states that board appointments and 
succession planning should, among other things, ``promote diversity of 
gender, social and ethnic backgrounds.'' \190\ In addition, the 
Companies Act requires companies to disclose gender diversity 
statistics among the board, management and employees.\191\ In 2018, the 
Financial Reporting Council reported that 83% of FTSE 100 and 74% of 
FTSE 250 companies had established a board diversity policy specifying 
gender, with approximately \1/3\ specifying ethnicity.\192\ More 
recently, a report commissioned by the Financial Reporting Council 
concluded that there is a lack of public disclosure regarding the 
LGBTQ+ status among directors and executives of public companies. While 
the report did not recommend amending Principle J of the U.K. Code to 
consider sexual orientation or gender identity, it emphasized that the 
U.K. Code ``seeks to promote diversity and inclusion of all minority 
groups within business'' \193\ and suggested that the government 
``update corporate reporting requirements to require companies to 
demonstrate how they intend to capture data on the sexual orientation 
and gender identity of staff.'' \194\
---------------------------------------------------------------------------

    \188\ See Financial Conduct Authority, LR 9.8.6(6), available 
at: https://www.handbook.fca.org.uk/handbook/LR/9/8.html; see also 
Financial Reporting Council, The UK Corporate Governance Code 3 
(July 2018), available at https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF. In addition, ``[i]n 2016, the [UK] Government also 
implemented the relevant provision of the EU Non-Financial Reporting 
Directive with a new reporting requirement in the FCA's Disclosure 
and Transparency Rules. This requires issuers (excluding [small and 
medium-sized enterprises]) admitted to trading on an EU regulated 
market to disclose their diversity policy in the corporate 
governance statement.'' See Financial Reporting Council, Board 
Diversity Reporting 5 (September 2018), available at: https://www.frc.org.uk/getattachment/62202e7d-064c-4026-bd19-f9ac9591fe19/Board-Diversity-Reporting-September-2018.pdf.
    \189\ See Financial Reporting Council, The UK Corporate 
Governance Code, supra note 188, at 9.
    \190\ Id. at 8.
    \191\ See UK Companies Act 2006, Sec.  414C.
    \192\ See Financial Reporting Council, Board Diversity 
Reporting, supra note 188, at 9.
    \193\ See Hay et al., supra note 98, at 37.
    \194\ Id.
---------------------------------------------------------------------------

    In 2011, the Davies Review called on FTSE 100 boards to achieve 25% 
women on boards by 2015.\195\ After that milestone was achieved, the 
Hampton Alexander Review encouraged FTSE 350 boards to have \1/3\ women 
by 2020, and it has been achieved by FTSE 100 companies.\196\ In 2017, 
the Parker Review called on FTSE 100 and 250 companies to have at least 
one director of color by 2021 and 2024, respectively.\197\ As of 
February 2020, approximately 37% of FTSE 100 companies surveyed and 59% 
of FTSE 350 companies surveyed did not have one director of color on 
their board.\198\
---------------------------------------------------------------------------

    \195\ See Women on boards, supra note 96.
    \196\ See Hampton-Alexander Review: FTSE Women Leaders (November 
2016), available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/613085/ftse-women-leaders-hampton-alexander-review.pdf.
    \197\ See Parker, supra note 97.
    \198\ See Sir John Parker, Ethnic Diversity Enriching Business 
Leadership 19 (Feb. 5, 2020), available at: https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-parker-review-2020-report-final.pdf.
---------------------------------------------------------------------------

    Australian Securities Exchange (``ASX'')-listed companies must 
comply with the ASX Corporate Governance Council's Corporate Governance 
Principles and Recommendations (the ``ASX Recommendations'') or explain 
why they do not. The ASX Recommendations require companies to have and 
disclose a diversity policy with measurable objectives and report on 
progress towards meeting those objectives. If the company is in the 
ASX/S&P 300, its objective for achieving gender diversity should be at 
least 30%.\199\ The Australian government also requires companies with 
100 or more employees to provide an annual report about gender equality 
indicators, including the gender composition of the board and the rest 
of the workforce.\200\ In 2015, the ASX and KPMG found that 99% of S&P/
ASX 200 companies and 88% of ASX 201-500 companies disclosed 
establishing a diversity policy rather than explaining why they do not 
have one.\201\ As of July 2020, women account for 28.4% and 31.8% of 
board seats among ASX 300 and ASX 100 companies, respectively.\202\
---------------------------------------------------------------------------

    \199\ See ASX Corporate Governance Council, Corporate Governance 
Principles and Recommendations 9 (4th ed. Feb. 2019), available at: 
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf.
    \200\ Workplace Gender Equality Act 2012, Part IV Sec.  13 
(March 25, 2015), available at: https://www.legislation.gov.au/Details/C2015C00088.
    \201\ See KPMG and ASX, ASX Corporate Governance Council 
Principles and Recommendations on Diversity: Analysis of disclosures 
for financial years ended 1 January 2015 and 31 December 2015 4 
(2016) available at: https://www.asx.com.au/documents/asx-compliance/asx-corp-governance-kpmg-diversity-report.pdf.
    \202\ See KPMG and 30% Club, Building Gender Diversity on ASX 
300 Boards: Seven Learnings from the ASX 200 4 (July 2020), 
available at: https://assets.kpmg/content/dam/kpmg/au/pdf/2020/building-gender-diversity-asx-300-boards.pdf. The report also noted 
that diversity counteracts groupthink and that ASX 201-299 companies 
with at least 30% female directors ``are more likely than not to 
[have seen] market capitalisation increases over the past 12 
months.'' Id. at 6.
---------------------------------------------------------------------------

    Nasdaq observed that women account for at least 30% of the boards 
of the largest companies in Australia, Sweden and the United Kingdom, 
and in three other countries that have implemented disclosure 
requirements or suggested milestones on a comply-or-explain

[[Page 80492]]

basis: Finland, New Zealand, and Canada.\203\ Nasdaq considered that 
countries that have implemented mandates have also seen progress in 
women's representation on boards, including, for example, Austria, 
Iceland, Belgium, France, Germany, Italy and Portugal.\204\ On average, 
women account for 31% of board seats in countries with gender 
mandates.\205\
---------------------------------------------------------------------------

    \203\ See The Conference Board of Canada, Data Dashboard (Sept. 
23, 2020), available at: https://www.conferenceboard.ca/focus-areas/inclusion/2020/aob-comparisons-around-the-world-table?AspxAutoDetectCookieSupport=1; Andrew MacDougall et al., 
Osler, Diversity Disclosure Practices 4 (2020), available at https://www.osler.com/osler/media/Osler/reports/corporate-governance/Diversity-and-Leadership-in-Corporate-Canada-2020.pdf. But see Heike 
Mensi-Klarbach et al., The Carrot or the Stick: Self-Regulation for 
Gender-Diverse Boards via Codes of Good Governance, J. Bus. Ethics 
11 (2019), available at: https://doi.org/10.1007/s10551-019-04336-z 
(reviewing longitudinal data from 2006 to 2016 on listed and state-
owned companies in Austria and concluding that ``self-regulation of 
gender diversity on boards is ineffective if merely based on 
recommendations in codes of good governance''). Mensi-Klarbach 
recommends setting concrete targets and providing public monitoring 
to improve the effectiveness of comply-or-explain frameworks.
    \204\ See Paul Hastings, supra note 177; see also Deloitte, 
Women in the Boardroom, supra note 86.
    \205\ See Paul Hastings, supra note 177; The Conference Board of 
Canada, supra note 203.
---------------------------------------------------------------------------

    Nasdaq discussed the benefits and challenges of mandate and comply-
or-explain models with over a dozen stakeholders, and while the 
majority of organizations were in agreement that companies would 
benefit from a regulatory impetus to drive meaningful and systemic 
change in board diversity, the majority also stated that a disclosure-
based approach would be more palatable to the U.S. business community 
than a mandate. Most organizations Nasdaq spoke with expressed general 
discomfort with mandates, although they acknowledged that opposition is 
lessening in the wake of California's S.B. 826 \206\ and A.B. 979.\207\ 
While many recognized that mandates can force boards to act more 
quickly and accelerate the rate of change, they believe that a 
disclosure-based approach is less controversial and would spur 
companies to take action and achieve the same results. Some 
stakeholders also highlighted additional challenges that smaller 
companies and companies in certain industries may face finding diverse 
board members. In contrast, a disclosure-based framework that provides 
companies with flexibility would empower companies to maintain 
decision-making authority over their board's composition while 
providing stakeholders with a better understanding of the company's 
current board composition and its philosophy regarding diversity. This 
approach would better inform the investment community and enable more 
informed analysis of, and conversations with, companies. Nasdaq 
believes that these goals will be achieved through the disclosure of 
consistent, comparable data across companies, as would be required by 
the Exchange's proposed definition of Diverse.
---------------------------------------------------------------------------

    \206\ See Cal. S.B. 826, supra note 112.
    \207\ See Cal. A.B. 979, supra note 112.
---------------------------------------------------------------------------

    For example, if, under Israeli law regarding board diversity, an 
Israeli company is required only to have a minimum of one woman on the 
board and such Israeli company chooses to comply with Israeli home 
country law in lieu of meeting the diversity objectives of Rule 
5605(f)(2)(B), it may choose to disclose that ``the Company is 
incorporated in Israel and required by Israeli law to have a minimum of 
one woman on the board, and satisfies home country requirements in lieu 
of Nasdaq Rule 5605(f)(2)(B), which requires each Foreign Issuer to 
have at least two Diverse directors.'' If a U.S. company had two 
Diverse directors but one resigned due to unforeseen circumstances, it 
could disclose, for example: ``Due to the unexpected resignation of Ms. 
Smith this year, the Company does not have at least one director who 
self-identifies as Female and one director who self-identifies as an 
Underrepresented Minority or LGBTQ+. We intend to undertake reasonable 
efforts to meet the diversity objectives of Rule 5605(f)(2)(A) prior to 
our next annual shareholder meeting and have engaged a search firm to 
identify qualified Diverse candidates. However, due to unforeseen 
circumstances, we may not achieve this goal.'' Or a U.S. company may 
disclose that it chooses to define diversity more broadly than Nasdaq's 
definition by considering national origin, veteran status or 
individuals with disabilities when identifying nominees for director 
because it believes such diversity brings a wide range of perspectives 
and experiences to the board. In each case, investors will have a 
better understanding of the company's reasons for not having at least 
two Diverse directors and can use that information to make an informed 
investment or voting decision.
ii. Higher vs. Lower Diversity Objectives
    Nasdaq observed that existing empirical research spanned companies 
across several countries, including the United States, Spain, China, 
Canada, France and Norway. Nasdaq considered that the studies related 
to company performance and board diversity found positive associations 
at various levels and measures of board diversity, including having at 
least one woman on the board,\208\ two or more diverse directors (with 
diverse considered female, Black, Hispanic or Asian),\209\ at least 
three women on the board \210\ and being in the top quartile for gender 
and ethnic diversity.\211\
---------------------------------------------------------------------------

    \208\ See Credit Suisse, supra note 30, at 16.
    \209\ See Thomas and Starr, supra note 23, at 5.
    \210\ See Eastman et al., supra note 31, at 3; Wagner, supra 
note 32.
    \211\ See McKinsey, supra note 36.
---------------------------------------------------------------------------

    Nasdaq considered that the academic studies related to investor 
protection and board diversity found positive associations at various 
levels and measures of board diversity, including having at least one 
woman on the board \212\ or up to 50% women on the board, and the 
assertions of certain academics that their findings may extend to other 
forms of diversity, including racial and ethnic diversity.\213\ Nasdaq 
also reviewed academic research suggesting that ``critical mass'' is 
achieved by having three or more women on the board, and that having 
only one diverse director on the board risks ``tokenism.'' \214\ Nasdaq 
considered that although the legislation enacted by Norway and 
California, and proposed by several other states, varies based on board 
size, the academic research considered companies across a spectrum of 
sizes and board sizes, including Fortune 100, S&P 500, Fortune 1000 and 
smaller (non-Fortune 1000) companies.
---------------------------------------------------------------------------

