Document ID: SEC-2021-1089-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2021-08-12T04:00Z

[Federal Register Volume 86, Number 153 (Thursday, August 12, 2021)]
[Notices]
[Pages 44424-44445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17179]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92590; File Nos. SR-NASDAQ-2020-081; SR-NASDAQ-2020-
082]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Approving Proposed Rule Changes, as Modified by Amendments No. 1, To 
Adopt Listing Rules Related to Board Diversity and To Offer Certain 
Listed Companies Access to a Complimentary Board Recruiting Service

August 6, 2021.

I. Introduction and Overview

    A self-regulatory organization, or ``SRO,'' may propose a change in 
its rules or propose a new rule by filing the proposal with the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ This 
order considers two separate proposed rule changes that The Nasdaq 
Stock Market LLC (``Nasdaq'' or ``Exchange'') filed with the 
Commission.
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    \1\ 15 U.S.C. 78s(b)(1).
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    On December 1, 2020, the Exchange filed with the Commission, 
pursuant to Section 19(b)(1) of the Act and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt listing rules related to board diversity 
(``Board Diversity Proposal''). The proposed rule change was published 
for comment in the Federal Register on December 11, 2020.\3\ On 
February 26, 2021, the Exchange filed Amendment No. 1 to the proposed 
rule change, which replaced and superseded the proposed rule change as 
originally filed.\4\
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    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 90574 (December 4, 
2020), 85 FR 80472 (SR-NASDAQ-2020-081). Comments received on the 
Board Diversity Proposal are available on the Commission's website 
at: https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081.htm. On January 19, 2021, pursuant to Section 
19(b)(2) of the Act, 15 U.S.C. 78s(b)(2), the Division of Trading 
and Markets (``Division''), for the Commission pursuant to delegated 
authority, designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or 
institute proceedings to determine whether to disapprove the 
proposed rule change. See Securities Exchange Act Release No. 90951, 
86 FR 7135 (January 26, 2021). The Division, for the Commission 
pursuant to delegated authority, designated March 11, 2021 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change. See also infra note 11 and accompanying text 
(providing additional procedural history for the Board Diversity 
Proposal).
    \4\ The full text of Amendment No. 1 to the Board Diversity 
Proposal is available on the Commission's website at: https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-8425992-229601.pdf.
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    On December 1, 2020, the Exchange also filed with the Commission, 
pursuant to Section 19(b)(1) of the Act \5\ and Rule 19b-4 
thereunder,\6\ a proposed rule change to offer certain listed companies 
access to a complimentary board recruiting service to help advance 
diversity on company boards (``Board Recruiting Service Proposal''), 
which was published for comment in the Federal Register on December 10, 
2020.\7\ On February 26, 2021, the Exchange filed Amendment No. 1 to 
the proposed rule change, which replaced and superseded the proposed 
rule change as originally filed.\8\
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    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ See Securities Exchange Act Release No. 90571 (December 4, 
2020), 85 FR 79556 (SR-NASDAQ-2020-082). Comments received on the 
Board Recruiting Service Proposal are available on the Commission's 
website at: https://www.sec.gov/comments/sr-nasdaq-2020-082/srnasdaq2020082.htm. On January 19, 2021, pursuant to Section 
19(b)(2) of the Act, 15 U.S.C. 78s(b)(2), the Division, for the 
Commission pursuant to delegated authority, designated a longer 
period within which to approve the proposed rule change, disapprove 
the proposed rule change, or institute proceedings to determine 
whether to disapprove the proposed rule change. See Securities 
Exchange Act Release No. 90952, 86 FR 7148 (January 26, 2021). The 
Division, for the Commission pursuant to delegated authority, 
designated March 10, 2021 as the date by which the Commission shall 
approve or disapprove, or institute proceedings to determine whether 
to disapprove, the proposed rule change. See also infra note 11 and 
accompanying text (providing additional procedural history for the 
Board Recruiting Service Proposal).
    \8\ The full text of Amendment No. 1 to the Board Recruiting 
Service Proposal is available on the Commission's website at: 
https://www.sec.gov/comments/sr-nasdaq-2020-082/srnasdaq2020082-8425987-229599.pdf.
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    On March 10, 2021, the Division, for the Commission pursuant to 
delegated authority, published notice of Amendments No. 1 \9\ and 
instituted proceedings pursuant to Section 19(b)(2)(B) of the Act \10\ 
to determine whether to approve or disapprove the proposed rule 
changes, as modified by Amendments No. 1.\11\
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    \9\ Amendment No. 1 to the Board Diversity Proposal and 
Amendment No. 1 to the Board Recruiting Service Proposal are 
collectively referred to as ``Amendments No. 1.''
    \10\ 15 U.S.C. 78s(b)(2)(B).
    \11\ See Securities Exchange Act Release No. 91286, 86 FR 14484 
(March 16, 2021). On June 7, 2021, pursuant to Section 19(b)(2) of 
the Act, 15 U.S.C. 78s(b)(2), the Division, for the Commission 
pursuant to delegated authority, designated a longer period within 
which to issue an order approving or disapproving the proposed rule 
changes, as modified by Amendments No. 1. See Securities Exchange 
Act Release Nos. 92118, 86 FR 31355 (June 11, 2021) (SR-NASDAQ-2020-
081); 92119, 86 FR 31355 (June 11, 2021) (SR-NASDAQ-2020-082). The 
Division, for the Commission pursuant to delegated authority, 
designated August 8, 2021 as the date by which the Commission shall 
approve or disapprove the Board Diversity Proposal, and August 7, 
2021 as the date by which the Commission shall approve or disapprove 
the Board Recruiting Service Proposal.
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    The Act governs the Commission's review of SRO-proposed rules. 
Section 19(b)(2)(C)(i) provides that the Commission ``shall approve'' a 
proposal if it finds that the rule is consistent with the requirements 
of the Act and the rules and regulations applicable to the SRO--
including requirements in Section 6(b).\12\ The statute does not give 
the Commission the ability to make any changes to the rule proposal as 
submitted, or to disapprove the rule proposal on the ground that the 
Commission would prefer some alternative rule on the same topic.
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    \12\ 15 U.S.C. 78s(b)(2)(C)(i).
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    Under the Board Diversity Proposal, the Exchange proposes to 
require each Nasdaq-listed company, subject to certain exceptions, to 
publicly disclose in an aggregated form, to the extent permitted by 
applicable law, information on the voluntary self-identified gender and 
racial characteristics and LGBTQ+ status (all terms defined below) of 
the company's board of directors. The Exchange also proposes to require 
each Nasdaq-listed company, subject to certain exceptions, 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 director who self-
identifies as female and at least one director who

[[Page 44425]]

self-identifies as an Underrepresented Minority or LGBTQ+.\13\ Under 
the Board Recruiting Service Proposal, the Exchange proposes to provide 
certain Nasdaq-listed companies with one year of complimentary access 
for two users to a board recruiting service, which would provide access 
to a network of board-ready diverse candidates for companies to 
identify and evaluate.
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    \13\ While these Nasdaq-listed companies would have an objective 
of at least two Diverse directors, including at least one director 
who self-identifies as female and at least one director who self-
identifies as an Underrepresented Minority or LGBTQ+, as described 
below, other Nasdaq-listed companies would have different board 
diversity objectives. See infra notes 25-27.
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    This order applies the governing standard under the Act and finds 
that the Board Diversity Proposal, as modified by Amendment No. 1, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. 
Separately, it finds that the Board Recruiting Service Proposal, as 
modified by Amendment No. 1, is also consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange. The proposed rule changes therefore are 
required to be and are approved.\14\
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    \14\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). See also 
infra Section II.
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    In particular, the Commission finds that the Board Diversity 
Proposal and the Board Recruiting Service Proposal are consistent with 
Section 6(b)(5) of the Act,\15\ which requires that the rules of a 
national securities exchange be designed, among other things, to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, to protect investors and the public interest, not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers, and not be 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; and Section 6(b)(8) of 
the Act,\16\ which requires that the rules of a national securities 
exchange not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Commission 
also finds that the Board Recruiting Service Proposal, as modified by 
Amendment No. 1, is consistent with Section 6(b)(4) of the Act,\17\ 
which requires that national securities exchange rules provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
its members and issuers and other persons using its facilities. The 
proposals and Commission findings are discussed below.
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    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78f(b)(8).
    \17\ 15 U.S.C. 78f(b)(4).
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II. Discussion and Commission Findings

    The Board Diversity Proposal would establish a disclosure-based 
framework that would make consistent and comparable statistics widely 
available to investors regarding the number of Diverse directors 
serving on a Nasdaq-listed company's board.\18\ Board-level diversity 
statistics are currently not widely available on a consistent and 
comparable basis, even though the Exchange and many commenters argue 
that this type of information is important to investors.\19\ The Board 
Diversity Proposal would also provide increased transparency and 
require an explanation regarding why a Nasdaq-listed company does not 
meet the proposed board diversity objectives, for those companies that 
do not choose to meet such objectives. It would augment existing 
Commission requirements that companies disclose whether, and how, their 
boards or board nominating committees consider diversity in nominating 
new directors.\20\ As noted by the Exchange and a number of 
commenters,\21\ a better understanding of why a company does not meet 
the proposed objectives would contribute to investors' investment and 
voting decisions. Investors and companies have different views 
regarding board diversity and whether board diversity affects company 
performance and governance.\22\ As discussed below, commenters 
representing a broad array of investors have indicated an interest in 
board diversity information. And, regardless of their views on those 
issues, the Board Diversity Proposal would provide investors with 
information to facilitate their evaluation of companies in which they 
might invest. The Board Diversity Proposal would therefore contribute 
to the maintenance of fair and orderly markets, which has previously 
been found by the Commission to support a finding that an exchange 
listing standard satisfied the requirements of Section 6(b)(5).\23\ 
Accordingly, as discussed below, the Commission finds that the Board 
Diversity Proposal is designed to promote just and equitable principles 
of trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
public interest. The Commission also finds that the Board Diversity 
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, and would not impose any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the Act.
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    \18\ Pursuant to proposed Rule 5605(f)(1), ``Diverse'' would be 
defined to mean an individual who self-identifies in one or more of 
the following categories: (i) Female, (ii) Underrepresented 
Minority, or (iii) LGBTQ+. Also pursuant to proposed Rule 
5605(f)(1), ``Female'' would be defined to mean an individual who 
self-identifies her gender as a woman, without regard to the 
individual's designated sex at birth; ``Underrepresented Minority'' 
would be defined to mean 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; and 
``LGBTQ+'' would be defined to mean an individual who self-
identifies as any of the following: Lesbian, gay, bisexual, 
transgender, or as a member of the queer community. See Amendment 
No. 1 to the Board Diversity Proposal at 327; proposed Rule 
5605(f)(1).
    \19\ See infra Section II.A.2. (describing the Exchange's and 
commenters' arguments regarding the demand for board diversity 
information, including board-level diversity statistics).
    \20\ See Regulation S-K, Item 407(c)(2)(vi).
    \21\ See infra Section II.A.2. (describing the Exchange's and 
commenters' arguments regarding the demand for board diversity 
information, including explanations for why a company does not meet 
the proposed diversity objectives).
    \22\ See infra Section II.B. (describing commenters' differing 
views regarding board diversity and whether board diversity affects 
company performance and governance).
    \23\ See Securities Exchange Act Release No. 78223 (July 1, 
2016), 81 FR 44400, 44403 (July 7, 2016) (order approving SR-NASDAQ-
2016-013) (``2016 Approval Order'') (finding that exchange 
disclosure-related listing standards contribute to the maintenance 
of fair and orderly markets). The maintenance of ``fair and orderly 
markets'' is a statutory goal included throughout the Act, including 
components that apply to SROs such as Nasdaq. See, e.g., Sections 
6(f), 9(i), 11, 11A, 12(f), and 19(b)(3) of the Act.
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    The Board Recruiting Service Proposal would provide Eligible 
Companies,\24\ which by definition do