    \212\ See Abbott et al., supra note 58; Chen et al., supra note 
64.
    \213\ See Wahid, supra note 59; Cumming et al., supra note 62, 
at 34.
    \214\ See Alison M. Konrad et al., Critical Mass: The Impact of 
Three or More Women on Corporate Boards, 37(2) Org. Dynamics 145 
(April 2008); Miriam Schwartz-Ziv, Gender and Board Activeness: The 
Role of a Critical Mass, 52(2) J. Fin. & Quant. Analysis 751 (April 
2017); Mariateresa Torchia et al., Women Directors on Corporate 
Boards: From Tokenism to Critical Mass, 102(2) J. Bus. Ethics. 299 
(Feb. 25, 2011), available at https://ssrn.com/abstract=1858347.
---------------------------------------------------------------------------

    Nasdaq concluded that there is no ``one-size fits all'' approach to 
promoting board diversity and that the academic literature regarding 
the relationship between board diversity, company performance and 
investor protections is continuing to evolve. However, in Nasdaq's 
survey of academic studies described above--and of the targets or 
mandates promulgated by regulatory bodies and organizations worldwide--
Nasdaq observed a common denominator of having at least one woman on 
the board. Similarly, Nasdaq observed a common denominator of having at 
least one director who is diverse in terms of race, ethnicity or sexual 
orientation among

[[Page 80493]]

the requirements related to, and academic research considering, board 
diversity beyond gender identity. Nasdaq therefore believes that a 
diversity objective of at least two Diverse directors provides a 
reasonable baseline for comparison across companies. Companies are not 
precluded from meeting a higher or lower alternative measurable 
objective. For example, a company may choose to disclose that it does 
not meet the diversity objectives under Rule 5605(f)(2) because it is 
subject to an alternative standard under state or foreign laws and has 
chosen to satisfy that diversity objective instead. On the other hand, 
many firms may strive to achieve even greater diversity than the 
objectives set forth in Nasdaq's proposed rule. Nasdaq believes that 
providing flexibility and clear disclosure when the company determines 
to follow a different path will improve the quality of information 
available to investors who rely on this information to make informed 
investment and voting decisions.
iii. Longer vs. Shorter Timeframes
    Nasdaq considered whether an alternative timeframe for satisfying 
the diversity objectives of Rule 5605(f)(2) would better promote the 
public interest than the timeframe Nasdaq has proposed under Rule 
5605(f)(7). While companies are not precluded from adding additional 
directors to their boards to satisfy Rule 5605(f)(2) by having two 
Diverse directors sooner than contemplated by the proposed rule, Nasdaq 
understands that some companies may need to obtain shareholder approval 
to amend their governing documents to allow for board expansion. Other 
companies may choose to replace an existing director on the board with 
a Diverse director, and board turnover may be low.\215\ Nasdaq 
recognizes that it also takes substantial lead time to identify, 
interview and select board nominees. To provide companies with 
sufficient time to satisfy Rule 5605(f) by having two Diverse 
directors, while recognizing that investors are calling for expedient 
change, Nasdaq has structured its proposal similarly to the approach 
taken by California, where companies must achieve one target by an 
earlier date and satisfy the entire diversity objective at a later 
date. Nasdaq also considered the approaches taken by foreign 
jurisdictions to implement diversity objectives. For example, Belgium 
and France implemented diversity objectives under a phased approach 
that provided companies with at least five years to fully satisfy the 
objectives,\216\ whereas Iceland and Portugal provided companies with 
three years or less.\217\
---------------------------------------------------------------------------

    \215\ See Matteo Tonello, Corporate Board Practices in the 
Russell 3000 and S&P 500, Harv. L. Sch. Forum on Corp. Governance 
(Oct. 18, 2020), https://corpgov.law.harvard.edu/2020/10/18/corporate-board-practices-in-the-russell-3000-and-sp-500/ (last 
accessed Nov. 24, 2020).
    \216\ See Paul Hastings, supra note 177, at 79 and 90; see also 
supra note 179.
    \217\ See Deloitte, Women in the Boardroom, supra note 86, at 
115 and 143; see also supra note 179.
---------------------------------------------------------------------------

    While companies may choose to satisfy Rule 5605(f)(2) on an 
alternative timeframe, a company that chooses a timeframe that is 
longer than the timeframes set forth in Rule 5605(f)(7) also must 
publicly explain its reasons for doing so. For example, an NGM-listed 
company that, while not technically a Smaller Reporting Company, views 
itself as similarly situated to a NCM-listed Smaller Reporting Company 
may disclose the following: ``While the Company is listed on NGM and 
technically qualifies as a Smaller Reporting Company, it does not file 
its SEC reports utilizing the Smaller Reporting Company designation. 
However, the Company believes that it is similarly situated to other 
Smaller Reporting Companies listed on NCM in terms of its annual 
revenues and public float, and therefore has chosen to satisfy Rule 
5605(f)(2)(C) in lieu of Rule 5605(f)(2)(A) and has satisfied this 
requirement by having at least two Diverse directors on the board who 
self-identify as Female within the timeframe provided under Rule 
5605(f)(7) applicable to NCM-listed companies.''
iv. Broader vs. Narrower Definition of Diverse
    Nasdaq considered whether the definition of Diverse should include 
broader characteristics than those reported on the EEO-1 report, such 
as the examples provided by the Commission's CD&I, including LGBTQ+, 
nationality, veteran status, and individuals with disabilities. During 
its stakeholder outreach, Nasdaq inquired whether a broad definition of 
Diversity would promote the public interest. While recognizing the 
diverse perspectives that different backgrounds can provide, most 
stakeholders supported a narrower definition of Diversity focused on 
gender, race and ethnicity, with several supporting broadening the 
definition to include the LGBTQ+ community.
    As discussed above, companies currently are permitted to define 
diversity ``in ways they consider appropriate'' under federal 
securities laws. One of the challenges of this principles-based 
approach has been the disclosure of inconsistent and noncomparable data 
across companies. However, most companies are required by law to report 
data on race, ethnicity and gender to the EEOC through the EEO-1 
Report. Nasdaq believes that adopting a broad definition of Diverse 
would maintain the status quo of inconsistent, noncomparable 
disclosures, whereas a narrower definition of Diverse focused on race, 
ethnicity, sexual orientation and gender identity will promote the 
public interest by improving transparency and comparability. Nasdaq 
also is concerned that the broader definitions of diversity utilized by 
some companies may result in Diverse candidates being overlooked, and 
may be hindering meaningful progress on improving diversity related to 
race, ethnicity, sexual orientation and gender identity. For example, a 
company may consider diversity to include age, education and board 
tenure. While such characteristics may provide laudable cognitive 
diversity, this focus may result in a homogenous board with respect to 
race, ethnicity, sexual orientation and gender identity that, by 
extension, does not reflect the diversity of a company's communities, 
employees, investors or other stakeholders.
    Nasdaq also believes that a transparent, consistent definition of 
Diverse would provide stakeholders with a better understanding of the 
company's current board composition and its philosophy regarding 
diversity if it does not have two Diverse directors. This would enable 
the investment community to conduct more informed analysis of, and have 
more informed conversations with, companies. To the extent a company 
chooses to satisfy the requirement of Rule 5605(f)(2) by having at 
least two Diverse directors on its board, it will have the ancillary 
benefit of making meaningful progress in improving board diversity 
related to race, ethnicity, sexual orientation and gender identity.
    Nasdaq's review of academic research on board diversity revealed a 
dearth of empirical analysis on the relationship between investor 
protection or company performance and broader diversity characteristics 
such as veteran status or individuals with disabilities.\218\ Nasdaq

[[Page 80494]]

acknowledges that there also is a lack of published research on the 
issue of LGBTQ+ representation on boards.\219\ This may be due to a 
lack of consistent, transparent data on broader diverse attributes, or 
because there is no voluntary self-disclosure workforce reporting 
requirements for LGBTQ+ status, such as the EEO-1 reporting framework 
for race, ethnicity, and gender. In any event, it is evident that while 
``[b]oardroom diversity is a topic that has gained significant traction 
. . . LGBT+ diversity, however, has largely been left out of the 
conversation.'' \220\
---------------------------------------------------------------------------

    \218\ KPMG (2020) states that veterans are underrepresented in 
boardrooms, with retired General and Flag Officers (``GFOs'') 
occupying less than 1% of Fortune 500 board seats. See KPMG, The 
value of veterans in the boardroom 1 (2020), available at: https://boardleadership.kpmg.us/content/dam/boardleadership/en/pdf/2020/the-value-of-veterans-in-the-boardroom.pdf (noting that ``[r]etired GFOs 
who have honed their leadership and critical decision-making skills 
in a high-threat environment can bring extensive risk oversight 
experience to the board, which may be especially valuable in the 
context of today's risk landscape''). Accenture (2018) observed that 
companies that offered inclusive working environments for employees 
with disabilities achieved an average of 28% higher revenue, 30% 
higher economic profit margins, and 2x net income than their 
industry peers. See Accenture, Getting to Equal: The Disability 
Inclusion Advantage (2018), available at: https://www.accenture.com/_acnmedia/PDF-89/Accenture-Disability-Inclusion-Research-Report.pdf.
    \219\ See Credit Suisse ESG Research, supra note 33, at 1; see 
also Out Leadership, supra note 35.
    \220\ See Out Leadership, supra note 35, at 3.
---------------------------------------------------------------------------

    Nonetheless, Nasdaq believes it is reasonable and in the public 
interest to include a reporting category for LGBTQ+ in recognition of 
the U.S. Supreme Court's recent affirmation that sexual orientation and 
gender identity are ``inextricably'' intertwined with sex,\221\ and 
based on studies demonstrating a positive association between board 
diversity and decision making, company performance and investor 
protections. Nasdaq also believes that the proposed rule would foster 
the development of data to conduct meaningful assessments of the 
association between LGBTQ+ board diversity, company performance and 
investor protections.
---------------------------------------------------------------------------

    \221\ See Bostock v. Clayton Cnty., supra note 160.
---------------------------------------------------------------------------

    As noted above, the proposal does not preclude companies from 
considering additional diverse attributes, such as nationality, 
disability, or veteran status in selecting board members; however, 
company would still have to provide the required disclosure under Rule 
5605(f)(3) if the company does not also have at least two directors who 
are Diverse. Nor would the proposal prevent companies from disclosing 
information related to other diverse attributes of board members beyond 
those highlighted in the rule if they felt such disclosure would 
benefit investors. Nasdaq believes such disclosure would help inform 
the evolving body of research on the relationship between broader 
diverse attributes, company performance and investor protection and 
provide investors with additional information about the company's 
philosophy regarding broader diversity characteristics.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\222\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\223\ in that it is designed to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, to prevent fraudulent and manipulative acts 
and practices, and, in general, to protect investors and the public 
interest, for the reasons set forth below. Further, Nasdaq believes the 
proposal is not designed to permit unfair discrimination between 
issuers or to regulate by virtue of any authority conferred by the Act 
matters not related to the purposes of the Act or the administration of 
the Exchange, for the reasons set forth below.
---------------------------------------------------------------------------

    \222\ See 15 U.S.C. 78f(b).
    \223\ Id. Sec.  78f(b)(5).
---------------------------------------------------------------------------

I. Board Statistical Disclosure

    Nasdaq has proposed what it believes to be a straightforward and 
clear approach for companies to publish their statistical data pursuant 
to proposed Rule 5606. The disclosure will assist investors in making 
more informed decisions by making meaningful, consistent, and reliable 
data readily available and in a clear and comprehensive format 
prescribed by the proposed rule. Nasdaq also believes that the 
disclosure format required by proposed Rule 5606 protects investors by 
eliminating data collection inaccuracies and decreasing costs, while 
enhancing investors' ability to utilize the information.
    As a threshold matter, as discussed above, diversity has become an 
increasingly important subject and, in recent years, investors 
increasingly have been advocating for greater board diversity and for 
the disclosure of board diversity statistics. The current board 
diversity disclosure regime is lacking in several respects, and Nasdaq 
believes that its proposed Rule 5606 addresses many of the current 
concerns and responds to investors' demands for greater transparency 
into the diversity characteristics of a company's board composition by 
mandating disclosure and curing certain deficiencies that exist within 
the current SEC disclosure requirements.
    Investors have expressed their dissatisfaction with having to 
independently collect board-level data about race, ethnicity and gender 
identity because such investigations can be time consuming, expensive, 
and fraught with inaccuracies.\224\ The lack of consistency and 
specificity in Regulation S-K has been a major impediment for many 
investors and data collectors. As a general matter, the Commission's 
requirements have not addressed the concerns expressed by commenters 
that ``disclosure about board diversity was important information to 
investors.'' \225\ Nasdaq believes that its proposed Rule 5606 
addresses many of the concerns that have been raised.
---------------------------------------------------------------------------