[[Page 44426]]

not have a specified number of Diverse directors, with access to a 
network of board-ready diverse candidates, allowing these companies to 
identify and evaluate such candidates if they choose to use the service 
to increase diverse representation on their boards. The Board 
Recruiting Service Proposal would also help Eligible Companies to meet 
(or exceed, in the case of a Company with a Smaller Board \25\) the 
diversity objectives under the separately approved Board Diversity 
Proposal, if they elect to meet those objectives rather than disclose 
why they have not met the objectives. Further, the Board Recruiting 
Service Proposal could help the Exchange compete to attract and retain 
listings, particularly in light of the diversity objectives in the 
Board Diversity Proposal, which is also approved by this order and that 
will apply to Nasdaq-listed companies. Accordingly, and as discussed 
below in Section II.I., the Commission finds that the Board Recruiting 
Service Proposal is designed to provide for the equitable allocation of 
reasonable dues, fees, and other charges among issuers, is not designed 
to permit unfair discrimination between issuers, and does not impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act. The Commission further believes that the 
Board Recruiting Service Proposal would provide for the equitable 
allocation of complimentary services and reflects the current 
competitive environment for listings among national securities 
exchanges.
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    \24\ The Board Recruiting Service Proposal in general defines 
``Eligible Company'' as a listed company that represents to the 
Exchange that it does not have: (i) At least one director who self-
identifies as Female; and (ii) at least one director who self-
identifies as one or more of the following: An Underrepresented 
Minority or LGBTQ+. See proposed IM-5900-9(a); Amendment No. 1 to 
the Board Recruiting Service Proposal at 11 n.20 (describing the 
treatment of a Company with a Smaller Board). A Foreign Issuer would 
be an Eligible Company if it represents to the Exchange that it does 
not have: (i) At least one director who self-identifies as Female; 
and (ii) at least one director who self-identifies as one or more of 
the following: Female, an Underrepresented Individual, or LGBTQ+. 
See proposed IM-5900-9(b). A Smaller Reporting Company would be an 
Eligible Company if it represents to the Exchange that it does not 
have: (i) At least one director who self-identifies as Female, and 
(ii) at least one director who self-identifies as one or more of the 
following: Female, an Underrepresented Minority, or LGBTQ+. See 
proposed IM-5900-9(c).
    \25\ Proposed Rule 5605(f)(2)(D) would require each company with 
a board of directors of five or fewer members (``Company with a 
Smaller Board'') to have, or explain why it does not have, at least 
one member of its board of directors who is Diverse.
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A. Disclosures Under the Board Diversity Proposal

1. Disclosure-Based Framework
    The Board Diversity Proposal's disclosure-based framework would be 
established by proposed Rules 5605(f) and 5606. The Exchange proposes 
to adopt new Rule 5605(f)(2), which would require each Nasdaq-listed 
company (other than a Foreign Issuer,\26\ Smaller Reporting 
Company,\27\ or Company with a Smaller Board) to have, or explain why 
it does not have, at least two members of its board of directors who 
are Diverse,\28\ including at least one Diverse director who self-
identifies as Female and at least one Diverse director who self-
identifies as an Underrepresented Minority or LGBTQ+.\29\ If a company 
elects to satisfy the requirements of proposed Rule 5605(f)(2) by 
disclosing why it does not meet the applicable diversity objectives, 
the company would be required to: (i) Specify the requirements of 
proposed Rule 5605(f)(2) that are applicable; and (ii) explain the 
reasons why it does not have two Diverse directors (or one Diverse 
director for a Company with a Smaller Board).\30\ The Exchange would 
not evaluate the substance or merits of a company's explanation.\31\
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    \26\ The Exchange proposes to define a Foreign Issuer 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, 17 CFR 240.3b-4(b), and (ii) has its principal 
executive offices located outside of the United States. See proposed 
Rule 5605(f)(1). For Foreign Issuers, the Exchange proposes to 
define ``Diverse'' to mean an individual who self-identifies as one 
or more of the following: Female, LGBTQ+, or an underrepresented 
individual based on national, racial, ethnic, indigenous, cultural, 
religious, or linguistic identity in the country of the company's 
principal executive offices as reported on the company's Form F-1, 
10-K, 20-F, or 40-F (``Underrepresented Individual''). See proposed 
Rule 5605(f)(2)(B)(i). Proposed Rule 5605(f)(2)(B) would require 
each Foreign Issuer (other than a Company with a Smaller Board) 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 Diverse 
director who self-identifies as Female. The second Diverse director 
may include an individual who self-identifies as one or more of the 
following: Female, LGBTQ+, or an Underrepresented Individual.
    \27\ The Exchange proposes to define a Smaller Reporting Company 
as set forth in Rule 12b-2 under the Act. See proposed Rule 
5605(f)(1). Proposed Rule 5605(f)(2)(C) would require each Smaller 
Reporting Company (other than a Company with a Smaller Board, as 
discussed below) 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 Diverse director who self-identifies as Female. The second 
Diverse director may include an individual who self-identifies as 
one or more of the following: Female, LGBTQ+, or an Underrepresented 
Minority.
    \28\ As proposed, ``two members of its board of directors who 
are Diverse'' would exclude emeritus directors, retired directors, 
and members of an advisory board. See Amendment No. 1 to the Board 
Diversity Proposal at 73 n.187.
    \29\ See proposed Rule 5605(f)(2)(A).
    \30\ See proposed Rule 5605(f)(3). The disclosure must be 
provided in advance of the company's next annual meeting of 
shareholders: (a) In any proxy statement or any information 
statement (or, if a company does not file a proxy, in its Form 10-K 
or 20-F); or (b) on the company's website. See id. If the company 
provides the disclosure on its website, the company must submit such 
disclosure concurrently with the filing made pursuant to (a) above 
and submit a URL link to the disclosure through the Nasdaq Listing 
Center, within one business day after such posting. See id.
    \31\ See Amendment No. 1 to the Board Diversity Proposal at 74-
75 (emphasizing that an explanation must ``satisfy subparagraphs (i) 
and (ii) of proposed Rule 5605(f)(3)''--the company must ``explain 
the reasons why it does not have the applicable number of Diverse 
directors,'' it is not enough ``merely to state that `the Company 
does not comply with Nasdaq's diversity rule'''). See also letter 
from John A. Zecca, Executive Vice President, Chief Legal Officer, 
and Chief Regulatory Officer, Nasdaq, to Vanessa A. Countryman, 
Secretary, Commission, dated February 26, 2021 (``Nasdaq Response 
Letter II''), at 8 (``The company can choose to disclose as much, or 
as little, insight into the company's circumstances or diversity 
philosophy as the company determines, and shareholders may request 
additional information directly from the company if they need 
additional information to make an informed voting or investment 
decision.''). See id., for examples of specific disclosures the 
Exchange would consider sufficient to satisfy the requirements of 
proposed Rule 5605(f)(3).
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    As proposed, if a company fails to adhere to proposed Rule 5605(f), 
the Exchange's Listing Qualifications Department would promptly notify 
the company and inform it that it has until the later of its next 
annual shareholders meeting or 180 days from the event that caused the 
deficiency to cure the deficiency.\32\ If a company does not regain 
compliance within the applicable cure period, the Listings 
Qualifications Department would issue a Staff Delisting Determination 
Letter.\33\
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    \32\ See proposed Rule 5605(f)(6)(A). Proposed Rule 
5605(f)(6)(B) would provide a grace period for a company that has 
satisfied the diversity objectives within the applicable timeframes, 
but later ceases to meet the diversity objectives due to a vacancy 
on its board of directors.
    \33\ See Rule 5810(c)(3). A company that receives a Staff 
Delisting Determination can appeal the determination to the Hearings 
Panel through the process set forth in Rule 5815. See Amendment No. 
1 to the Board Diversity Proposal at 88.
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    Pursuant to proposed Rule 5606(a), each Nasdaq-listed company would 
be required to annually disclose its board-level diversity data in a 
substantially similar format as the ``Board Diversity Matrix.'' In the 
proposed Board Diversity Matrix, a company would be required to provide 
the total number of directors on its board, and the company (other than 
a Foreign Issuer) would be required to provide the following: (1) The 
number of directors based on gender identity (female, male, or non-
binary\34\) and the number of directors who did not disclose gender; 
(2) the number of directors based on race and ethnicity (African 
American or Black, Alaskan Native or Native American, Asian, Hispanic 
or Latinx, Native Hawaiian or Pacific Islander, White, or Two or More 
Races or Ethnicities \35\),

[[Page 44427]]

disaggregated by gender identity (or did not disclose gender); (3) the 
number of directors who self-identify as LGBTQ+; and (4) the number of 
directors who did not disclose a demographic background under item (2) 
or (3) above.\36\
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    \34\ See Amendment No. 1 to the Board Diversity Proposal at 327 
(defining ``non-binary''). Although non-binary is included as a 
category in the Board Diversity Matrix, a company would not satisfy 
the diversity objectives in proposed Rule 5605(f)(2) if a director 
self-identifies solely as non-binary. See id. at 66 n.173.
    \35\ If a director self-identifies in the ``Two or More Races or 
Ethnicities'' category, the director must also self-identify in each 
individual category, as appropriate. See id. at 66 n.174.
    \36\ See proposed Rule 5606(a).
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    A company that qualifies as a Foreign Issuer may elect to use an 
alternative Board Diversity Matrix format.\37\ A Foreign Issuer would 
be required to provide the total number of directors on its board, and 
would also be required to provide the following: (1) Its country of 
principal executive offices; (2) whether it is a Foreign Private 
Issuer; (3) whether disclosure is prohibited under its home country 
law; (4) the number of directors based on gender identity (female, 
male, or non-binary) and the number of directors who did not disclose 
gender; (5) the number of directors who self-identify as 
Underrepresented Individuals in its home country jurisdiction; (6) the 
number of directors who self-identify as LGBTQ+; and (7) the number of 
directors who did not disclose the demographic background under item 
(5) or (6) above.\38\
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    \37\ See id.
    \38\ See id. Proposed Rule 5606 would become operative one year 
after Commission approval of the proposal. See proposed Rule 
5606(e). A company would be required to be in compliance with 
proposed Rule 5606 by the later of: (i) One calendar year from the 
approval date (``Effective Date''); or (ii) the date the company 
files its proxy statement or its information statement for its 
annual meeting of shareholders (or, if the company does not file a 
proxy or information statement, the date it files its Form 10-K or 
20-F) during the calendar year of the Effective Date.
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    As proposed, if a company fails to adhere to proposed Rule 5606, 
the Exchange would notify the company that it is not in compliance with 
a listing standard and allow the company 45 calendar days to submit a 
plan to regain compliance and, upon review of such plan, the Exchange 
may provide the company with up to 180 days to regain compliance.\39\ 
If the company does not submit a plan or regain compliance within the 
applicable time periods, it would be issued a Staff Delisting 
Determination, which the company could appeal to a Hearings Panel.\40\
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    \39\ See Rule 5810(c)(2).
    \40\ See id.
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    The Exchange states that, with these provisions, it is proposing a 
disclosure-based framework and not a mandate.\41\ The Exchange also 
states that while some companies have made progress in diversifying 
their boardrooms, the national market system and the public interest 
would be well-served by a ``disclosure-based, business driven'' 
framework for companies to embrace meaningful and multi-dimensional 
diversification of their boards.\42\
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    \41\ See Amendment No. 1 to the Board Diversity Proposal at 19. 
See also id. at Section 3.a.VII.D (discussing the alternatives that 
the Exchange has considered, including a mandate versus a 
disclosure-based approach).
    \42\ See id. at 8-9, 12, 41. The Exchange states that, although 
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 jurisdictions that have focused on board diversity, and 
progress toward bringing underrepresented racial and ethnic groups 
into the boardroom has been slower. See id. at 12, Section 3.a.IV.
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    Some commenters express support for a ``flexible'' ``comply-or-
disclose'' approach.\43\ Some commenters state that the proposal would 
not impose a quota for board diversity,\44\ and emphasize that the 
Exchange does not plan to judge the merits of a company's explanation 
relating to board diversity.\45\ Other commenters express the concern 
that the Board Diversity Proposal would establish a quota for a minimum 
number of Diverse directors.\46\ Some commenters also argue that the 
proposal would substitute a regulator's judgment for that of 
shareholders' and companies' boards and management in choosing 
directors,\47\ and that directors should be selected for their 
experience, competence, and skills.\48\
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    \43\ See, e.g., letter from Kristi Mitchem, Chief Executive 
Officer, BMO Global Asset Management, to Vanessa Countryman, 
Secretary, Commission, dated January 11, 2021 (``BMO Letter''), at 
2; letter from Brian V. Breheny, Skadden, Arps, Slate, Meagher & 
Flom LLP, to Vanessa Countryman, Secretary, Commission, dated 
January 4, 2021 (``Skadden Letter''), at 2; letter from Lisa M. 
Fairfax, Alexander Hamilton Professor of Business Law, George 
Washington University Law School, to Vanessa Countryman, Secretary, 
Commission, dated January 4, 2021 (``Fairfax Letter''), at 10; 
letter from Molly Gochman, Founder & President, Stardust, to Vanessa 
Countryman, Secretary, Commission, dated January 4, 2021 (``Stardust 
Letter''), at 2; letter from Brenda Chia and Sanjiv Shah, Co-Chairs, 
Association of Asian American Investment Managers, dated December 
28, 2020 (``AAAIM Letter''), at 2; letter from Betty T. Yee, 
California State Controller, to Vanessa Countryman, Secretary, 
Commission, dated December 21, 2020, at 1-2; letter from Hershel 
Harper, Chief Investment Officer, UAW Retiree Medical Benefits 
Trust, to Vanessa Countryman, Secretary, Commission, dated December 
22, 2020 (``UAW Letter''), at 2-3; letter from Jay Huish, Executive 
Director, and William J. Coaker Jr., Chief Investment Officer, San 
Francisco Employees' Retirement System, to Vanessa Countryman, 
Secretary, Commission, dated December 17, 2020, at 2.
    \44\ See, e.g., letter from Kurt Schacht, Head of Advocacy, CFA 
Institute Advocacy and Karina Karakulova Sr. Manager, Capital 
Markets Policy--Americas, CFA institute, to Vanessa Countryman, 
Secretary, Commission, dated January 4, 2021 (``CFA Letter'') at 6; 
letter from Scott M. Stringer, New York City Comptroller, to Vanessa 
Countryman, Secretary, Commission, dated January 4, 2021 (``New York 
City Comptroller Letter''), at 1 and 3; letter from William J. 
Stromberg, President and CEO, and David Oestreicher, General Counsel 
and Corporate Secretary, T. Rowe Price Group, Inc., to Vanessa 
Countryman, Secretary, Commission, dated December 29, 2020 (``T. 
Rowe Letter''), at 2; letter from Joseph M. Torsella, Pennsylvania 
State Treasurer, to Vanessa Countryman, Secretary, Commission, dated 
January 4, 2021, at 1-2; AAAIM Letter at 2; letter from Douglas K. 
Chia, Soundboard Governance LLC, to Vanessa Countryman, Secretary, 
Commission, dated December 29, 2020 (``Soundboard Letter''), at 2; 
letter from Amy L. Goodman and John F. Olson to Vanessa A. 
Countryman, Secretary, Commission, dated December 24, 2010 
(``Goodman and Olson Letter''), at 2; letter from Patricia Gazda, 
Corporate Governance Officer, Ohio Public Employees Retirement 
System, to Vanessa Countryman, Secretary, Commission, dated December 
23, 2020 (``OPERS Letter''), at 2; UAW Letter at 2-3; letter from 
Barb Smoot, President and CEO, Women for Economic and Leadership 
Development, to Vanessa Countryman, Secretary, Commission, dated 
December 21, 2020.
    \45\ See, e.g., letter from John W. Rogers, Jr., Chairman and 
Co-CEO, and Mellody Hobson, President and Co-CEO, Ariel Investments, 
LLC, to Vanessa Countryman, Secretary, Commission, dated December 
29, 2020 (``Ariel Letter''), at 1; letter from Aeisha Mastagni, 
Portfolio Manager, Sustainable Investment and Stewardship 
Strategies, California State Teachers' Retirement System, to Vanessa 
A. Countryman, Secretary, Commission, dated December 23, 2020, at 2.
    \46\ See, e.g., letter from Publius Oeconomicis to Vanessa 
Countryman, Secretary, Commission, dated May 3, 2021 (``Publius 
Letter II''), at 1-2; letter from Peter Flaherty, Chair, and Paul D. 
Kamenar, Counsel, National Legal and Policy Center, to Vanessa 
Countryman, Secretary, Commission, dated January 14, 2021 (``NLPC 
Letter''); letter from Henry D. Wolfe, Chairman, De la Vega 
Occidental & Oriental Holdings L.L.C., to Vanessa Countryman, 
Secretary, Commission, dated January 4, 2021 (``De La Vega 
Letter''), at 2; letter from Dennis E. Nixon, President, 
International Bancshares Corporation, to Vanessa A. Countryman, 
Secretary, Commission, dated December 31, 2020 (``IBC Letter''), at 
5; anonymous letter with pseudonym ``Publius Oeconomicis'' to 
Vanessa Countryman, Secretary, Commission, dated December 28, 2020 
(``Publius Letter''), at 8-10; letter from Walter Donnellan dated 
December 14, 2020 (``Donnellan Letter''), at 3. One commenter argues 
that the Exchange downplays the consequences of non-compliance, and 
that the proposed framework would require companies to either 
discriminate based on sex, race, or sexual orientation or assume a 
serious risk of reputational and litigation harm. See letter from C. 
Boyden Gray and Jonathan Berry, Boyden Gray & Associates, submitted 
on behalf of the Alliance for Fair Board Recruitment, dated April 6, 
2021 (``Alliance for Fair Board Recruitment Letter''), at 31-33. 
Some commenters also argue that men and women do not choose or 
desire all professions equally. See letter from Richard Morrison, 
Research Fellow, Competitive Enterprise Institute, dated March 11, 
2021 (``CEI Letter''), at 3-4; letter from Independent Women's 
Forum, dated December 24, 2020 (``Independent Women's Forum 
Letter''), at 2.
    \47\ See, e.g., letter from David R. Burton, Senior Fellow in 
Economic Policy, The Heritage Foundation, to J. Matthew 
DeLesDernier, Assistant Secretary, Commission, dated January 4, 2021 
(``Heritage Foundation Letter''), at 6-7; IBC Letter at 2; Donnellan 
Letter at 2-3; Type A Letter.
    \48\ See, e.g., De La Vega Letter at 2-3; Heritage Foundation 
Letter at 16.
---------------------------------------------------------------------------

    In response to comments, the Exchange notes that the Board 
Diversity Proposal would establish a disclosure-based framework and not 
a mandate or quota.\49\ According to the Exchange,

[[Page 44428]]

proposed Rule 5605(f) would set forth ``aspirational diversity 
objectives'' and not quotas, mandates, or set-asides, and companies 
that do not meet the objectives need only explain why they do not.\50\ 
The Exchange also provides examples of what might be contained in such 
an explanation and reiterates that it would not assess the substance of 
the explanation, but would merely verify that the company has provided 
one.\51\ The Exchange further states that the proposal would not 
require any particular board composition or require a company to select 
directors based on any criteria other than an individual's 
qualifications for the position.\52\ The Exchange believes that its 
proposal would balance the calls of investors for companies to increase 
diverse representation on their boards with the need for companies to 
maintain flexibility and decision-making authority over their board 
composition.\53\
---------------------------------------------------------------------------

    \49\ See Nasdaq Response Letter II at 6-7. The Exchange also 
rejects the comments that claim that the proposal is a de facto 
quota, and states that the proposal is intended to provide 
shareholders with sufficient information to make an informed voting 
or investment decision, or to facilitate informed discussions with 
companies. See id. at 8.
    \50\ See letter from Stephen J. Kastenberg, Ballard Spahr LLP, 
to Vanessa Countryman, Secretary, Commission, dated February 5, 2021 
(submitted on behalf of the Exchange by its counsel) (``Nasdaq 
Response Letter I''), at 2.
    \51\ See id. at 2-3. See also Nasdaq Response Letter II at 7.
    \52\ See Nasdaq Response Letter I at 3.
    \53\ See Nasdaq Response Letter II at 7. See also infra Section 
II.D. (describing the Exchange's argument that companies are free to 
decide where to list and may switch listing markets).
---------------------------------------------------------------------------