    \224\ See Petition for Amendment of Proxy Rule, supra note 80, 
at 2.
    \225\ See Proxy Disclosure Enhancements, 74 FR at 68,343-44 
(amending Item 407(c)(2)(vi) of Regulation S-K, codified at 17 CFR 
229.407(c)(2)(vi)).
---------------------------------------------------------------------------

    Nasdaq believes that requiring the annual disclosure of a company's 
board diversity, as proposed in Rule 5606(a), will provide consistent 
information to the public and will enable investors to continually 
review the board composition of a company to track trends and simplify 
or eliminate the need for a company to respond to multiple investor 
requests for information about the diverse characteristics of the 
company's board. Requiring annual disclosures also would make 
information available to investors who otherwise would not be able to 
obtain individualized disclosures.\226\ Moreover, consistent 
disclosures may encourage boards to consider a wider range of board 
candidates in the nomination process, including candidates with fewer 
ties to the current board.\227\
---------------------------------------------------------------------------

    \226\ See Petition for Rulemaking, supra note 123.
    \227\ See Proxy Disclosure Enhancements, 74 FR at 68,355 (``To 
the extent that boards branch out from the set of candidates they 
would ordinarily consider, they may nominate directors who have 
fewer existing ties to the board or management and are, 
consequently, more independent.''); Hazen and Broome, supra note 
114, at 57-58.
---------------------------------------------------------------------------

    The Commission's 2009 amendments to Regulation S-K provide no 
definition for diversity and do not explicitly require disclosures 
specifically related to details about the board's gender, racial, 
ethnic and LGBTQ+ composition. Additionally, the Commission's CD&I does 
not address the definition of diversity, and it requires a registrant 
to disclose diversity information only in certain limited 
circumstances. Investors have expressed that current regulations and 
accompanying interpretations impair their ability to obtain clear and 
consistent data.\228\ As a result, Nasdaq believes that proposed Rule 
5606(a) protects investors and the public

[[Page 80495]]

interest by making clear that a company's annual diversity data 
disclosure must include information related to gender identity, race, 
ethnicity and LGBTQ+ status, thereby leaving less discretion for 
companies to selectively disclose certain diversity information and 
enhancing the comparability of such data across companies. Moreover, it 
is in the public interest to provide clear requirements for diversity 
disclosure, and Nasdaq's proposed Board Diversity Matrix format 
provides such clarity.
---------------------------------------------------------------------------

    \228\ See Petition for Amendment of Proxy Rule, supra note 80, 
at 2; Petition for Rulemaking, supra note 123, at 7.
---------------------------------------------------------------------------

    Nasdaq does not intend to obligate directors to self-identify in 
any of the categories related to gender identity, race, ethnicity and 
LGBTQ+. Nasdaq believes that a director should have autonomy to decide 
whether to provide such information to their company. Therefore, Nasdaq 
believes that it is reasonable and in the public interest to allow 
directors to opt out of disclosing the information required by proposed 
Rule 5606(a) by permitting a company to identify such directors in the 
``Undisclosed'' category.
    Nasdaq believes that it is in the public interest to utilize the 
Board Diversity Matrix format for all companies as proposed in Rule 
5606(a). Additionally, Nasdaq believes that the format removes any 
impediments to aggregating and analyzing data across all companies by 
requiring each company to disclose separately the number of male, 
female, and non-binary directors, the number of male, female, and non-
binary directors that fall into certain racial and ethnic categories, 
and the number of directors that identify as LGBTQ+. The format allows 
investors to easily disaggregate the data and track directors with 
multiple diversity characteristics.
    As discussed above, most listed companies are required by law to 
complete an EEOC Employer Information Report EEO-1 Form. Although 
outside directors generally are not employees and therefore are not 
covered in the EEO-1,\229\ Nasdaq believes that collecting the 
information required by proposed Rule 5606(a) is familiar to most 
companies, and that it is reasonable to require disclosure of the 
additional board information.
---------------------------------------------------------------------------

    \229\ The EEO-1 Form does not require a company to disclose data 
for outside directors because such directors are not company 
employees.
---------------------------------------------------------------------------

    Nasdaq also believes that requiring currently listed companies to 
comply with proposed Rule 5606 within one year from the date of 
Commission approval is a reasonable amount of time, given that most 
companies already collect similar information for certain employees. 
Moreover, most companies are required to prepare an annual proxy 
statement and update the Commission within four business days when a 
new director is appointed to the board.\230\
---------------------------------------------------------------------------

    \230\ See SEC Form 8-K, available at: https://www.sec.gov/files/form8-k.pdf.
---------------------------------------------------------------------------

    Further, Nasdaq believes that the disclosure required by proposed 
Rule 5606(a) will remove impediments to shareholders by making 
available information related to board-level diversity in a 
standardized manner, thereby enhancing the consistency and 
comparability of the information and helping to better protect 
investors. The proposed disclosure will also help protect investors and 
the public interest by enabling investors to determine the total number 
of diverse directors, which is information that is not consistently 
available in existing proxy disclosures in cases where a single 
director has multiple diverse characteristics. While companies can 
elect to make this information available either in a proxy statement or 
on the company's website, Nasdaq believes it is in the public interest 
to allow companies the option to provide the disclosure in a way they 
believe will be most meaningful to their shareholders.
    Nasdaq recognizes that the proposed definition of Underrepresented 
Minority in Rule 5605(f)(1) may not apply to companies outside of the 
United States because each country has its own unique demographic 
composition. Moreover, Nasdaq's definition of Underrepresented Minority 
proposed in Rule 5606(f)(1) may be inapplicable to a Foreign Issuer, 
making this Board Matrix data less relevant for such companies and not 
useful for investors. Therefore, Nasdaq believes that offering Foreign 
Issuers the option of a separate template that requires different 
disclosure categories will provide investors with more accurate 
disclosures related to the diversity of directors among the board of a 
Foreign Issuer. Additionally, Nasdaq believes that providing an 
``Underrepresented Individual in Home Country Jurisdiction'' category 
provides Foreign Issuers with more flexibility to identify and disclose 
diverse directors within their home countries.
    The annual requirement in the proposed rule will guarantee that the 
information is available to the public on a continuous and consistent 
basis. As described in the instructions to the Board Diversity Matrix 
disclosure form and Rule 5606(a), each year following the first year 
that a company publishes the Board Diversity Matrix, the company will 
be required to publish its data for the current and immediately prior 
years. Nasdaq believes that disclosing at least two years of data 
allows the public to view any changes and track a board's diversity 
progress.
    In addition to providing a means for shareholders to assess a 
company's board-level diversity and measure its progress in improving 
that diversity over time, Nasdaq believes that proposed Rule 5606 will 
provide a means for Nasdaq to assess whether companies meet the 
diversity objectives of proposed Rule 5605(f). The ability to determine 
satisfaction of the proposed listing rule's diversity objectives will 
protect investors and the public interest.
    Moreover, the proposed rule provides transparency into diversity 
based not only on race, ethnicity, and gender identity, but also on a 
director's self-identified sexual orientation. Nasdaq believes that 
expanding the diversity characteristics beyond those which are commonly 
reported by companies currently will broaden the way boards view 
diversity, and ensure that board diversity is occurring across all 
protected groups.
    Finally, Nasdaq believes that the proposal is not unfairly 
discriminatory because proposed Rule 5606 will apply to all Nasdaq-
listed companies, except for the following companies: Acquisition 
companies listed under IM-5101-2; asset-backed issuers and other 
passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set 
forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 
5615(a)(4)); management investment companies (as set forth in Rule 
5615(a)(5)); issuers of non-voting preferred securities, debt 
securities and Derivative Securities (as set forth in Rule 5615(a)(6)); 
and issuers of securities listed under the Rule 5700 Series--which meet 
the definition of Exempt Companies as defined under proposed Rule 
5605(f)(4). Nasdaq believes it is reasonable and not unfairly 
discriminatory to exempt these companies from the proposed rule because 
the exemption of these companies is consistent with the approach taken 
by Nasdaq in Rule 5615 as it relates to certain Nasdaq corporate 
governance standards for board composition.
    Nasdaq further believes it is reasonable to provide companies with 
a one-year phase-in period to comply with proposed Rule 5606. Nasdaq 
believes there is only a de minimis burden placed on companies to 
collect the board data and prepare the Board Diversity Matrix. 
Moreover, as discussed above, companies already are required to gather 
similar information for certain employees. Therefore, Nasdaq believes 
that one year is

[[Page 80496]]

sufficient time for companies to incorporate their directors into their 
data collection. Furthermore, newly listed companies have many 
obligations to meet under Nasdaq listing rules. Therefore, Nasdaq 
believes that it is reasonable under proposed Rule 5606(d) to provide 
newly listed Nasdaq companies, including companies listing in 
connection with a business combination under IM-5101-2, with one year 
from the time of listing to comply with the proposed rule.

II. Diverse Board Representation or Explanation

a. Removes Impediments to and Perfects the Mechanism of a Free and Open 
Market and a National Market System
    As discussed above, studies suggest that the traditional director 
candidate selection process may create barriers to considering 
qualified diverse candidates for board positions by limiting the search 
for director nominees to existing directors' social networks and 
candidates with C-suite experience.\231\ In analyzing Norway's 
experience in implementing a gender mandate, Dhir (2015) observed that 
``[b]oard seats tend to be filled by directors engaging their networks, 
and the resulting appointees tend to be of the same socio-demographic 
background.'' \232\ Dhir concluded that broadening the search for 
directors outside of traditional networks ``is unlikely to occur 
without some form of regulatory intervention, given the prevalence of 
homogenous social networks and in-group favoritism.'' \233\ Regulatory 
action was effective in increasing the representation of women on 
boards in Norway by ``democratiz[ing] access to a space previously 
unavailable to women.'' \234\ The number of public company board seats 
held by women in Norway increased from 6% in 2002 to 42% in 2020.\235\ 
One Norwegian director ``grudgingly accept[ed] that the free market 
principles she held so dearly had disappointed her--and that the 
[mandate] was a necessary correction of market failure.'' \236\
---------------------------------------------------------------------------

    \231\ See GAO Report, supra note 44; Vell, supra note 100; Rhode 
& Packel, supra note 104, at 39; Deloitte, Women in the Boardroom, 
supra note 86; see also Parker, supra note 97, at 38 (acknowledging 
that, ``as is the case with gender, people of colour within the UK 
have historically not had the same opportunities as many mainstream 
candidates to develop the skills, networks and senior leadership 
experience desired in a FTSE Boardroom'').
    \232\ See Dhir, supra note 78, at 52.
    \233\ Id. at 51. See also Albertine d'Hoop-Azar et al., Gender 
Parity on Boards Around the World, Harv. L. Sch. Forum on Corp. 
Governance (January 5, 2017), available at: https://corpgov.law.harvard.edu/2017/01/05/gender-parity-on-boards-around-the-world/ (comparing gender diversity on boards in countries with 
varying requirements and enforcement measures and concluding that 
external pressures--``progressive societal norms'' and regulations--
are needed to increase board diversity).
    \234\ See Dhir, supra note 78, at 101.
    \235\ See Marianne Bertrand et al., Breaking the Glass Ceiling? 
The Effect of Board Quotas on Female Labor Market Outcomes in 
Norway, Nat'l Bureau of Econ. Rsch. Working Paper 20256 (June 2017), 
available at https://www.nber.org/papers/w20256; Statistics Norway, 
Board and management in limited companies (Mar. 6, 2020), https://www.ssb.no/en/styre (last accessed Nov. 27, 2020).
    \236\ See Dhir, supra note 78, at 116.
---------------------------------------------------------------------------

    In contrast, Nasdaq observed that other countries have made 
comparable progress using a disclosure-based model. Women account for 
at least 30% of the largest boards of companies in six countries using 
comply-or-explain models:\237\ Australia, Finland, Sweden, New Zealand, 
Canada and the United Kingdom.\238\ Nasdaq discussed the benefits and 
challenges of mandate and disclosure-based models with over a dozen 
stakeholders, and the majority of organizations were in agreement that 
companies would benefit from a regulatory impetus to drive meaningful 
and systemic change in board diversity, and that a disclosure-based 
approach would be more palatable to the U.S. business community than a 
mandate. While many organizations recognized that mandates can force 
boards to act more quickly and accelerate the rate of change, they 
believe that a disclosure-based approach is less controversial and 
would spur companies to take action and achieve the same results. Some 
stakeholders also highlighted additional challenges that smaller 
companies and companies in certain industries may face finding diverse 
board members. However, leaders from across the spectrum of 
stakeholders with whom Nasdaq spoke reinforced the notion that if 
companies recruit by skill set and expertise rather than title, then 
they will find there is more than enough diverse talent to satisfy 
demand.
---------------------------------------------------------------------------

    \237\ See Paul Hastings, supra note 177; Deloitte, Women in the 
Boardroom, supra note 86.
    \238\ See Conference Board of Canada, supra note 201; Osler, 
supra note 203, at 4.
---------------------------------------------------------------------------

    Nasdaq also considered Commissioner Lee's observation that 
disclosure ``gets investors the information they need to make 
investment decisions based on their own judgment of what indicators 
matter for long-term value. Importantly, it can also drive corporate 
behavior.'' Specifically, she observed that:

    For one thing, when companies have to formulate disclosure on 
topics it can influence their treatment of them, something known as 
the ``what gets measured, gets managed'' phenomenon. Moreover, when 
companies have to be transparent, it creates external pressure from 
investors and others who can draw comparisons company to company. 
The Commission has long-recognized that influencing corporate 
behavior is an appropriate aim of our regulations, noting that 
``disclosure may, depending on determinations made by a company's 
management, directors and shareholders, influence corporate 
conduct'' and that ``[t]his sort of impact is clearly consistent 
with the basic philosophy of the disclosure provisions of the 
federal securities laws.\239\
---------------------------------------------------------------------------

    \239\ See Lee, supra note 22.

    Nasdaq believes that a disclosure-based framework may influence 
corporate conduct if a company chooses to meet the diversity objective 
of Rule 5605(f)(2) by having two Diverse directors on the board. A 
company may satisfy that objective by broadening the search for 
qualified candidates and considering candidates from other professional 
pathways that bring a wider range of skills and perspectives beyond 
traditional C-suite experience.\240\ Nasdaq believes that this will 
help increase opportunities for Diverse candidates that otherwise may 
be overlooked due to the impediments of the traditional director 
recruitment process, which will thereby remove impediments to a free 
and open market and a national market system. Further, boards that 
choose to have at least two Diverse directors may experience other 
benefits from diversity that perfect the mechanism of a free and open 
market and national market system. As discussed above in Section 
II.A.1.II.b (Diversity and Investor Protection), and further discussed 
below in Section II.A.2.II.b (Prevent Fraudulent and Manipulative Acts 
and Practices), studies suggest that diversity is positively associated 
with reduced stock volatility,\241\ more transparent public 
disclosures,\242\ and less information asymmetry,\243\ leading to stock 
prices that better reflect public information, and further removing 
impediments to and perfecting a free and open market and a national 
market system. Importantly, Nasdaq believes that the disclosure-based 
framework proposed under Rule 5605(f) will not create additional 
impediments to a free and open market and a national market system 
because it will empower

[[Page 80497]]

companies to maintain decision-making authority over the composition of 
their boards.
---------------------------------------------------------------------------

    \240\ See, e.g., Hillman et al., supra note 105 (finding that 
African-American and white women directors were more likely to have 
specialized expertise in law, finance, banking, public relations or 
marketing, or community influence from positions in politics, 
academia or clergy).
    \241\ See Bernile et al., supra note 28.
    \242\ See Gul et al., supra note 66; Bravo and Alcaide-Ruiz, 
supra note 56.
    \243\ See Abad et al., supra note 67.
---------------------------------------------------------------------------

    To the extent a company chooses not to meet the diversity 
objectives of Rule 5605(f)(2) to have at least two Diverse directors, 
Nasdaq believes that proposed Rule 5605(f)(3) will provide analysts and 
investors with a better understanding about the company's reasons for 
not doing so and its philosophy regarding diversity. Rule 5605(f) will 
thus remove impediments to a free and open market and a national market 
system by enabling the investment community to conduct more informed 
analyses of, and have more informed conversations with, companies. 
Nasdaq believes that such analyses and conversations will be better 
informed by consistent, comparable data across companies, which Nasdaq 
proposes to achieve by adopting a consistent definition of ``Diverse'' 
under Rule 5605(f)(1). Nasdaq further believes that providing such 
disclosure will improve the quality of information available to 
investors who rely on this information to make informed investment and 
voting decisions, thereby promoting capital formation and efficiency 
and perfecting the mechanism of a free and open market and a national 
market system.
b. Prevent Fraudulent and Manipulative Acts and Practices
    Nasdaq's analysis discussed above in Section II.A.1.II raises the 
concern that the failure of homogenous boards to consider a broad range 
of viewpoints can result in suboptimal decisions that have adverse 
effects on company performance, board performance and stakeholders. 
Nasdaq believes that including diverse directors with a broader range 
of skills, perspectives and experiences may help detect and prevent 
fraudulent and manipulative acts and practices by mitigating 
``groupthink.'' Increased board diversity also may reduce the 
likelihood of insider trading and other fraudulent and manipulative 
acts and practices.
    Nasdaq reached this conclusion by reviewing public statements by 
investors and organizations regarding the impact of groupthink on 
decision making processes, as well as academic studies on the 
relationship between diversity, groupthink and fraud. Nasdaq observed 
that groupthink can result in ``self-censorship'' \244\ and failure to 
voice dissenting viewpoints in pursuit of ``consensus without critical 
evaluation and without considering different possibilities.'' \245\ In 
contrast, ``board members who possess a variety of viewpoints may raise 
different ideas and encourage a full airing of dissenting views. Such a 
broad pool of talent can be assembled when potential board candidates 
are not limited by gender, race, or ethnicity.'' \246\
---------------------------------------------------------------------------

    \244\ See Forbes and Milliken, supra note 74, at 496.
    \245\ See Dhir, supra note 78, at 124.
    \246\ See Petition for Amendment of Proxy Rule, supra note 80, 
at 4.
---------------------------------------------------------------------------

    Dhir (2015) concluded that gender diversity may ``promote cognitive 
diversity and constructive conflict in the boardroom'' and may be more 
effective at overseeing management.\247\ One respondent in Dhir's 
survey of Norwegian directors observed that:
---------------------------------------------------------------------------

    \247\ See Dhir, supra note 78, at 150.

    I've seen situations where the women were more willing to dig 
into the difficult questions and really go to the bottom even if it 
was extremely painful for the rest of the board, but mostly for the 
CEO . . . when it comes to the really difficult situations, [where] 
you think that the CEO has . . . done something criminal . . . [o]r 
you think that he has done something negligent, something that makes 
it such that you . . . are unsure whether he's the suitable person 
to be in the driving seat.\248\
---------------------------------------------------------------------------

    \248\ Id. at xiv.

    Another director observed that ``[i]f you have different 
experiences and a more diversified board, you will have different 
questions asked.'' \249\ Dhir concluded that ``women directors may be 
particularly adept at critically questioning, guiding and advising 
management without disrupting the overall working relationship between 
the board and management.'' \250\
---------------------------------------------------------------------------

    \249\ Id. at 120.
    \250\ Id. at 35.
---------------------------------------------------------------------------

    Pucheta[hyphen]Mart[iacute]nez et al. (2016) reasoned that 
questioning management is a critical part of the audit committee's 
oversight role, along with ensuring that management does not pressure 
the external auditor to issue a clean audit opinion notwithstanding the 
identification of any uncertainties or scope limitations.\251\ 
Otherwise, ``[a]uditors may accept the demands of management for a 
clean audit report when the firm deserves a scope limitation and an 
uncertainty qualification.'' \252\ The authors found that ``the 
percentage of female [directors] on [audit committees] reduces the 
probability of [audit] qualifications due to errors, non-compliance or 
the omission of information,'' \253\ and further found a positive 
association between gender-diverse audit committees and disclosing 
audit reports with uncertainties and scope limitations. This suggests 
that gender-diverse audit committees better ``ensure that managers do 
not seek to pressure auditors into issuing a clean opinion instead of a 
qualified opinion'' when any uncertainties or scope limitations are 
identified.\254\
---------------------------------------------------------------------------

    \251\ See Pucheta[hyphen]Mart[iacute]nez et al., supra note 52, 
at 368.
    \252\ Id. at 364.
    \253\ Id. at 363.
    \254\ Id. at 368.
---------------------------------------------------------------------------

    Nasdaq also reviewed other studies that found a positive 
association between board gender diversity and important investor 
protections regardless of whether women are on the audit committee, and 
considered the assessment of some academics that their findings may 
extend to other forms of diversity, including racial and ethnic 
diversity. Nasdaq therefore believes that such findings with respect to 
audit committees would be expected to be more broadly applicable to the 
quality of the broader board's decision-making process, and to other 
forms of diversity, including diversity of race, ethnicity and sexual 
orientation.
    In examining the association between broader board gender diversity 
and fraud, Cumming, et al. observed that ``[g]ender diversity in 
particular facilitates more effective monitoring by the board and 
protection of shareholder interests by broadening the board's 
expertise, experience, interests, perspectives and creativity.'' \255\ 
They observed that the presence of women on boards is associated with a 
lower likelihood of securities fraud; indeed, they found ``strong 
evidence of a negative and diminishing effect of women on boards and 
the probability of being in our fraud sample.'' \256\ The authors 
suggested that ``other forms of board diversity, including but not 
limited to gender diversity, may likewise reduce fraud.'' \257\
---------------------------------------------------------------------------

    \255\ See Cumming et al., supra note 62, at 34.
    \256\ Id. at 12-14.
    \257\ Id. at 33.
---------------------------------------------------------------------------

    Similarly, Wahid (2017) noted that board gender diversity may 
``lead to less biased and superior decision-making'' because it ``has a 
potential to alter group dynamics by affecting cognitive conflict and 
cohesion.'' \258\ Wahid (2017) concluded that ``gender-diverse boards 
commit fewer financial reporting mistakes and engage in less fraud,'' 
\259\ finding that companies with female directors have ``fewer 
irregularity-type [financial] restatements, which tend to be indicative 
of financial manipulation.'' \260\ Wahid also suggested that other 
forms of diversity, including

[[Page 80498]]

racial diversity, could introduce additional perspectives to the 
boardroom,\261\ which Nasdaq believes could further mitigate 
groupthink.
---------------------------------------------------------------------------

    \258\ See Wahid, supra note 59, at 6.
    \259\ Id. at 1.
    \260\ Id. at 23.
    \261\ Id. at 24-25; see also Shecter, supra note 61 (quoting 
Wahid as saying that ``[i]f you're going to introduce perspectives, 
those perspectives might be coming not just from male versus female. 
They could be coming from people of different ages, from different 
racial backgrounds. . .. If we just focus on one, we could be 
essentially taking away from other dimensions of diversity and 
decreasing perspective.'').
---------------------------------------------------------------------------

    Abbott, Parker and Persley (2012) posited that ``a female board 
presence contribut[es] to the board's ability to maintain an attitude 
of mental independence, diminish[es] the extent of groupthink and 
enhance[es] the ability of the board to monitor financial reporting.'' 
\262\ They noted that ``poorer [internal] controls and the lack of an 
independent and questioning board-level attitude toward accounting 
judgments can create an opportunity for fraud.'' \263\ They observed a 
lower likelihood of a material financial restatements stemming from 
fraud or error in companies with at least one woman on the board.\264\
---------------------------------------------------------------------------