    The Board Diversity Proposal would establish a disclosure-based 
framework for Nasdaq-listed companies that would contribute to 
investors' investment and voting decisions. While the proposal may have 
the effect of encouraging some Nasdaq-listed companies to increase 
diversity on their boards, the proposed rules do not mandate any 
particular board composition. The proposal would not require a company 
to select a director solely because that person falls within the 
proposed definition of ``Diverse,'' would not prevent companies and 
their shareholders from selecting directors based on experience, 
competence, and skills, and would not substitute a regulator's judgment 
for companies' or their shareholders' judgment in selecting directors. 
Rather, a Nasdaq-listed company that does not meet the board diversity 
objectives may comply with proposed Rule 5605(f) by identifying the 
requirements of Rule 5605(f)(2) that apply to the company and 
explaining why it does not meet the objectives, and the Exchange would 
not assess the substance of the company's explanation.\54\
---------------------------------------------------------------------------

    \54\ One commenter states that, if the Exchange is truly 
interested in establishing only a disclosure framework, it should 
remove the diversity objectives and only require board-level 
statistical disclosure, or alternatively require all companies to 
disclose an explanation for the constitution of their boards. See 
Publius Letter II at 2. As discussed in Section II.C.2., it is not 
unreasonable to only require companies that do not meet the proposed 
diversity objectives to disclose why they have not done so, rather 
than to require all Nasdaq-listed companies to disclose their 
approach to board diversity. Moreover, as discussed in Section 
II.A.2., explanations from companies that do not meet the proposed 
diversity objectives, in addition to board-level statistical 
disclosure, would contribute to investors' investment and voting 
decisions.
---------------------------------------------------------------------------

    Some companies may prefer not to explain their approach to board 
diversity for various reasons, such as concerns regarding perceived 
reputational, legal, or other harm. However, the proposal could 
mitigate potential concerns by giving companies substantial flexibility 
in crafting the required explanation--including how much detail to 
provide--and the Exchange would not evaluate the substance of the 
explanation. Moreover, while there would be costs to listing 
elsewhere,\55\ companies that object to providing any explanation can 
choose instead to list on a different exchange. No company is required 
to list on Nasdaq. Rather, exchanges compete for listings, with four 
exchanges that currently list securities of operating companies \56\ 
and nine exchanges that have rules for the listing of issuers on the 
exchange.\57\ Listing exchanges compete with each other for listings in 
many ways, including listing fees, listing standards, and listing 
services.\58\ In approving proposed rule changes relating to 
complimentary services that exchanges offer to issuers, including 
issuers that switch listing markets, the Commission has also explained 
that exchanges are responding to competitive market pressures.\59\ As 
discussed in Section II.D. below, the current proposals may provide 
another way in which the exchanges compete for listings.
---------------------------------------------------------------------------

    \55\ These costs would include the fixed costs associated with 
listing on a different exchange (such as the exchange's application 
fee, and the legal and accounting expenses associated with ensuring 
that the issuer satisfies the listing standards of the new 
exchange), as well as the costs associated with communicating with 
investors about the transfer of listing. See Securities Act Release 
No. 10428 (October 24, 2017), 82 FR 50059, 50065 (October 30, 2017) 
(``Rule 146 Release'').
    \56\ These exchanges are Nasdaq; New York Stock Exchange LLC 
(``NYSE''); Cboe BZX Exchange, Inc. (``BZX''); and NYSE American LLC 
(``NYSE American'').
    \57\ These exchanges are Nasdaq; NYSE; BZX; NYSE American; 
Investors Exchange LLC (``IEX''); Long-Term Stock Exchange, Inc. 
(``LTSE''); Nasdaq BX, Inc.; NYSE Arca, Inc.; and NYSE Chicago, Inc. 
See also, e.g., LTSE Rule 14.425(a)(1)(C) (requiring LTSE-listed 
issuers to adopt and publish a policy on the company's approach to 
diversity and inclusion).
    \58\ See Rule 146 Release, supra note 55, at 50064. The 
Exchange, along with other exchanges, currently have a number of 
listing standards governing a listed company's board of directors. 
See, e.g., Nasdaq Rule 5600 Series; NYSE Listed Company Manual 
Section 303A.00.
    \59\ See, e.g., Securities Exchange Act Release No. 90893 
(January 11, 2021), 86 FR 4166 (January 15, 2021) (approving SR-
NYSE-2020-94 relating to certain complimentary services); Securities 
Exchange Act Release No. 90729 (December 18, 2020), 85 FR 84434 
(December 28, 2020) (approving SR-NASDAQ-2020-060 relating to 
certain complimentary services).
---------------------------------------------------------------------------

2. Demand for and Potential Benefits of the Proposed Disclosures
    In the Board Diversity Proposal, the Exchange states that its 
discussions with organizational leaders representing a broad spectrum 
of market participants and stakeholders (including members of the 
business, investor, governance, legal, and civil rights communities) 
revealed strong support for disclosure requirements that would 
standardize the reporting of board diversity statistics.\60\ The 
Exchange also states that current reporting of board diversity data is 
not provided in a consistent manner or on a sufficiently widespread 
basis and, as such, investors are not able to readily compare board 
diversity statistics across companies.\61\ In pointing out the ``broad 
latitude'' afforded to companies by Commission rules relating to board 
diversity and proxy disclosure, the Exchange states that the absence of 
a specific definition of ``diversity'' for such disclosures has 
resulted in current reporting of board-level diversity
---------------------------------------------------------------------------

    \60\ See Amendment No. 1 to the Board Diversity Proposal at 
Section 3.a.V. The Exchange also states that such discussions 
reinforced the notion that if companies recruit by skill set and 
experience rather than title, diverse talent would satisfy demand. 
See id. at 19-20, 46. According to the Exchange, studies suggest 
that the traditional director candidate selection process may create 
barriers to considering qualified diverse candidates for board 
positions. See id. at 41-44, Section 3.b.II.A.
    \61\ See id. at 9. The Exchange also states that, while 
conducting research on the state of board diversity among its listed 
companies, it encountered multiple 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. See id. at 51. 
See also id. at 59, 107.

---------------------------------------------------------------------------

[[Page 44429]]

statistics being significantly unreliable and unusable to 
investors.\62\ The Exchange notes that the lack of transparency creates 
barriers to investment analysis, due diligence, and academic study, and 
affects investors who are increasingly basing public advocacy, proxy 
voting, and direct shareholder-company engagement decisions on board 
diversity considerations.\63\
---------------------------------------------------------------------------

    \62\ See id. at Sections 3.a.VI.A-B.
    \63\ See id. at 51-52. See also id. at Section 3.a.VI.C. 
(describing examples of support for board diversity disclosures).
---------------------------------------------------------------------------

    The Exchange asserts that the disclosure-based framework of 
proposed Rule 5605(f) may influence corporate conduct if a company 
chooses to meet the proposed diversity objectives,\64\ and could help 
increase opportunities for Diverse candidates.\65\ Moreover, the 
Exchange states that, if a company does not meet the proposed 
objectives, the disclosure under proposed Rule 5605(f)(3) would provide 
analysts and investors with a better understanding about a company's 
reasons for not doing so.\66\ The Exchange believes that this 
disclosure would enable the investment community to conduct more 
informed analyses of, and have more informed conversations with, 
companies and improve the quality of information available to investors 
who rely on this information to make informed investment and voting 
decisions.\67\
---------------------------------------------------------------------------

    \64\ See id. at 121.
    \65\ See id. The Exchange also states that proposed Rule 5605(f) 
would empower companies to maintain decision-making authority over 
the composition of their boards. See id. at 122. The Exchange 
recognizes that directors may bring diverse perspectives, skills, 
and experiences to the board, notwithstanding that they have similar 
attributes; therefore, the Exchange believes that it is in the 
public interest to permit a company to choose whether to meet the 
proposed diversity objectives or explain why it does not. See id. at 
129-30.
    \66\ See id. at 122.
    \67\ See id. at 122-23.
---------------------------------------------------------------------------

    In addition, the Exchange believes that the disclosure-based 
framework of proposed Rule 5606 would eliminate data collection 
inaccuracies, decrease investors' costs, enhance investors' ability to 
utilize the information disclosed, and make information available to 
investors who otherwise would not be able to obtain individualized 
disclosures.\68\ The Exchange also states that proposed Rule 5606 would 
protect investors that view information related to board diversity as 
material to their investment and voting decisions, and enhance investor 
confidence by assisting investors in making more informed 
decisions.\69\ Moreover, the Exchange believes that the disclosures 
would provide consistent information to the public and would enable 
investors to continually review the board composition of a company to 
track trends,\70\ as well as simplify or eliminate the need for a 
company to respond to multiple investor requests for board diversity 
information.\71\
---------------------------------------------------------------------------

    \68\ See id. at 110-13.
    \69\ See id. at 110-11.
    \70\ The Exchange also states that the disclosures under 
proposed Rule 5606 would provide a means for the Exchange to assess 
whether companies meet the diversity objectives under proposed Rule 
5605(f). See id. at 116.
    \71\ See id. at 112.
---------------------------------------------------------------------------

    Many commenters who support the Board Diversity Proposal believe 
that investors currently do not have sufficient access to consistent, 
meaningful, or reliable board diversity information.\72\ Many 
commenters believe that board diversity information is important for 
investment decision making,\73\ investment strategies and analysis,\74\ 
and voting decisions.\75\ Some commenters also believe that the 
availability of board diversity information would facilitate studies on 
the impact of board diversity.\76\ In addition, many commenters believe 
that the proposed board diversity disclosures would be material to 
investors,\77\ would improve access to transparent and comparable board 
diversity disclosures across companies,\78\ would allow more efficient 
and less costly access to and usage of board diversity information,\79\ 
and would allow investors to monitor

[[Page 44430]]

and assess companies' board diversity.\80\ Moreover, some commenters 
believe that the proposal would enhance progress in increasing board 
diversity.\81\
---------------------------------------------------------------------------