    \262\ See Abbott et al., supra note 58, at 607.
    \263\ Id. at 610.
    \264\ Id. at 613 (``The previously discussed lines of research 
lead us to form our hypothesis. In summary, restatements may stem 
from error or fraud. In either instance, the internal control system 
(to which the board of directors contributes by setting the overall 
tone at the top) has failed to detect or prevent a misstatement. 
Ineffective internal controls may stem from insufficient questioning 
of assumptions underlying financial reporting, inadequate attention 
to the internal control systems, or insufficient support for the 
audit committee's activities.'').
---------------------------------------------------------------------------

    Nasdaq believes that these studies provide substantial evidence 
suggesting an association between gender diverse boards or audit 
committees and a lower likelihood of fraud; a lower likelihood of 
receiving audit qualifications due to errors, non-compliance or 
omission of information; and a greater likelihood of disclosing audit 
reports with uncertainties and scope limitations. Moreover, academics 
have suggested that other forms of diversity, including racial and 
ethnic diversity, may reduce fraud and mitigate groupthink. Further, 
while homogenous boards may unwittingly fall into the trap of 
groupthink due to a lack of diverse perspectives, ``heterogeneous 
groups share conflicting opinions, knowledge, and perspectives that 
result in a more thorough consideration of a wide range of 
interpretations, alternatives, and consequences.'' \265\ Nasdaq 
therefore believes that the proposed rule is designed to reduce 
groupthink, and otherwise to enhance the functioning of boards, and 
thereby to prevent fraudulent and manipulative acts and practices.
---------------------------------------------------------------------------

    \265\ See Dallas, supra note 76, at 1391.
---------------------------------------------------------------------------

    Further, the Commission has suggested that in seeking board 
diversity, ``[t]o the extent that boards branch out from the set of 
candidates they would ordinarily consider, they may nominate directors 
who have fewer existing ties to the board or management and are, 
consequently, more independent.'' \266\ Nasdaq believes that the 
benefits of the proposed rule are analogous to the benefits of Nasdaq's 
rules governing and requiring director independence. In 2003, Nasdaq 
adopted listing rules requiring, among other things, that independent 
directors comprise a majority of listed companies' boards, which were 
``intended to enhance investor confidence in the companies that list on 
Nasdaq.'' \267\ The Commission observed that self-regulatory 
organizations ``play an important role in assuring that their listed 
issuers establish good governance practices,'' and concluded that the 
proposed rule changes would secure an ``objective oversight role'' for 
issuers' boards of directors, and ``foster greater transparency, 
accountability, and objectivity'' in that role.'' \268\ Along the same 
lines, in approving Nasdaq's application for registration as a national 
securities exchange, the Commission found Nasdaq's rules governing the 
independence of members of boards and certain committees to be 
consistent with Section 6(b)(5) of the Act because they advanced the 
``interests of shareholders'' in ``greater transparency, 
accountability, and objectivity'' in oversight and decision-making by 
corporate boards.\269\ Nasdaq proposes to promote accountability in 
corporate decision-making by requiring companies who do not have at 
least two Diverse directors on their board to provide investors with a 
public explanation of the board's reasons for not doing so under Rule 
5605(f)(3).
---------------------------------------------------------------------------

    \266\ See Proxy Disclosure Enhancements, supra note 73, 74 FR at 
68,355.
    \267\ See Order Approving Proposed Rule Changes, 68 FR at 
64,161.
    \268\ Id. at 64, 175.
    \269\ See In re Nasdaq Stock Market, 71 FR 3550, 3565 (Jan. 23, 
2006). See also 68 FR 18,788, 18,815 (April 16, 2003) (in adopting 
Rule 10A-3, setting standards for the independence of audit 
committee members, the Commission concluded that such standards 
would ``enhance the quality and accountability of the financial 
reporting process and may help increase investor confidence, which 
implies increased efficiency and competitiveness of the U.S. capital 
markets'').
---------------------------------------------------------------------------

    Nasdaq believes it is critical to the detection and prevention of 
fraudulent and manipulative acts and practices to have directors on the 
board who are willing to critically question management and air 
dissenting views. Nasdaq believes that boards comprised of directors 
from Diverse backgrounds enhance investor confidence by ensuring that 
board deliberations consider the perspectives of more than one 
demographic group, leading to robust dialogue and better decision 
making. However, Nasdaq recognizes that directors may bring diverse 
perspectives, skills and experiences to the board, notwithstanding that 
they have similar attributes. Nasdaq therefore believes it is in the 
public interest to permit a company that chooses not to meet the 
diversity objectives of Rule 5605(f)(2) to explain why it does not, in 
accordance with Rule 5605(f)(3)--for example, if it believes that 
defining diversity more broadly than Nasdaq, for example by considering 
national origin, veteran status and disabilities, brings a wide range 
of perspectives and experiences to the board. Nasdaq believes such 
disclosure will provide investors with a better understanding of the 
company's philosophy regarding diversity. This would better inform the 
investment community and enable more informed analyses of, and 
conversations with, companies. Therefore, Nasdaq believes satisfying 
Rule 5605(f)(2) through disclosure pursuant to Rule 5605(f)(3) is 
consistent with Section 6(b)(5) of the Act because it advances the 
``interests of shareholders'' in ``greater transparency, 
accountability, and objectivity'' of boards and their decision-making 
processes.\270\ In addition, as discussed further in Section 
II.A.2.II.c (Promotes Investor Protection and the Public Interest) 
below, Nasdaq believes that the proposed diversity requirement could 
help to reduce information asymmetry, and thereby reduce the risk of 
insider trading or other opportunistic insider behavior.
---------------------------------------------------------------------------

    \270\ Id.
---------------------------------------------------------------------------

c. Promotes Investor Protection and the Public Interest
    Nasdaq has found substantial evidence that board diversity is 
positively associated with more transparent public disclosures and 
higher quality financial reporting, thereby promoting investor 
protection. Specifically, studies have concluded that companies with 
gender-diverse boards are associated with more transparent public 
disclosures and less information asymmetry, leading to stock prices 
that better reflect public information. Gul, Srinidhi & Ng (2011) found 
that ``gender diversity improves stock price informativeness by 
increasing voluntary public disclosures in large firms and increasing 
the

[[Page 80499]]

incentives for private information collection in small firms.'' \271\ 
Bravo and Alcaide-Ruiz (2019) found a positive association between 
women on the audit committee with financial or accounting expertise and 
the voluntary disclosure of forward-looking information.\272\ Abad et 
al. (2017) concluded that companies with gender-diverse boards are 
associated with lower levels of information asymmetry, suggesting that 
``the policies recently implemented in several European countries to 
increase the presence of female directors in company boards could have 
beneficial effects on stock markets by reducing the risk of informed 
trading and enhancing stock liquidity.'' \273\
---------------------------------------------------------------------------

    \271\ See Gul et al., supra note 66, at 2.
    \272\ See Bravo and Alcaide-Ruiz, supra note 56, at 151.
    \273\ See Abad et al., supra note 67, at 202.
---------------------------------------------------------------------------

    Nasdaq believes that one consequence of information asymmetry is 
that insiders may engage in opportunistic behavior prior to a public 
announcement of financial results and before the market incorporates 
the new information into the company's stock price. This can result in 
unfair gains or an avoidance of losses at the expense of shareholders 
who did not have access to the same information. This may exacerbate 
the principal-agent problem, in which the interests of a company's 
board and shareholders are not aligned. Lucas-Perez et al. (2014) found 
that board gender diversity is positively associated with linking 
executive compensation plans to company performance,\274\ which may be 
an effective mechanism to deter opportunistic behavior by management 
and better align their interests with those of their company's 
shareholders.\275\
---------------------------------------------------------------------------

    \274\ See Lucas-Perez et al., supra note 69.
    \275\ Id.
---------------------------------------------------------------------------

    Another concern is that ``[w]hen information asymmetry is high, 
stakeholders do not have sufficient resources, incentives, or access to 
relevant information to monitor managers' actions, which gives rise to 
the practice of earnings management.'' \276\ Earnings management ``is 
generally defined as the practice of using discretionary accounting 
methods to attain desired levels of reported earnings.'' \277\ 
Manipulating earnings is particularly concerning to investors because 
``[i]f users of financial data are `misled' by the level of reported 
income, then investors' allocation of resources may be inappropriate 
when based on the financial statements provided by management,'' \278\ 
thereby undermining the efficacy of the capital formation process for 
investors who rely on such information to make informed investment and 
voting decisions.
---------------------------------------------------------------------------

    \276\ See Vernon J. Richardson, Information Asymmetry and 
Earnings Management: Some Evidence, 15 Rev. Quantitative Fin. and 
Acct. 325 (2000).
    \277\ See Gull et al., supra note 55, at 2.
    \278\ Id.
---------------------------------------------------------------------------

    Gull et al. (2018) \279\ observe that overseeing management is a 
crucial component of investor protection, particularly with regard to 
earnings management:

    \279\ See generally id.
---------------------------------------------------------------------------

    The role of the board of directors and board characteristics 
(i.e. board independence and gender diversity) is usually associated 
with the protection of shareholder interests. . .. This role is 
particularly crucial with regard to the issue of earnings 
management, in that one of the responsibilities of boards is to 
monitor management.\280\
---------------------------------------------------------------------------

    \280\ Id. at 6 (citations omitted).

    The authors of that study found that the presence of female audit 
committee members with business expertise is associated with a lower 
magnitude of earnings management. Srinidhi, Gul and Tsui (2011) 
observed that better oversight of management combined with lower 
information asymmetry leads to better earnings quality. They noted that 
``[e]arnings quality is an important outcome of good governance 
demanded by investors and therefore its improvement constitutes an 
important objective of the board.'' \281\ They found that companies 
with women on the board, specifically on the audit committee, exhibit 
``higher earnings quality'' and ``better reporting discipline by 
managers.'' \282\ They concluded that ``including female directors on 
the board and the audit committee are plausible ways of improving the 
firm's reporting discipline and increasing investor confidence in 
financial statements.'' \283\
---------------------------------------------------------------------------

    \281\ See Srinidhi et al., supra note 50, at 1638.
    \282\ Id. at 1612.
    \283\ Id.
---------------------------------------------------------------------------

    Chen, Eshleman and Soileau (2016) suggested that the relationship 
between gender diversity and higher earnings quality observed by 
Srinidhi, Gul and Tsui (2011) is ultimately driven by reduced internal 
control weaknesses, noting that ``prior literature has established a 
negative relationship between internal control weaknesses and earnings 
quality.'' \284\ Internal control over financial reporting are 
procedures designed ``to provide reasonable assurance regarding the 
reliability of financial reporting and the preparation of financial 
statements for external purposes in accordance with GAAP.'' \285\ 
Weaknesses in internal controls can ``lead to poor financial reporting 
quality'' and ``more severe insider trading'' \286\ or failure to 
detect a material misstatement. According to the PCAOB:

    \284\ See Chen et al., supra note 64, at 18.
    \285\ See Public Company Accounting Oversight Board, Auditing 
Standard No. 5: Appendix A, A5 available at: https://pcaobus.org/oversight/standards/archived-standards/details/Auditing_Standard_5_Appendix_A.
    \286\ See Chen et al., supra note 64, at 12.
---------------------------------------------------------------------------

    A material weakness is a deficiency, or a combination of 
deficiencies, in internal control over financial reporting, such 
that there is a reasonable possibility that a material misstatement 
of the company's annual or interim financial statements will not be 
prevented or detected on a timely basis.\287\
---------------------------------------------------------------------------

    \287\ See Public Company Accounting Oversight Board, supra note 
285, at A7.