    \72\ See, e.g., letter from Aron Szapiro, Head of Policy 
Research, Morningstar, Inc., and Michael Jantzi, Chief Executive 
Officer, Sustainalytics, to Vanessa Countryman, Secretary, 
Commission, dated January 13, 2021 (``Morningstar Letter''), at 1-2; 
letter from Ramiro A. Cavazos, President and CEO, United States 
Hispanic Chamber of Commerce, to Vanessa Countryman, Secretary, 
Commission, dated January 4, 2021 (``Hispanic Chamber of Commerce 
Letter''), at 3; New York City Comptroller Letter at 2-3; Fairfax 
Letter at 7; letter from Michael W. Frerichs, Illinois State 
Treasurer, to Vanessa Countryman, Secretary, Commission, dated 
December 31, 2020 (``Illinois State Treasurer Letter''), at 2; 
Constance F. Armstrong, Executive Director, The Boston Club, to 
Vanessa Countryman, Secretary, Commission, dated December 31, 2020 
(``Boston Club Letter'') at 1; letter from Roger W. Ferguson, Jr., 
President and CEO, Teachers Insurance and Annuity Association of 
America, and Jose Minaya, CEO, Nuveen, LLC, to Vanessa Countryman, 
Secretary, Commission, dated December 31, 2020 (``TIAA Letter''), at 
2; letter from Esther Aguilera, President and CEO, Latino Corporate 
Directors Association, to Vanessa Countryman, Secretary, Commission, 
dated December 30, 2020 (``LCDA Letter''), at 9-11; letter from 
Robert W. Lovelace, Chief Executive Officer, Capital Research and 
Management Company, to Vanessa Countryman, Secretary, Commission, 
dated December 22, 2020 (``Capital Research and Management Company 
Letter''), at 2-3; letter from Rachel Stern, Executive Vice 
President, Chief Legal Officer and Global Head of Strategic 
Resources, FactSet Research Systems Inc., to Vanessa Countryman, 
Secretary, Commission, dated December 22, 2020 (``FactSet Letter''), 
at 1-2. Some commenters also note that not all investors currently 
have the same access to board diversity information. See, e.g., 
Fairfax Letter at 6 (stating that collection of board diversity data 
on a company-by-company basis creates informational asymmetries, 
particularly for investors without the time or resources to 
effectively engage in this manner); New York City Comptroller Letter 
at 3 (stating that the proposal would level the playing field for 
smaller institutional investors who may not have the resources 
available to do the research and engagement necessary to ascertain 
the racial and ethnic diversity of boards).
    \73\ See, e.g., BMO Letter at 1; letter from Olshan Frome 
Wolosky LLP to Vanessa A. Countryman, Secretary, Commission, dated 
January 6, 2021 (``Olshan Letter''), at 3-4; letter from Steve 
Nelson, Chief Executive Officer, Institutional Limited Partners 
Association, to Vanessa Countryman, Secretary, Commission, dated 
January 4, 2021 (``Institutional Limited Partners Association 
Letter''), at 2; TIAA Letter at 3; LCDA Letter at 6-10; letter from 
Mary Pryshlak, Head of Investment Research, Wellington Management 
Company LLP, to Vanessa Countryman, Secretary, Commission, dated 
December 30, 2020 at 1-2; Ariel Letter at 1. Some commenters also 
specifically express support for the proposed disclosures of the 
reason why a company does not meet the board diversity objectives 
and believe that such disclosures would contribute to investment or 
voting decisions. See, e.g., letter from Jeffrey P. Mahoney, General 
Counsel, Council of Institutional Investors, to Secretary, 
Commission, dated December 30, 2020, at 4-5; Ariel Letter at 1.
    \74\ See, e.g., T. Rowe Letter at 1-2; UAW Letter at 6; FactSet 
Letter at 1-2.
    \75\ See, e.g., letter from Dev Stahlkopf, Corporate Vice 
President, General Counsel and Secretary, Microsoft Corporation, to 
Vanessa Countryman, Secretary, Commission, dated January 4, 2021 
(``Microsoft Letter''), at 2; New York City Comptroller Letter at 2-
3.
    \76\ See, e.g., letter from Olivia D. Morgan, Executive Director 
and Co-Founder, California Partners Project, to Vanessa Countryman, 
Secretary, Commission, dated January 3, 2020 [sic] (``California 
Partners Project Letter''), at 2; letter from Dieter Waizenegger, 
Executive Director, CtW Investment Group, to Vanessa Countryman, 
Secretary, Commission, dated December 31, 2020 (``CtW Letter''), at 
2; Soundboard Letter at 2; UAW Letter at 6; letter from Sarah 
Keohane Williamson, Chief Executive Officer, Ariel Fromer Babcock, 
Managing Director, Head of Research, and Victoria Tellez Leal, 
Senior Associate, Research, FCLTGlobal, to Vanessa Countryman, 
Secretary, Commission, dated December 18, 2020, at 3.
    \77\ See, e.g., letter from Fran Seegull, President, U.S. Impact 
Investing Alliance, to Vanessa Countryman, Secretary, Commission, 
dated March 5, 2021 (``Alliance Letter''), at 1; CFA Letter at 3; 
letter from Edgar Hernandez, Assistant Director, Capital 
Stewardship, Service Employees International Union, to Vanessa A. 
Countryman, Secretary, Commission, dated January 4, 2020 [sic] 
(``SEIU Letter''), at 2; Illinois State Treasurer Letter at 1-2.
    \78\ See, e.g., BMO Letter at 1; SEIU Letter at 2; letter from 
Alfred P. Poor, Chief Executive Officer, Ideanomics, Inc., to 
Vanessa Countryman, Secretary, Commission, dated December 28, 2020 
(``Ideanomics Letter''), at 1, 3; letter from Kimberly Jeffries 
Leonard, National President, The Links, Incorporated, to Vanessa A. 
Countryman, Secretary, Commission, dated December 17, 2020 (``Links 
Letter''), at 2.
    \79\ See, e.g., letter from Paul M. Kinsella, Emily J. Oldshue, 
Jeremiah Williams, Partners, Ropes & Gray LLP, to Vanessa 
Countryman, Secretary, Commission, dated December 31, 2020 (``Ropes 
& Gray Letter''), at 4; UAW Letter at 6.
    \80\ See, e.g., Fairfax Letter at 7; letter from Lisa Hayles, 
Investment Manager, Trillium Asset Management, to Vanessa 
Countryman, Secretary, Commission, dated January 4, 2021 (``Trillium 
Letter''), at 3; letter from Charlotte Laurent-Ottomane, Executive 
Director, and Toni Wolfman, Co-Chair, Public Policy Outreach 
Committee, Thirty Percent Coalition, to Vanessa Countryman, 
Secretary, Commission, dated January 1, 2021 (``Thirty Percent 
Coalition Letter''), at 1; CtW Letter at 2; OPERS Letter at 1-2.
    \81\ See, e.g., FactSet Letter at 2; letter from Fiona Ma, 
California State Treasurer, to Vanessa Countryman, Secretary, 
Commission, dated December 15, 2020 (``California State Treasurer 
Letter''). See also, e.g., letter from Thomas Chow, Irene Liu, and 
Andrew Song, Co-Chairs, Bay Area Asian American General Counsel, to 
Vanessa Countryman, Secretary, Commission, dated January 4, 2021, at 
2 (stating that the Board Diversity Proposal provides an appropriate 
impetus to depart from the traditional director search process and 
to diversify the candidate pool).
---------------------------------------------------------------------------

    Some commenters, by contrast, argue that the perceived investor 
demand for diverse boards and diversity information is overstated, and 
if diversity requirements increase returns, then boards, management, 
and shareholders would not require any regulatory mandate to adopt 
them.\82\ Further, some commenters argue that the proposal is 
unnecessary and that company boards are already becoming more 
diverse,\83\ and some commenters argue that shareholders have the power 
to push for diversity changes in the boardroom.\84\
---------------------------------------------------------------------------

    \82\ See, e.g., Alliance for Fair Board Recruitment Letter at 
43; CEI Letter at 1-2; letter from John Quigley to Vanessa 
Countryman, Secretary, Commission, dated January 25, 2021 (``Quigley 
Letter''), at 1; Heritage Foundation Letter at 3, 5-6; letter from 
Boyden Gray & Associates PLLC, dated January 4, 2020 [sic] 
(``Project on Fair Representation Letter''), at 5; Publius Letter at 
3. See also NLPC Letter at 4 (stating that it is in a company's 
interest to promote and advertise the diversity of its board if it 
believes that such diversity would attract investors, regardless of, 
or in addition to, the economic performance of the company).
    \83\ See, e.g., letter from Pat Toomey et al, U.S. Senators, to 
Allison Herren Lee, Acting Chair, Commission, dated February 12, 
2021 (``Toomey Letter''), at 3; NLPC Letter at 3-4 (also arguing 
that information is available on a company's website with the 
biographical information of its board members and officers, and that 
investors are unlikely to access such information from the 
Commission); Publius Letter at 2-3.
    \84\ See, e.g., Project on Fair Representation Letter at 5; 
letter from Jerry D. Guess, Founder, Chairman, and CEO, Guess & Co. 
Corporation, to Martha Miller, Director, Office of the Advocate for 
Small Business Formation, Commission, dated December 2, 2020 
(``Guess Letter''), at 2.
---------------------------------------------------------------------------

    In response, the Exchange states that investors are increasingly 
interested in board diversity data, as investors view board diversity 
as a key indicator of corporate governance.\85\ Moreover, the Exchange 
states that the wave of investors increasingly calling for companies to 
disclose diversity metrics and diversify their boards, and basing their 
voting decisions on whether companies do or do not, demonstrates that 
investors consider diversity disclosures material to their voting and 
investment decisions.\86\ The Exchange explains that its goal is to 
facilitate the collection, reliability, and uniformity of board 
diversity data, while expanding access to the information.\87\ The 
Exchange also states that its proposal would level the playing field 
for retail and institutional investors, and decrease the cost and time 
associated with data collection for all investors, by providing them 
with accessible, comparable, and transparent information by which they 
could critically evaluate a company's decisions with respect to how, 
whether, or when to pursue board diversity.\88\ And the Exchange 
reiterates that the proposal provides flexibility for companies that do 
not wish to achieve the diversity objectives or wish to do so on a 
different timeline.\89\
---------------------------------------------------------------------------

    \85\ See Nasdaq Response Letter II at 20.
    \86\ See id. at 12.
    \87\ See id. at 20.
    \88\ See id. at 13, 25.
    \89\ See id. at 25. The Exchange also states that, absent 
encouragement, progress toward increased board diversity has been 
demonstrably slow, and that regulatory action has proven effective 
in removing barriers and increasing board diversity among those 
traditionally underrepresented in other jurisdictions. See id. at 
15, 25-26.
---------------------------------------------------------------------------