    A material misstatement can occur ``as a result of some type of 
inherent risk, whether fraud or error (e.g., management's aggressive 
accounting practices, erroneous application of GAAP).'' \288\ The 
failure to prevent or detect a material misstatement before financial 
statements are issued can require the company to reissue its financial 
statements and potentially face costly shareholder litigation. Chen et 
al. found that having at least one woman on the board (regardless of 
whether or not she is on the audit committee) ``may lead [a] to reduced 
likelihood of material weaknesses [in internal control over financial 
reporting],'' \289\ and Abbott, Parker and Persley (2012) found ``a 
significant association between the presence of at least one woman on 
the board and a lower likelihood of [a material financial] 
restatement.'' \290\ Notably, while the Sarbanes-Oxley Act (``SOX'') 
implemented additional measures to ensure that a company has robust 
internal controls, the findings of Abbott et al. were consistent among 
a sample of pre- and post-SOX restatements, suggesting that ``an 
additional, beneficial layer of independence in group decision-making 
is associated with gender diversity.'' \291\
---------------------------------------------------------------------------

    \288\ See Abbott et al., supra note 58, at 609-10.
    \289\ See Chen et al., supra note 64, at 18.
    \290\ See Abbott et al., supra note 58, at 607.
    \291\ Id. at 609.
---------------------------------------------------------------------------

    Nasdaq believes that the proposal to require listed companies to 
have at least two Diverse directors under Rule 5605(f) could help to 
lower information asymmetry and reduce the risk of insider trading or 
other opportunistic insider behavior, which would help to increase 
stock price informativeness and enhance stock liquidity, thereby 
protecting investors and promoting capital formation and efficiency. 
Nasdaq

[[Page 80500]]

believes that information asymmetry could also be reduced by permitting 
companies to satisfy Rule 5605(f)(2) by publicly disclosing their 
reasons for not meeting its diversity objectives in accordance with 
Rule 5605(f)(3), because the requirement will improve the quality of 
information available to investors who rely on this information to make 
informed investment and voting decisions, which will further protect 
investors and promote capital formation and efficiency.
    Moreover, Nasdaq believes that proposed Rule 5605(f) could foster 
more transparent public disclosures, higher quality financial 
reporting, and stronger internal control over financial reporting and 
mechanisms to monitor management. This could be particularly beneficial 
for Smaller Reporting Companies that are not subject to the SOX 404(b) 
requirement to obtain an independent auditor's attestation of 
management's assessment of the effectiveness of internal control over 
financial reporting, thereby promoting investor protection.
    Nasdaq believes that the body of research on the relationship 
between economic performance and board diversity summarized under 
Section II.A.1.II.a above provides substantial evidence supporting the 
conclusion that board diversity does not have adverse effects on 
company financial performance, and therefore Nasdaq believes the 
proposal will not negatively impact capital formation, competition or 
efficiency among its public companies.\292\ Nasdaq considered that some 
studies on gender diversity alone have had mixed results,\293\ and that 
the U.S. GAO (2015) and Carter et al. (2010) concluded that the mixed 
results are due to differences in methodologies, data samples and time 
periods.\294\ This is not the first time Nasdaq has considered whether, 
on balance, various studies finding mixed results related to board 
composition and company performance are sufficient rationale to propose 
a listing rule. For example, in 2003, notwithstanding the mixed results 
of studies regarding the relationship between company performance and 
board independence,\295\ Nasdaq adopted listing rules requiring a 
majority independent board that were ``intended to enhance investor 
confidence in the companies that list on Nasdaq.'' \296\ In its 
Approval Order, the SEC noted that ``[t]he Commission has long 
encouraged exchanges to adopt and strengthen their corporate governance 
listing standards in order to, among other things, enhance investor 
confidence in the securities markets;'' the Commission concluded that 
the independence rules would secure an ``objective oversight role'' for 
issuers' boards, and ``foster greater transparency, accountability, and 
objectivity'' in that role.\297\ Nasdaq believes this reasoning applies 
to the current proposed rule as well. Even without clear consensus 
among studies related to board diversity and company performance, the 
heightened focus on corporate board diversity by investors demonstrates 
that investor confidence is undermined when data on board diversity is 
not readily available and when companies do not explain the reasons for 
the apparent absence of diversity on their boards.\298\ Legislators are 
increasingly taking action to encourage corporations to diversify their 
boards and improve diversity disclosures.\299\ Moreover, during its 
discussions with stakeholders, Nasdaq found consensus across every 
constituency that there is inherent value in board diversity. Lastly, 
it has been a longstanding principle that ``Nasdaq stands for integrity 
and ethical business practices in order to enhance investor confidence, 
thereby contributing to the financial health of the economy and 
supporting the capital formation process.'' \300\
---------------------------------------------------------------------------

    \292\ See Alexandre Di Miceli and Angela Donaggio, Women in 
Business Leadership Boost ESG Performance: Existing Body of Evidence 
Makes Compelling Case, 42 International Finance Corporation World 
Bank Group, Private Sector Opinion at 11 n.15 (2018), available at: 
https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/resources/private+sector+opinion/women+in+business+leadership+boost+esg+performance (``The 
overwhelming majority of empirical studies conclude that a higher 
ratio of women in business leadership does not impair corporate 
performance (virtually all studies find positive or non-
statistically significant results)''). See also Wahid, supra note 
59, at 6 (suggesting that ``at a minimum, gender diversity on 
corporate boards has a neutral effect on governance quality, and at 
best, it has positive consequences for boards' ability to monitor 
firm management'').
    \293\ See, e.g., Pletzer et al., supra note 38; Post and Byron, 
supra note 39; Adams and Ferreira, supra note 42.
    \294\ See GAO Report, supra note 44, at 5 (``Some research has 
found that gender diverse boards may have a positive impact on a 
company's financial performance, but other research has not. These 
mixed results depend, in part, on differences in how financial 
performance was defined and what methodologies were used''); Carter 
(2010), supra note 40, at 400 (observing that the different 
``statistical methods, data, and time periods investigated vary 
greatly so that the results are not easily comparable.'').
    \295\ See supra note 45.
    \296\ See Order Approving Proposed Rule Changes, 68 FR at 
64,161.
    \297\ Id. at 64,176.
    \298\ See supra notes 4 and 8.
    \299\ See supra note 112.
    \300\ See Nasdaq Rulebook, Rule 5101.
---------------------------------------------------------------------------

    For all the foregoing reasons, Nasdaq believes that proposed Rule 
5605(f) will promote investor protection and the public interest by 
enhancing investor confidence that all listed companies are considering 
diversity in the context of selecting directors, either by including at 
least two Diverse directors on their boards or by explaining their 
rationale for not meeting that objective. To the extent a company 
chooses not to meet the diversity objectives of Rule 5605(f)(2), Nasdaq 
believes that the proposal will provide investors with additional 
disclosure about the company's reasons for doing so under Rule 
5605(f)(3). For example, the company may choose to disclose that it 
does not meet the diversity objectives of Rule 5605(f)(2) because it is 
subject to an alternative standard under state or foreign laws and has 
chosen to satisfy that diversity objective instead. On the other hand, 
many firms may strive to achieve even greater diversity than the 
objectives set forth in our proposed rule. Nasdaq believes that 
providing such flexibility and clear disclosure where the company 
determines to follow a different path will improve the quality of 
information available to investors who rely on this information to make 
informed investment and voting decisions, thereby promoting capital 
formation and efficiency, and further promoting the public interest.
d. Not Designed to Permit Unfair Discrimination Between Customers, 
Issuers, Brokers, or Dealers
    Nasdaq believes that proposed Rule 5605(f) is not designed to 
permit unfair discrimination among companies because it requires all 
companies subject to the rule to have at least two Diverse directors or 
explain why they do not. Further, the proposal requires at least one of 
the two Diverse directors to be an individual who self-identifies as 
Female. While the proposal provides different requirements for the 
second Diverse director among Smaller Reporting Companies, Foreign 
Issuers and other companies, Nasdaq believes that the rule is not 
designed to permit unfair discrimination among companies. In all cases, 
a company can choose to meet the diversity objectives of the entire 
rule or to satisfy only certain elements of the rule. Further, the 
proposed rule does not limit board sizes--if a board chooses to 
nominate a Diverse individual to the board to meet the diversity 
objectives of the proposed rule, it is not precluded from also 
nominating a non-Diverse director for an additional board seat.

[[Page 80501]]

i. Rule 5605(f)(2)(B): Foreign Issuers
    Similar to all other companies subject to Rule 5605(f), the 
proposal requires all Foreign Issuers to have, or explain why they do 
not have, at least two Diverse directors, including one director who 
self-identifies as Female. However, Nasdaq proposes to provide Foreign 
Issuers with additional flexibility with regard to the second Diverse 
director. Foreign Issuers could satisfy the second director objective 
by including another Female director, or an individual who self-
identifies as LGBTQ+ or as an underrepresented individual based on 
national, racial, ethnic, indigenous, cultural, religious or linguistic 
identity in the company's home country jurisdiction. While the proposal 
provides a different requirement for the second Diverse director for 
Foreign Issuers, Nasdaq believes it is not designed to permit unfair 
discrimination between Foreign Issuers and other companies because it 
recognizes that the unique demographic composition of the United 
States, and its historical marginalization of Underrepresented 
Minorities and the LGBTQ+ community, may not extend to all countries 
outside of the United States. Further, Nasdaq believes that it is 
challenging to apply a consistent definition of minorities to all 
countries globally because ``[t]here is no internationally agreed 
definition as to which groups constitute minorities.'' \301\ Similarly, 
``there is no universally accepted international definition of 
indigenous peoples.'' \302\ Rather, the United Nations Declaration on 
the Rights of Indigenous Peoples recognizes ``that the situation of 
indigenous peoples varies from region to region and from country to 
country and that the significance of national and regional 
particularities and various historical and cultural backgrounds should 
be taken into consideration.'' \303\ Accordingly, Nasdaq believes that 
it is not unfairly discriminatory to allow an alternative mechanism for 
Foreign Issuers to satisfy Rule 5605(f)(2) in recognition that the 
U.S.-based EEOC definition of Underrepresented Minorities is not 
appropriate for every Foreign Issuer. In addition, Foreign Issuers have 
the ability to satisfy Rule 5605(f)(2)(B) by explaining that they do 
not satisfy this alternative definition. Similarly, any company that is 
not a Foreign Issuer, but that prefers the alternative definition 
available for Foreign Issuers, could follow Rule 5605(f)(2)(B) and 
disclose its reasons for doing so.
---------------------------------------------------------------------------

    \301\ See United Nations, Minority Rights: International 
Standards and Guidance for Implementation 2 (2010), available at: 
https://www.ohchr.org/Documents/Publications/MinorityRights_en.pdf. 
See also G.A. Res. 47/135. art. 1.1 (Dec. 18, 1992) (``States shall 
protect the existence and the national or ethnic, cultural, 
religious and linguistic identity of minorities within their 
respective territories and shall encourage conditions for the 
promotion of that identity.''). The preamble to the Declaration also 
``[r]eaffirm[s] that one of the basic aims of the United Nations, as 
proclaimed in the Charter, is to promote and encourage respect for 
human rights and for fundamental freedoms for all, without 
distinction as to race, sex, language or religion.''
    \302\ See United Nations, Minority Rights, supra note 301, at 3.
    \303\ See G.A. Res. 61/295 (Sept. 13, 2007).
---------------------------------------------------------------------------

    Under the proposal, Foreign Issuer means (a) a Foreign Private 
Issuer (as defined in Rule 5005(a)(19)) or (b) a company that (i) is 
considered a ``foreign issuer'' under Rule 3b-4(b) under the Act, and 
(ii) has its principal executive offices located outside of the United 
States. For example, a company that is considered a ``foreign issuer'' 
under Rule 3b-4(b) under the Act and has its principal executive 
offices located in Ireland would qualify as a Foreign Issuer for 
purposes of Rule 5605(f)(2), even if it is not considered a Foreign 
Private Issuer under Nasdaq or SEC rules.
    Nasdaq recognizes that Foreign Issuers may be located in 
jurisdictions that impose privacy laws limiting or prohibiting self-
identification questionnaires, particularly as they relate to race or 
ethnicity. In such countries, a company may not be able to determine 
each director's self-identified Diverse attributes due to restrictions 
on the collection of personal information. The company may instead 
publicly disclose pursuant to Rule 5605(f)(3) that ``Due to privacy 
laws in the company's home country jurisdiction limiting its ability to 
collect information regarding a director's self-identified Diverse 
attributes, the company is not able to determine that it has two 
Diverse directors as set forth under Rule 5605(f)(2)(B)(ii).''
ii. Rule 5605(f)(2)(C): Smaller Reporting Companies
    While the proposal provides a different requirement for the second 
Diverse director for Smaller Reporting Companies, Nasdaq believes that 
this distinction is not designed to permit unfair discrimination among 
companies. Nasdaq has designed the proposed rule to ensure it does not 
have a disproportionate economic impact on Smaller Reporting Companies 
by imposing undue costs or burdens. Nasdaq recognizes that Smaller 
Reporting Companies, especially pre-revenue companies that depend on 
the capital markets to fund ground-breaking research and technological 
advancements, may not have the resources to compensate an additional 
director or engage a search firm to find director candidates outside of 
the directors' traditional networks. Nasdaq believes that this is a 
reasonable basis to distinguish Smaller Reporting Companies from other 
companies subject to the rule.
    Smaller Reporting Companies already are provided certain exemptions 
from Nasdaq's listing rules. For example, under Rule 5605(d)(3), 
Smaller Reporting Companies must have a compensation committee 
comprised of at least two independent directors and a formal written 
compensation committee charter or board resolution that specifies the 
committee's responsibilities and authority, but such companies are not 
required to grant authority to the committee to retain or compensate 
consultants or advisors or consider certain independence factors before 
selecting such advisors, consistent with Rule 10C-1 of the Act.\304\ In 
its approval order, the SEC concluded as follows:
---------------------------------------------------------------------------

    \304\ See Nasdaq Rulebook, Rule 5605(d)(3).