    The Commission finds that the Board Diversity Proposal would 
provide widely available, consistent, and comparable information that 
would contribute to investors' investment and voting decisions. Because 
the Exchange would define ``Diverse'' for purposes of the proposed 
disclosures and would require consistent format and timing for the 
proposed disclosures,\90\ the proposal would make it more efficient and 
less costly for investors to collect, use, and compare information on 
board diversity. The reduced cost and improved efficiency in 
collecting, using, and comparing such information could enhance 
investors' investment and voting decision-making processes, and enhance 
investors' ability to make informed investment and voting decisions. 
Because the proposal would make such information widely available on 
the same basis to all investors, the proposal would also mitigate any 
concerns regarding unequal access to information that may currently 
exist between certain (likely larger and more resourceful) investors 
who could obtain the information and other (likely smaller) investors 
who may not be able to do so. Accordingly, the Commission finds that 
the proposal is designed to promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
public interest.
---------------------------------------------------------------------------

    \90\ In particular, companies would be required to: make board-
level diversity disclosures in a substantially similar format as the 
Board Diversity Matrix; following the first year of disclosure, 
disclose the current year and immediately prior year Board Diversity 
Matrix; provide the Board Diversity Matrix in a searchable format; 
and provide the required disclosures in a proxy statement or 
information statement (or if a company does not file a proxy, in its 
Form 10-K or 20-F) in advance of the company's annual shareholders 
meeting or provide the required disclosures on the company's website 
concurrently with the filing of the company's proxy statement or 
information statement (or, if the company does not file a proxy, its 
Form 10-K or 20-F).
---------------------------------------------------------------------------

    The diverse collection of commenters who expressed interest in 
board diversity information, including institutional investors, 
investment managers, listed companies, and individual investors, as 
well as statements made by institutional investors, asset managers, and 
business organizations,\91\ demonstrates the broad demand for this 
information.\92\ Moreover, while investors may have differing views 
regarding whether companies should increase board diversity and whether 
and how board diversity affects company performance and governance, the 
proposed disclosures would contribute to investors' investment and 
voting

[[Page 44431]]

decisions regardless of their views on whether board diversity is 
desirable or beneficial. For example, for investors who support board 
diversity, the proposed disclosures could inform their decision on 
issues related to corporate governance, including director elections, 
and company explanations as to why they do not meet the diversity 
objectives could better inform those investors as to the risks and 
costs of increased board diversity. And for investors who do not 
believe that having additional ``Diverse'' directors would be 
beneficial for a company, the proposed disclosures could inform their 
decision to vote to preserve the existing board composition in a 
company. The disclosures' focus on providing greater transparency 
regarding existing board composition and companies' approaches to board 
diversity--rather than mandating any particular board composition or 
requiring Nasdaq-listed companies to change the composition of their 
boards--will provide investors with board-level diversity statistics 
and explanations for certain companies' approaches to board diversity, 
which would contribute to investors' investment and voting decisions, 
including decisions related to companies' board compositions.
---------------------------------------------------------------------------

    \91\ See, e.g., Amendment No. 1 to the Board Diversity Proposal 
at 8 n.9, 54 n.142 (referencing statements from Vanguard, State 
Street Global Advisors, and BlackRock that call for companies to 
disclose board diversity information); id. at 54 nn.139-40 
(referencing petitions for Commission rulemaking from groups of 
institutional investors that call for disclosures of board diversity 
information); id. at 54 n.143 (referencing an initiative by a state 
treasurer and group of institutional investors calling for Russell 
3000 companies to disclose board diversity information); id. at 57 
n.152 (referencing a letter from various business associations 
expressing support for the passage of a bill by the U.S. House of 
Representatives that would require board diversity disclosures).
    \92\ Commenters who express support for the proposed disclosures 
include institutional investors, investment managers, listed 
companies, and individual investors. See, e.g., letter from Cynthia 
Overton to Vanessa Countryman, Secretary, Commission, dated January 
3, 2021; letter from Dan Dees, Co-Head Investment Banking Division, 
Goldman Sachs Group, Inc., to Secretary, Commission, dated January 
1, 2021 (``Goldman Sachs Letter''); letter from Marcie Frost, Chief 
Executive Officer, California Public Employees' Retirement System, 
to Vanessa Countryman, Secretary, Commission, dated December 31, 
2020; TIAA Letter; letter from Jo Brickman, dated December 18, 2020. 
They also include listed companies. See, e.g., Microsoft Letter; 
letter from Sheryl Sandberg, Chief Operating Officer, Facebook Inc., 
to Vanessa Countryman, Secretary, Commission, dated January 3, 2021; 
letter from Jeff Ray, CEO, Brightcove, to Vanessa Countryman, dated 
December 23, 2020 (``Brightcove Letter'').
---------------------------------------------------------------------------

B. Potential Effects of Board Diversity on Companies and Investors

    In the Board Diversity Proposal, the Exchange states that it has 
reviewed dozens of empirical studies and found that an extensive body 
of empirical research demonstrates that diverse boards are positively 
associated with improved corporate governance and company 
performance.\93\ While the Exchange states that the overwhelming 
majority of empirical studies it has reviewed indicate that board 
diversity is positively associated with company performance, it 
acknowledges that the results of some studies on gender diversity are 
mixed.\94\ Nevertheless, the Exchange believes that ``there is a 
compelling body of credible research on the association between company 
performance and board diversity'' and, at a minimum, the academic and 
empirical studies support the conclusion that board diversity does not 
have adverse effects on company performance.\95\
---------------------------------------------------------------------------

    \93\ See Amendment No. 1 to the Board Diversity Proposal at 13. 
The Exchange states that studies have 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. See id. at 
13, Section 3.a.III.A. The Exchange also points to a report that 
suggests that the relationship between board gender diversity and 
corporate performance may extend to LGBTQ+ diversity. See id. at 25.
    \94\ See id. at 25-28 (referencing Carter et al., infra note 
119, and the U.S. Government Accountability Office's conclusion that 
the mixed nature of various academic and empirical studies may be 
due to differences in methodologies, data samples, and time 
periods).
    \95\ See id. at 28.
---------------------------------------------------------------------------

    The Exchange also states that there is substantial evidence that 
board diversity promotes investor protection, including by enhancing 
the quality of a company's financial reporting, internal controls, 
public disclosures, and management oversight.\96\ According to the 
Exchange, more than a dozen studies have found a positive association 
between gender diversity and important investor protections,\97\ and 
some academics assert that such findings may extend to other forms of 
diversity, including racial and ethnic diversity.\98\ The Exchange also 
states that it has reviewed studies suggesting that board diversity 
could enhance a company's ability to monitor management by reducing 
``groupthink'' and improving decision-making.\99\
---------------------------------------------------------------------------

    \96\ See id. at 29.
    \97\ See id. at 29, Section 3.a.III.B. The Exchange states that 
studies have found that 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. See id. at 
13, Section 3.a.III.B. In addition, the Exchange states that 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. See id. at 13, Section 3.a.III.B, Section 3.b.II.B.
    \98\ See id. at 29, Section 3.a.III.B.
    \99\ See id. at Section 3.a.III.C.
---------------------------------------------------------------------------

    Some commenters similarly believe that there are benefits 
associated with board diversity, such as improved board decision-
making,\100\ corporate governance,\101\ financial performance or 
shareholder value,\102\ risk mitigation,\103\ innovation,\104\ investor 
protection,\105\ investor confidence,\106\ and corporate culture.\107\ 
By contrast, some commenters argue that the Exchange has not 
demonstrated causation between board diversity and the benefits 
described in the Board Diversity Proposal, and that the supporting 
studies cited by the Exchange do not show that diversity on a company's 
board causes, rather than is merely correlated with, performance 
enhancement.\108\ Commenters further assert that the peer-reviewed 
economics literature is inconclusive, with most studies showing little 
or no discernable effect based on the sexual, racial, or ethnic 
composition of corporate boards.\109\ In addition, some commenters 
state that some studies have not found a positive correlation between 
board diversity and benefits, and point out the lack of research 
relating to LBGTQ+ board

[[Page 44432]]

representation and diversity relating to Underrepresented 
Minorities.\110\ Moreover, some commenters argue that there is academic 
work reporting that diversifying boards can harm financial performance 
or shareholder value.\111\ Another commenter argues that the proposal 
is not consistent with a free market because the proposed diversity 
requirement does not demonstrably improve corporate performance, and 
could sometimes harm it.\112\ This commenter further argues that the 
proposal may result in increases in the size of boards, potentially 
hindering corporate oversight and governance.\113\
---------------------------------------------------------------------------

    \100\ See, e.g., letter from Kewsong Lee, Chief Executive 
Officer, The Carlyle Group, to Vanessa Countryman, Secretary, 
Commission, dated March 16, 2021 (``Carlyle Letter''), at 1; letter 
from Joan Haffenreffer, President, Women's Forum of New York, to 
Vanessa Countryman, Secretary, Commission, dated January 4, 2021 
(``Women's Forum Letter''), at 1-2; letter from Abraham Kim, 
Executive Director, Council of Korean Americans, to Vanessa 
Countryman, Secretary, Commission, dated January 3, 2021, at 1; 
Goldman Sachs Letter at 1; T. Rowe Letter at 1-2; Ideanomics Letter 
at 2, 4; letter from Aaron Meder, CEO, LGIM America, to Vanessa 
Countryman, Secretary, Commission, dated December 23, 2020 (``LGIM 
America Letter''), at 2; Goodman and Olson Letter at 1-2; letter 
from Mercy Investment Services, Inc., to Vanessa Countryman, 
Secretary, Commission, dated December 22, 2020 (``Mercy Investment 
Letter''), at 1; letter from Luan Jenifer, President, Miller/Howard 
Investments, Inc., to Vanessa Countryman, Secretary, Commission, 
dated December 22, 2020 (``Miller/Howard Letter''), at 1; letter 
from Kerrie Waring, Chief Executive Officer, International Corporate 
Governance Network, to Jay Clayton, Chairman, Commission, dated 
December 16, 2020, at 2.
    \101\ See, e.g., Carlyle Letter at 1; letter from Dorri 
McWhorter, Chief Executive Officer, YWCA Metropolitan Chicago, to 
Vanessa Countryman, Secretary, Commission, dated January 4, 2021; 
Women's Forum Letter at 2; AAAIM Letter at 2; Miller/Howard Letter 
at 1; letter from Seth Brody, Partner and Global Head of the 
Operational Excellence Practice, Apax Partners, to Vanessa 
Countryman, Secretary, Commission, dated December 16, 2020.
    \102\ See, e.g., Carlyle Letter at 1; letter from Kerry E. 
Berchem, Akin Gump Strauss Hauer & Feld LLP, to Vanessa Countryman, 
Secretary, dated January 4, 2021 (``Akin Gump Letter''), at 2; 
Goldman Sachs Letter at 1; Capital Research and Management Company 
Letter at 1; FactSet Letter at 1.
    \103\ See, e.g., Akin Gump Letter at 4; letter from Michelle 
Dunstan, SVP, Global Head of Responsible Investing, and Diana Lee, 
AVP, Director of Corporate Governance, AllianceBernstein L.P., to 
Vanessa A. Countryman, Secretary, Commission, dated January 4, 2021 
(``AllianceBernstein Letter''), at 1; Hispanic Chamber of Commerce 
Letter at 3.
    \104\ See, e.g., LGIM America Letter at 2; Miller/Howard Letter 
at 1.
    \105\ See, e.g., Women's Forum Letter at 2; Miller/Howard Letter 
at 1; Douglas B. Sieg, Managing Partner, Lord Abbett, to Vanessa 
Countryman, Secretary, Commission, dated December 18, 2020, at 1.
    \106\ See, e.g., FactSet Letter at 2; Miller/Howard Letter at 1; 
UAW Letter at 3-4.
    \107\ See, e.g., Akin Gump Letter at 4; California Partners 
Project Letter at 2; Capital Research and Management Company Letter 
at 1-2.
    \108\ See, e.g., Publius Letter II at 2; Toomey Letter at 2; 
Heritage Foundation Letter at 7-10; Project on Fair Representation 
Letter at 3-4; letter from Scott Shepard, Free Enterprise Project, 
National Center for Public Policy Research, to Vanessa Countryman, 
Secretary, Commission, dated December 30, 2020 (``Free Enterprise 
Project Letter''), at 2-3; Publius Letter at 4-7; letter from John 
Richter dated December 12, 2020 (``Richter Letter''), at 1-2.
    \109\ See Heritage Foundation Letter at 7-10. See also, e.g., 
Alliance for Fair Board Recruitment Letter at 7-31; De La Vega 
Letter at 2; Richter Letter at 1.
    \110\ See, e.g., Toomey Letter at 2; Donnellan Letter at 1; 
Project on Fair Representation Letter at 6-7; Publius Letter at 6-7; 
Alliance for Fair Board Recruitment Letter at 26-28.
    \111\ See, e.g., letter from Samuel S. Guzik, Guzik & 
Associates, to J. Matthew DeLesDernier, Assistant Secretary, 
Commission, dated April 5, 2021 (``Guzik Letter''), at 3-5; letter 
from Theo Vermaelen, dated December 29, 2020.
    \112\ See Toomey Letter at 2.
    \113\ See id. at 3. Another commenter also predicts that the 
proposal will weaken corporate governance. See De La Vega Letter at 
2-3.
---------------------------------------------------------------------------