    The Commission believes that these provisions are consistent 
with the Act and do not unfairly discriminate between issuers. The 
Commission believes that, for similar reasons to those for which 
Smaller Reporting Companies are exempted from the Rule 10C-1 
requirements, it makes sense for Nasdaq to provide some flexibility 
to Smaller Reporting Companies regarding whether the compensation 
committee's responsibilities should be set forth in a formal charter 
or through board resolution. Further . . . in view of the potential 
additional costs of an annual review, it is reasonable not to 
require a Smaller Reporting Company to conduct an annual assessment 
of its charter or board resolution.\305\
---------------------------------------------------------------------------

    \305\ See Order Granting Accelerated Approval of Proposed Rule 
Change, 78 FR 4,554, 4,567 (Jan. 22, 2013).

    The Commission also makes accommodations for Smaller Reporting 
Companies based on their more limited resources, allowing them to 
comply with scaled disclosure requirements in certain SEC reports 
rather than the more rigorous disclosure requirements for larger 
companies. For example, Smaller Reporting Companies are not required to 
include a compensation discussion and analysis in their proxy or Form 
10-K describing the material elements of the compensation of its named 
executive officers.\306\ Eligible Smaller Reporting Companies also are 
relieved from the SOX 404(b) requirement to obtain an independent 
auditor's attestation of management's assessment of the effectiveness 
of internal control over

[[Page 80502]]

financial reporting.\307\ In each case, companies may choose to comply 
with the more rigorous requirements in lieu of relying on the 
exemptions.
---------------------------------------------------------------------------

    \306\ See 17 CFR 229.402(l).
    \307\ See Accelerated Filer and Large Accelerated Filer 
Definitions, 85 FR 17,178 (March 26, 2020).
---------------------------------------------------------------------------

    Any company that is not a Smaller Reporting Company, but prefers 
the alternative rule available for Smaller Reporting Companies, could 
follow Rule 5605(f)(2)(C) and disclose their reasons for doing so. As 
such, Nasdaq believes that the proposed alternative rule for Smaller 
Reporting Companies is not designed to, and does not, unfairly 
discriminate among companies. Lastly, Nasdaq believes that Rule 
5605(f)(2)(C) is not designed to permit unfair discrimination among 
companies because it requires Smaller Reporting Companies to have at 
least one director who self-identifies as Female, similar to other 
companies subject to Rule 5065(f).
iii. Rule 5605(f)(3): Public Disclosure of Non-Diverse Board
    Under proposed Rule 5605(f)(3), if a company determines not to meet 
the diversity objectives of Rule 5605(f) in its entirety, it must 
specify the applicable requirements of the Rule and explain its reasons 
for not having at least two Diverse directors. Nasdaq designed the 
proposal to avoid unduly burdening competition or efficiency, or 
conflicting with existing securities laws, by providing all companies 
subject to Rule 5605(f) with the option to make the public disclosure 
required under Rule 5605(f)(3) in the company's proxy statement or 
information statement for its annual meeting of shareholders or, 
alternatively on the company's website, provided that the company 
submits a URL link to such disclosure to Nasdaq through the Listing 
Center no later than 15 calendar days after the company's annual 
shareholder meeting. Nasdaq believes Rule 5605(f)(3) is not designed to 
permit unfair discrimination among companies because the proposed rule 
provides all companies subject to Rule 5605(f) the option to disclose 
an explanation rather than meet the diversity objectives of Rule 
5605(f)(2).
    Certain federal securities laws similarly permit companies to 
satisfy corporate governance requirements through disclosure of reasons 
for not meeting the applicable requirement. For example, under 
Regulation S-K, Item 407 requires a company to disclose whether or not 
its board of directors has determined that the company has at least one 
audit committee financial expert. If a company does not have a 
financial expert on the audit committee, it must provide an 
explanation.\308\ Item 406 requires a company to disclose whether it 
has adopted a written code of ethics that applies to the chief 
executive officer and senior financial or accounting officers. If a 
company has not adopted such a code of ethics, it must disclose the 
reasons why not.\309\ Item 402 regarding pay ratio disclosure defines 
how total compensation for employees should be calculated, but permits 
companies to use a different measure as long as they explain their 
approach.\310\
---------------------------------------------------------------------------

    \308\ See 17 CFR 229.407(d)(5).
    \309\ Id. Sec.  229.406(a).
    \310\ Id. Sec.  229.402.
---------------------------------------------------------------------------

    Furthermore, Nasdaq rules and SEC guidance already recognize that 
website disclosure can be a method of disseminating information to the 
public. For example, Nasdaq listing rules permit companies to provide 
website disclosures related to third party director compensation,\311\ 
foreign private issuer home country practices,\312\ and reliance on the 
exception relating to independent compensation committee members.\313\ 
The SEC has recognized that ``[a] company's website is an obvious place 
for investors to find information about the company'' \314\ and permits 
companies to make public disclosure of material information through 
website disclosures if, among other things, the company's website is 
``a recognized channel of distribution of information.'' \315\
---------------------------------------------------------------------------

    \311\ See Nasdaq Rulebook, Rule 5250(b)(3)(A).
    \312\ Id., Rule 5615(a)(3)(B) and IM-5615-3.
    \313\ Id., Rules 5605(d)(2)(B) (non-independent compensation 
committee member under exceptional and limited circumstances) and 
5605(e)(3) (non-independent nominations committee member under 
exceptional and limited circumstances).
    \314\ See Commission Guidance on the Use of Company websites, 73 
FR 45,862, 45,864 (Aug. 7, 2008).
    \315\ Id. at 45,867.
---------------------------------------------------------------------------

iv. Rule 5605(f)(4): Exempt Companies
    Under proposed Rule 5605(f)(4), Nasdaq proposes to exempt the 
following types of companies from the requirements of Rule 5605(f) 
(defined as ``Exempt Companies''): acquisition companies listed under 
IM-5101-2; asset-backed issuers and other passive issuers (as set forth 
in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); 
limited partnerships (as set forth in Rule 5615(a)(4)); management 
investment companies (as set forth in Rule 5615(a)(5)); issuers of non-
voting preferred securities, debt securities and Derivative Securities 
(as set forth in Rule 5615(a)(6)); and issuers of securities listed 
under the Rule 5700 Series. Each of the types of Exempt Companies 
either has no board of directors, lists only securities with no voting 
rights towards the election of directors, or is not an operating 
company, and the holders of the securities they issue do not expect to 
have a say in the composition of their boards. As such, Nasdaq believes 
the proposal is not designed to permit unfair discrimination by 
excluding Exempt Companies from the application of proposed Rule 
5605(f). These companies already are exempt from certain of Nasdaq's 
corporate governance standards related to board composition, as 
described in Rule 5615.
v. Rule 5605(f)(5): Phase-in Period
    Proposed Rule 5605(f)(5)(A) will allow any newly listing company 
that was not previously subject to a substantially similar requirement 
of another national securities exchange one year from the date of 
listing to satisfy the requirements of Rule 5605(f). Proposed Rule 
5605(f)(5)(B) also will allow any company that ceases to be a Foreign 
Issuer, a Smaller Reporting Company or an Exempt Company one year from 
the date that the company no longer qualifies as a Foreign Issuer, a 
Smaller Reporting Company or an Exempt Company, respectively, to 
satisfy the requirements of Rule 5605(f). This phase-in period will 
apply after the end of the transition period provided in Rule 
5605(f)(7).
    Nasdaq believes this approach is not designed to permit unfair 
discrimination because it provides all companies that become newly 
subject to the rule the same time period within which to comply. In 
addition, this approach is similar to other phase-in periods granted to 
companies listing on or transferring to Nasdaq. For example, Rule 
5615(b)(1) provides a company listing in connection with its initial 
public offering one year to fully comply with the compensation and 
nomination committee requirements of Rules 5605(d) and (e), and the 
majority independent board requirement of Rule 5605(b). Similarly, SEC 
Rule 10A-3(b)(1)(iv)(A) allows a company up to one year from the date 
its registration statement is effective to fully comply with the 
applicable audit committee composition requirements. Nasdaq Rule 
5615(b)(3) provides a one-year timeframe for compliance with the board 
composition requirements for companies transferring from other listed 
markets that do not have a substantially similar requirement.

[[Page 80503]]

vi. Rule 5605(f)(7): Effective Dates/Transition
    Under proposed Rule 5605(f)(7), each company must have, or explain 
why it does not have, one Diverse director no later than two calendar 
years after the Approval Date,\316\ and two Diverse directors no later 
than (i) four calendar years after the Approval Date for companies 
listed on the NGS or NGM tiers, or (ii) five calendar years after the 
Approval Date for companies listed on the NCM tier.
---------------------------------------------------------------------------

    \316\ The ``Approval Date'' is the date that the SEC approves 
the proposed rule.
---------------------------------------------------------------------------

    Nasdaq believes this approach is not designed to permit unfair 
discrimination because it recognizes that companies listed on the 
Nasdaq Capital Market may not have the resources necessary to 
compensate an additional director or engage a search firm to search for 
director candidates outside of the directors' traditional networks. 
Therefore, Nasdaq believes it is in the public interest to provide such 
companies with one additional year to meet the diversity objectives of 
Rule 5605(f), should they choose to do so. Nasdaq notes that all 
companies may choose to follow a timeframe applicable to a different 
market tier, provided they publicly describe their explanation for 
doing so. They also may construct their own timeframe for meeting the 
diversity objectives of Rule 5605(f), provided they publicly disclose 
their reasons for not abiding by Nasdaq's timeframe.
e. Not Designed to Regulate by Virtue of any Authority Conferred by the 
Act Matters Not Related to the Purposes of the Act or the 
Administration of the Exchange
    Nasdaq believes that the proposal is not designed to regulate by 
virtue of any authority conferred by the Act matters not related to the 
purposes of the Act or the administration of the Exchange.\317\ The 
proposal relates to the Exchange's corporate governance standards for 
listed companies. As discussed above, ``[t]he Commission has long 
encouraged exchanges to adopt and strengthen their corporate governance 
listing standards in order to, among other things, enhance investor 
confidence in the securities markets.'' \318\ And because ``it is not 
always feasible to define . . . every practice which is inconsistent 
with the public interest or with the protection of investors,'' the Act 
leaves to SROs ``the necessary work'' of rulemaking pursuant to Section 
6(b)(5).\319\
---------------------------------------------------------------------------

    \317\ See 15 U.S.C. 78f(b)(5).
    \318\ See Order Approving Proposed Rule Changes, 68 FR at 
64,161.
    \319\ See Heath v. SEC, 586 F.3d 122, 132 (2d Cir. 2009) (citing 
Avery v. Moffat, 55 N.Y.S.2d 215, 228 (Sup. Ct. 1945)).
---------------------------------------------------------------------------

    Nasdaq recognizes that U.S. states are increasingly proposing and 
adopting board diversity requirements, and because corporations are 
creatures of state law, some market participants may believe that such 
regulation is best left to states. However, Nasdaq considered that 
certain of its listing rules related to corporate governance currently 
relate to areas that are also regulated by states. For example, states 
impose standards related to quorums \320\ and shareholder approval of 
certain transactions,\321\ which also are regulated under Nasdaq's 
listing rules.\322\ Nasdaq has adopted rules relating to such matters 
to ensure uniformity of such rules among its listed companies. 
Similarly, Nasdaq believes that the proposed rule will create 
uniformity among listed companies by helping to assure investors that 
all non-exempt companies have at least two Diverse directors on their 
board or publicly describe why they do not.
---------------------------------------------------------------------------

    \320\ See, e.g., 8 Del. Code Sec.  216 (providing that a quorum 
at a shareholder's meeting shall consist of no less than \1/3\ of 
the shares entitled to vote at such meeting).
    \321\ See, e.g., id. Sec. Sec.  251, 271 (providing that 
shareholder approval by a majority of the outstanding voting shares 
entitled to vote is required for mergers and the sale of all or 
substantially all of a corporation's assets).
    \322\ See, e.g., Nasdaq Rulebook, Rules 5620(c) and 5635(a).
---------------------------------------------------------------------------

    Further, Nasdaq believes the proposal will enhance investor 
confidence that listed companies that have two Diverse directors are 
considering the perspectives of more than one demographic group, 
leading to robust dialogue and better decision making, as well as the 
other corporate governance benefits of diverse boards discussed above 
in Section II.A.1.II. To the extent companies choose to disclose their 
reasons for not meeting the diversity objectives of Rule 5605(f)(2) 
pursuant to Rule 5605(f)(3), Nasdaq believes that such disclosure will 
improve the quality of information available to investors who rely on 
this information to make an informed voting decision, thereby promoting 
capital formation and efficiency. It has been the Exchange's 
longstanding principle that ``Nasdaq stands for integrity and ethical 
business practices in order to enhance investor confidence, thereby 
contributing to the financial health of the economy and supporting the 
capital formation process.'' \323\
---------------------------------------------------------------------------

    \323\ Id., Rule 5101.
---------------------------------------------------------------------------

    In addition, as discussed in Section II.A.1.I, in passing Section 
342 of the Dodd-Frank Act, Congress recognized the need to respond to 
the lack of diversity in the financial services industry, and the 
Standards designed by the Commission and other financial regulators 
provide a framework for addressing that industry challenge. The 
Standards themselves identify several focus areas, including the 
importance of ``Organizational Commitment,'' which speaks to the 
critical role of senior leadership--including boards of directors--in 
promoting diversity and inclusion across an organization. In addition, 
like the proposed rule, the Standards also consider ``Practice to 
Promote Transparency,'' and recognize that transparency is a key 
component of any diversity initiative. Specifically, the Standards 
provide that the ``transparency of an entity's diversity and inclusion 
program promotes the objectives of Section 342,'' and also is important 
because it provides the public with necessary information to assess an 
entity's diversity policies and practices.\324\
---------------------------------------------------------------------------

    \324\ Final Interagency Policy Statement Establishing Joint 
Standards for Assessing the Diversity Policies and Practices of 
Entities Regulated by the Agencies, 80 FR 33,016 (June 10, 2015).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act. Nasdaq reviewed requirements related to 
board diversity in two dozen foreign jurisdictions, and almost every 
jurisdiction imposes diversity-focused requirements on listed 
companies, either through a securities exchange, financial regulator or 
the government. Nasdaq competes for listings globally, including in 
countries that have implemented a more robust regulatory reporting 
framework for diversity and ESG disclosures. Currently in the U.S., the 
Long Term Stock Exchange (``LTSE''), which includes a number of 
sponsors which have investment businesses, has communicated to 
institutional investors that it that it seeks to distinguish itself by 
focusing on corporate governance, including, for example, diversity and 
inclusion. Under Rule 14.425, companies listed on LTSE must adopt and 
publish a long-term stakeholder policy that explains, among other 
things, ``the Company's approach to diversity and inclusion.'' \325\
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    \325\ See Long-Term Stock Exchange Rule Book, Rule 14.425.

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[[Page 80504]]

I. Board Statistical Disclosure
    The Exchange does not believe that proposed Rule 5606 will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act. Specifically, the Exchange believes that 
the adoption of Rule 5606 will not impose any undue burden on 
competition among listed companies for the reasons set forth below.
    With a few exceptions, all companies would be required to make the 
same disclosure of their board-level statistical information. The 
average board size of a company that is currently listed on the 
Exchange is eight directors. Although a company would be required to 
disclose its board-level statistical data, directors may choose to opt 
out rather than reveal their diversity characteristics to their 
company. A company would identify such directors in the ``Undisclosed'' 
category. For directors who voluntarily disclose their diversity 
characteristics, the company would collect their responses and disclose 
the information in either the company's proxy statement, information 
statement of shareholder meeting or on the company's website, using 
Nasdaq's required format. While the time and economic burden may vary 
based on a company's board size, Nasdaq does not believe there is any 
significant burden associated with gathering, preparing and reporting 
this data. Therefore, Nasdaq believes that there will be a de minimis 
time and economic burden on listed companies to collect and disclose 
the diversity statistical data.
    Some investors value demographic diversity, and list it as an 
important factor influencing their director voting decisions.\326\ 
Investors have stated that consistent data would make its collection 
and analysis easier and more equitable for investors that are not large 
enough to demand or otherwise access individualized disclosures.\327\ 
Therefore, Nasdaq believes that any burden placed on companies to 
gather and disclose their board-level diversity statistics is 
counterbalanced by the benefits that the information will provide to a 
company's investors.
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    \326\ See Hunt et al., supra note 26.
    \327\ See Petition for Rulemaking, supra note 123, at 2.
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    Moreover, as discussed above, most listed companies are required to 
submit an annual EEO-1 Report, which provides statistical data related 
to race and gender data among employees similar to the data required 
under proposed Rule 5606(a). Because most companies are already 
collecting similar information annually to satisfy their EEOC 
requirement, Nasdaq does not believe that adding directors to the 
collection will place a significant burden on these companies. 
Additionally, the information requested from Foreign Issuers is limited 
in scope and therefore does not impose a significant burden on them.
    Nasdaq faces competition in the market for listing services. 
Proposed Rule 5606 reflects that competition, but it does not impose 
any burden on competition with other exchanges. As discussed above, 
investors have made clear their desire for greater transparency into 
public companies' board-level diversity as it relates to gender 
identity, race, and ethnicity. Nasdaq believes that the proposed rule 
will enhance the competition for listings. Other exchanges can set 
similar requirements for their listed companies, thereby increasing 
competition to the benefit of those companies and their shareholders. 
Accordingly, Nasdaq does not believe the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
II. Diverse Board Representation or Explanation
    Nasdaq believes that proposed Rule 5605(f) will not impose burdens 
on competition among listed companies because the Exchange has 
constructed a framework for similarly-situated companies to satisfy 
similar requirements (i.e., Foreign Issuers, Smaller Reporting 
Companies and other companies), and has provided all companies with the 
choice of satisfying the requirements of Rule 5605(f)(2) by having at 
least two Diverse directors, or by explaining why they do not. Nasdaq 
believes that this will avoid imposing undue costs or burdens on 
companies that, for example, cannot afford to compensate an additional 
director or believe it is not appropriate, feasible or desirable to 
meet the diversity objectives of Rule 5605(f) based on the company's 
particular circumstances (for example, the company's size, operations 
or current board composition). Rather than requiring a company to 
divert resources to compensate an additional director, and place the 
company at a competitive disadvantage with its peers, the rule provides 
the flexibility for such company to explain why it does not meet the 
diversity objective.
    The cost of identifying director candidates can range from nothing 
or a nominal fee (via personal, work or school-related networks, or 
board affinity organizations, as well as internal research by the 
corporate secretary's team) to amounts that can vary widely depending 
on the specific search firm and the size of the company. Some industry 
observers estimate board searches for independent directors cost about 
one-third of a director's annual compensation, while others estimate it 
costs between $75,000 and $150,000. The underlying figures vary; for 
example, one search firm generally charges $25,000 to $50,000. Nasdaq 
observes that total annual director compensation can range widely; 
median director pay is estimated at $134,000 for Russell 3000 companies 
and $232,000 for S&P 500 companies. Moreover, there is a wider range of 
underlying compensation amounts. For example, Russell 3000 directors 
may receive approximately $32,600 (10th percentile), or up to $250,000 
(90th percentile) or more. S&P 500 directors may receive approximately 
$100,000 (10th percentile) or up to $310,000 (90th percentile) or 
more.\328\ Most, if not all, of these costs would be borne in any event 
in the search for new directors regardless of the proposed rule. While 
the proposed rule might lead some companies to search for director 
candidates outside of already established networks, the incremental 
costs of doing so would be tied directly to the benefit of a broader 
search.
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    \328\ Total annual director compensation varies by compensation 
elements and structure as well as amount, which is generally based 
on the size, sector, maturity of the company, and company specific 
situation. See Mark Emanuel et al., Semler Brossy and the Conference 
Board, Director Compensation Practices in the Russell 3000 and S&P 
500 (2020 ed.), available at https://conferenceboard.esgauge.org/directorcompensation/report.
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    To reduce costs for companies that do not currently meet the 
diversity objectives of Rule 5605(f)(2), Nasdaq is proposing to provide 
listed companies that have not yet met their diversity objectives with 
free access to a network of board-ready diverse candidates and a tool 
to support board evaluation, benchmarking and refreshment. This 
offering is designed to ease the search for diverse nominees and reduce 
the costs on companies that choose to meet the diversity objectives of 
Rule 5605(f)(2). Nasdaq is contemporaneously submitting a rule filing 
to the Commission regarding the provision of such services. Nasdaq also 
plans to publish FAQs on its Listing Center to provide guidance to 
companies on the application of the proposed rules, and to establish a 
dedicated mailbox for companies and their counsel to email additional 
questions to Nasdaq regarding the application of the proposed rule. 
Nasdaq believes that these services will

[[Page 80505]]

help to ease the compliance burden on companies whether they choose to 
meet the listing rule's diversity objectives or provide an explanation 
for not doing so.
    Nasdaq also has structured the proposed rule to provide companies 
with at least four years from the Approval Date to satisfy Rule 
5605(f)(2) so that companies do not incur immediate costs striving to 
meet the diversity objectives of Rule 5605(f)(2). Nasdaq also has 
reduced the compliance burden on Smaller Reporting Companies and 
Foreign Issuers by providing them with additional flexibility when 
satisfying the requirement related to the second Diverse director. 
Smaller Reporting Companies could satisfy the proposed diversity 
objective to have two Diverse directors under Rule 5605(f)(2)(C) with 
two Female directors. Like other companies, Smaller Reporting Companies 
also could satisfy the second director objective by including an 
individual who self-identifies as an Underrepresented Minority or a 
member of the LGBTQ+ community. Foreign Issuers could satisfy the 
second director objective by including another Female director, or an 
individual who self-identifies as LGBTQ+ or an underrepresented 
individual based on national, racial, ethnic, indigenous, cultural, 
religious or linguistic identity in the company's home country 
jurisdiction. Nasdaq has further reduced the compliance burdens on 
companies listed on the Nasdaq Capital Market tier by providing them 
with five years from the Approval Date to satisfy Rule 5605(f)(2), 
recognizing that such companies may face additional challenges and 
resource constraints when identifying additional director nominees who 
self-identify as Diverse.
    For the foregoing reasons, Nasdaq does not believe that proposed 
Rule 5605(f) will impose any burden on competition among issuers that 
is not necessary or appropriate in furtherance of the purposes of the 
Act. Further, Nasdaq does not believe the proposed rule will impose any 
burden on competition among listing exchanges. As described above, 
Nasdaq competes with other exchanges globally for listings, including 
exchanges based in jurisdictions that have implemented disclosure 
requirements related to diversity. Within the United States, LTSE 
requires listed companies to adopt and publish a long-term stakeholder 
policy that explains, among other things, ``the Company's approach to 
diversity and inclusion.'' \329\ Other listing venues within the United 
States may propose to adopt rules similar to LTSE's requirements or the 
Exchange's proposal if they believe companies would prefer to list on 
an exchange with diversity-related listing standards.
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    \329\ See Long-Term Stock Exchange Rule Book, Rule 14.425.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2020-081 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2020-081. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2020-081, and should be submitted 
on or before January 4, 2021.
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    \330\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\330\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-27091 Filed 12-10-20; 8:45 am]
BILLING CODE 8011-01-P