    With respect to comments that disagree that board diversity is 
linked to enhanced company performance, innovation, long-term 
sustainable returns, or investor protection, the Exchange states that 
``the weight of empirical evidence'' supports its belief in the 
benefits of board diversity for companies that choose to meet the 
proposed diversity objectives.\114\ With respect to commenters' view 
that there is insufficient evidence to establish a positive 
relationship between LGBTQ+ diversity and board performance, the 
Exchange reiterates that it is reasonable and in the public interest to 
treat LGBTQ+ status as ``inextricably'' intertwined with gender 
identity.\115\
---------------------------------------------------------------------------

    \114\ See Nasdaq Response Letter II at 8-10.
    \115\ See id. at 10.
---------------------------------------------------------------------------

    The Exchange also states that Section 6(b)(5) of the Act does not 
require the Exchange to show that its listing rules enhance the 
financial performance of listed companies.\116\ With respect to the 
comment that adding board members to satisfy the proposal could create 
less effective corporate oversight and governance due to a larger 
board, the Exchange states that the proposal would not require that 
companies add or remove any directors in order to increase 
diversity.\117\
---------------------------------------------------------------------------

    \116\ See id.
    \117\ See id. at 28.
---------------------------------------------------------------------------

    The conclusions from the studies together referenced by the 
Exchange and commenters on the effects of changes in board diversity on 
investors are mixed.\118\ Some of the results from the studies cited by 
the Exchange and commenters are consistent with the view that increases 
in board diversity cause increases in shareholder wealth.\119\ One 
study concludes that greater board diversity leads to better firm 
performance, consistent with diversity fostering more efficient (real) 
risk-taking, firms with greater board diversity are found to invest 
persistently more in research and development and have more efficient 
innovation processes.\120\ Other studies have concluded that increases 
in board diversity may not be beneficial to investors. For example, one 
study concludes that the effect of gender diversity on firm performance 
is negative for some companies.\121\ In addition, some studies of some 
board diversity mandates have concluded they are not beneficial to 
investors.\122\ For example, studies of the effects of the board 
diversity mandates in Norway have presented indications that the 
mandates caused a decline in company performance and reduced 
shareholder wealth.\123\ According to one study, some companies chose 
to go private rather than comply with the Norway board diversity 
mandate.\124\ A more recent study, however, questions the statistical 
significance of these findings.\125\ Taken together, studies of the 
effects of board diversity are generally inconclusive, and suggest that 
the effects of even mandated changes remain the subject of reasonable 
debate.
---------------------------------------------------------------------------

    \118\ The studies and their findings are also subject to the 
various caveat and limitations that are described in the studies.
    \119\ See, e.g., Gennaro Bernile et al., Board Diversity, Firm 
Risk, and Corporate Policies, 127 J. Fin. Econ. 588, 605 (2018); 
David A. Carter et al., The Gender and Ethnic Diversity of US Boards 
and Board Committees and Firm Financial Performance, 18 Corporate 
Governance 396, 410 (2010); Jason M. Thomas & Megan Starr, The 
Carlyle Group, Global Insights: From Impact Investing to Investing 
for Impact 5 (2020). See also Olga Kuzmina & Valentina Melentyeva, 
Gender Diversity in Corporate Boards: Evidence from Quota-Implied 
Discontinuities (CEPR, Discussion Paper No. DP14942, 2021), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3638047; Muhammad Nadeem et al., Women on 
Boards, Firm Risk and the Profitability Nexus: Does Gender Diversity 
Moderate the Risk and Return Relationship?, 64 Int'l Rev. Econ. & 
Fin. 427 (2019).
    \120\ See Bernile et al., supra note 119.
    \121\ See Ren[eacute]e B. Adams & Daniel Ferreira, Women in the 
Boardroom and Their Impact on Governance and Performance, 94 J. Fin. 
Econ. 291 (2009). This study observes that the effect of gender 
diversity on firm performance may be negative and in general depends 
on the specification of the analysis.
    \122\ See Alliance for Fair Board Recruitment Letter at 2, 24.
    \123\ See, e.g., Kenneth R. Ahern & Amy K. Dittmar, The Changing 
of the Boards: The Impact on Firm Valuation of Mandated Female Board 
Representation, 127 Q.J. Econ. 137 (2012); David A. Matsa & Amalia 
R. Miller, A Female Style in Corporate Leadership? Evidence from 
Quotas, 5 a.m. Econ. J. Applied Econ. 136 (2013). As an additional 
example, some studies of the effects of the 2018 California law 
requiring increased board gender diversity have reported indications 
of negative effects on shareholder wealth. See, e.g., Daniel Greene 
et al., Do Board Gender Quotas Affect Firm Value? Evidence from 
California Senate Bill No. 826, J. Corp. Fin., (February 2020); 
Sunwoo Hwang et al., Mandating Women on Boards: Evidence from the 
United States (Kenan Institute of Private Enterprise, Research Paper 
No. 18-34, 2018), available at https://ssrn.com/abstract=3265783.
    \124\ See [Oslash]yvind B[oslash]hren & Siv Staubo, Does 
Mandatory Gender Balance Work? Changing Organizational Form to Avoid 
Board Upheaval, 28 J. Corp. Fin. 152 (2014).
    \125\ See B. Espen Eckbo et al., Valuation Effects of Norway's 
Board Gender-Quota Law Revisited (ECGI, Finance Working Paper No. 
463/2016, 2021), available at https://ssrn.com/abstract=2746786.
---------------------------------------------------------------------------

    Studies of board diversity mandates, in any event, do not provide a 
reliable basis for evaluating the likely overall effects of the Board 
Diversity Proposal, which does not mandate any particular board 
composition. Unlike companies in those studies, Nasdaq-listed companies 
would have the option of providing an explanation for their board 
composition under the new listing standard. This is distinct from 
facing a fine as an alternative to compliance or possibly facing the 
requirement to dissolve for non-compliance. Some of the mandates 
requiring increased board diversity do not present companies with the 
option of providing an explanation rather than facing a sanction, or 
any other option besides compliance with the mandate.\126\ According to 
one study, comply-or-explain corporate governance reforms have been 
found to increase shareholder wealth more than corporate governance 
mandates, on average.\127\ Further, under the Board Diversity Proposal, 
Nasdaq-listed companies would be required to disclose board-level 
diversity statistics, and those companies that do not meet the proposed 
diversity objectives would be required to choose between providing an 
explanation and increasing the diversity of their boards. In responding 
to the disclosure requirements, companies can consider the analyses and 
conclusions from academic and

[[Page 44433]]

other studies on the effects of changes in board composition on company 
performance and share value. And they may apply those conclusions to 
their own circumstances.
---------------------------------------------------------------------------

    \126\ See A.B. 979, 2019-2020 Leg., Reg. Sess. (Cal. 2020) 
(amending Cal. Corp. Code Section 301.3 and adding Cal. Corp. Code 
Sections 301.4 and 2115.6), available at http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB979; S.B. 826, 2017-2018 
Leg., Reg. Sess. (Cal. 2018) (adding Cal. Corp. Code Sections 301.3 
and 2115.5), available at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180SB826.
    \127\ See Larry Fauver et al., Board Reforms and Firm Value: 
Worldwide Evidence, 125 J. Fin. Econ. 120 (2017) (providing evidence 
of a greater increase in firm value from comply-or-explain-based 
reforms than for rule-based reforms in a study of the impact of 
corporate board reforms on firm value across 41 countries).
---------------------------------------------------------------------------

    The Board Diversity Proposal is thus distinguishable from the board 
diversity mandates described above. Moreover, the Exchange's proposal 
would mitigate concerns regarding unequal access to information that 
may currently exist between certain (likely larger and more 
resourceful) investors who could obtain board diversity information and 
other (likely smaller) investors who may not be able to do the same. 
And, because the Board Diversity Proposal would not mandate any 
particular board composition, companies that choose to meet the 
diversity objectives are likely to be the ones who stand to benefit the 
most, or incur the least cost. Those companies which view the diversity 
objectives themselves as challenging are likely to choose to explain 
rather than incur the costs to them of meeting the objectives, and 
those companies for whom explaining would be challenging will have the 
option to list on a different exchange. For these reasons, the costs of 
the Board Diversity Proposal are likely to be relatively limited as 
compared to those regulatory regimes that have mandated board diversity 
and provided neither the option to explain or to opt-out of the regimes 
by listing elsewhere.
    In light of the disclosure benefits that the Board Diversity 
Proposal would provide, and given that the studies of the effects of 
board diversity are generally inconclusive and the costs of the 
proposal are likely to be comparatively limited, the Commission finds 
that the Board Diversity Proposal is consistent with the requirements 
of the Act.

C. Applicability of the Board Diversity Rules

1. Definition of Diverse
    In the Board Diversity Proposal, the Exchange states that current 
reporting of board-level diversity statistics is unreliable and 
unusable to investors and points to inconsistencies in the definitions 
of diversity characteristics across companies.\128\ It notes that a 
transparent, consistent definition of Diverse would provide 
stakeholders with a better understanding of a company's current board 
composition and philosophy regarding diversity if the company does not 
meet the proposed diversity objectives.\129\ In addition, the Exchange 
believes that having a broader definition of ``Diverse'' would permit 
inconsistent, non-comparable 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.\130\
---------------------------------------------------------------------------

    \128\ See Amendment No. 1 to the Board Diversity Proposal at 50-
51.
    \129\ See id. at 107.
    \130\ See id. The Exchange also states that the categories it 
has proposed to comprise an Underrepresented Minority are consistent 
with the categories reported to the Equal Employment Opportunity 
Commission (``EEOC'') through the Employer Information Report EEO-1 
Form (``EEO-1''). See id. at 9-10, 61. In addition, the Exchange 
states that, while the EEO-1 report refers to ``Hispanic or Latino'' 
rather than ``Latinx,'' the Exchange 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. See id. 
at 61 n.160. The Exchange further states that the terms in the 
proposed definition of LGBTQ+ are similar to the identities defined 
in California's A.B. 979, but have been expanded to include the 
queer community. See id. at 61.
---------------------------------------------------------------------------

    Some commenters support the proposed definition of ``Diverse'' 
because it would improve the transparency, consistency, and 
comparability of disclosures across companies, whereas a broader 
definition would maintain the status quo of inconsistent, non-
comparable data.\131\ One commenter points out that the proposal would 
not prevent companies from considering other attributes beyond the 
proposed definition of ``Diverse,'' such as veteran or disability 
status.\132\ By contrast, other commenters object to the proposed 
definition of ``Diverse'' as narrow and superficial.\133\ Moreover, 
some commenters request that the Exchange expand the proposed 
definition of ``Diverse'' to include individuals with 
disabilities,\134\ veterans, or others who are not typically well-
represented at the board level.\135\
---------------------------------------------------------------------------

    \131\ See, e.g., Women's Forum Letter at 2; Miller/Howard Letter 
at 2. See also, e.g., Fairfax Letter at 8-9; CFA Letter at 4-5.
    \132\ See Goodman and Olson Letter at 2.
    \133\ See, e.g., Toomey Letter at 1-3; Heritage Foundation 
Letter at 16; Richter Letter at 2-3.
    \134\ See, e.g., letter from National LGBT Chamber of Commerce 
(NGLCC), National Veteran-Owned Business Association (NaVOBA), Out & 
Equal Workplace Advocates, U.S. Black Chambers, Inc. (USBC), United 
States Hispanic Chamber of Commerce (USHCC), US Pan Asian American 
Chamber of Commerce Education Foundation (USPAACC), and Women 
Impacting Public Policy (WIPP), to Vanessa Countryman, Secretary, 
Commission, dated April 2, 2021; letter from The Members of the 
National Disability Alliance, to Adena T. Friedman, President and 
Chief Executive Officer, Nasdaq, dated March 9, 2021; letter from 
Maria Town, President & CEO, American Association of People with 
Disabilities, and Jill Houghton, President & CEO, Disability:IN, to 
Allison Lee, Acting Chair, Commission, dated February 2, 2021; 
letter from Janice S. Lintz, CEO, Hearing Access & Innovations, 
Inc., dated January 25, 2021; letter from Jennifer Laszlo Mizrahi, 
President, RespectAbility, Carol Glazer, President, National 
Organization on Disability, Katherine McCary, CEO, Disability: IN DC 
Metro, William D. Goren, Attorney and Consultant, Americans with 
Disabilities, Thomas Foley, President, National Disability 
Institute, and Sean Luechtefeld, Senior Director Communications, 
ANCOR, to Vanessa Countryman, Secretary, dated January 25, 2021; 
letter from Zainab Alkebsi, President, Board of Directors, Deaf and 
Hard of Hearing Bar Association, to Vanessa Countryman, Secretary, 
Commission, dated January 25, 2021; letter from Victor Calise, 
Commissioner, New York City Mayor's Office for People with 
Disabilities, dated January 8, 2021; letter from Nicholas D. Lawson, 
J.D. Candidate, Georgetown University Law Center, to Vanessa 
Countryman, Secretary, Commission, dated January 15, 2021; letter 
from Robert Ludke, Founder, Ludke Consulting, LLC, and Regina Kline, 
Founder and CEO, SmartJob, LLC, to Vanessa Countryman, Secretary, 
Commission, dated December 31, 2020; CFA Letter at 5; Ideanomics 
Letter at 4; letter from James Morgan dated December 22, 2020; 
letter from Carol Glazer, CEO, National Organization on Disability, 
to Vanessa Countryman, Secretary, Commission, dated December 9, 
2020.
    \135\ See, e.g., CFA Letter at 5; Ideanomics Letter at 4-5. See 
also, e.g., letter from Kevin R. Eckert, Partner, Task Force X 
Capital, to Vanessa Countryman, Secretary, Commission, dated April 
20, 2021 (urging the inclusion of veterans in the definition of 
Diverse); letter from David A. Morken, CEO and Chairman, Bandwidth 
Inc., to Vanessa Countryman, Secretary, Commission, dated April 6, 
2021. One commenter states that the proposal would fail to treat 
similarly situated categories alike, and that the proposal's 
distinctions are arbitrary and capricious. See Alliance for Fair 
Board Recruitment Letter at 53-54.
---------------------------------------------------------------------------

    In response to comments,\136\ the Exchange reiterates that the 
proposed definition of ``Diverse'' is suitable to improve transparency 
and comparability of disclosures across companies.\137\ The Exchange 
also states that companies are not precluded from using a broader 
definition of diversity, including persons with disabilities and other 
categories such as veteran status or age, provided that these companies 
disclose this under proposed Rule 5605(f)(3).\138\
---------------------------------------------------------------------------

    \136\ The Exchange also points to commenters who argue that the 
proposal would not promote diversity because, for example, it would 
not prohibit homogenous boards, and Diverse directors would bring 
similar perspectives to those of white male board members. See 
Nasdaq Response Letter II at 10-11. The Exchange states that 
companies are free to consider additional diverse attributes when 
identifying director nominees (e.g., nationality, disability, 
veteran status) and are free to disclose information relating to 
diverse attributes beyond those highlighted in the proposal. See id. 
at 11.
    \137\ See id. at 14.
    \138\ See id. The Exchange also encourages companies to disclose 
board diversity metrics beyond those categories identified in the 
proposal, to the extent a company considers it material to its 
investors' voting and investment decisions. See id.
---------------------------------------------------------------------------

    The proposal would facilitate comparable board diversity 
disclosures by Nasdaq-listed companies, which would lead to more 
efficient collection and use of the information by investors. In 
connection with facilitating comparable board diversity disclosures and 
for the reasons discussed below, the Exchange's proposed definition of

[[Page 44434]]

``Diverse'' is not unreasonable. It is not unreasonable for the 
Exchange to propose a definition of ``Underrepresented Minority'' that 
is consistent with the EEO-1 categories reported to the EEOC because, 
among other reasons, companies may already be familiar with the EEO-1 
categories, which could promote efficiency for companies in complying 
with the proposed rules. It is also not unreasonable for the Exchange 
to include LGBTQ+ in its proposed definition of ``Diverse.'' Moreover, 
as stated by the Exchange, companies are not precluded from considering 
director characteristics that do not fall within the proposed 
definition of ``Diverse'' and providing the disclosures under proposed 
Rule 5605(f)(3) if the company does not satisfy the proposed board 
diversity objectives.
2. Flexibility for Certain Companies
    In the Board Diversity Proposal, the Exchange recognizes that the 
operations, size, and current board composition of each Nasdaq-listed 
company are unique, and states that it endeavors to provide a 
disclosure-based, business-driven framework to enhance board diversity 
that balances the need for flexibility with each company's particular 
circumstances.\139\ According to the Exchange, the proposed disclosure 
framework and phase-in \140\ and transition periods \141\ under Rule 
5605(f) recognize the differences (e.g., in demographics or resources) 
among different types of companies and would not unfairly discriminate 
among companies.\142\ The Exchange states that the definition of 
Foreign Issuer 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 Commission reports, and is designed to exclude companies that 
are domiciled in a foreign jurisdiction without having a physical 
presence in that country.\143\ Further, according to the Exchange, 
because the EEOC categories of race and ethnicity may not extend to all 
countries globally since each country has its own unique demographic 
composition, and because on average women tend to be underrepresented 
in boardrooms across the globe, proposed Rule 5605(f)(2)(B) would allow 
Foreign Issuers to meet the diversity objectives by having one Female 
director and one Underrepresented Individual \144\ (rather than 
Underrepresented Minority) or LGBTQ+ director, or two Female 
directors.\145\ With respect to Smaller Reporting Companies, the 
Exchange states that, because these companies may not have the 
resources necessary to compensate an additional director or engage a 
search firm to search outside of directors' networks, it proposes to 
provide these companies with additional flexibility in their 
approach.\146\ Moreover, in providing additional flexibility to 
Companies with a Smaller Board, the Exchange states that these 
companies may face similar resource constraints to those of Smaller 
Reporting Companies, but not all Companies with a Smaller Board are 
Smaller Reporting Companies, and therefore the alternative diversity 
objective that would be provided to Smaller Reporting Companies may not 
be available to them.\147\ The Exchange further states that Companies 
with a Smaller Board may be disproportionately impacted if they plan to 
satisfy proposed Rule 5605(f)(2) by

[[Page 44435]]

adding additional directors, which may impose additional costs in the 
form of director compensation and D&O insurance.\148\ With respect to 
Exempt Companies,\149\ the Exchange states that they do not have 
boards, do not list equity securities, list only securities with no 
voting rights towards the election of directors, or are not operating 
companies, and that holders of the securities they issue do not expect 
to have a say in the composition of their boards.\150\ And the Exchange 
states that proposed Rule 5606 would provide appropriate flexibility 
for Foreign Issuers \151\ and exceptions for certain types of Nasdaq-
listed companies.\152\
---------------------------------------------------------------------------

    \139\ See Amendment No. 1 to the Board Diversity Proposal at 16-
17.
    \140\ Proposed Rule 5605(f)(5) would specify the phase-in period 
for any company newly listing on the Exchange (including companies 
listing through an initial public offering, direct listing, transfer 
from another exchange or the over-the-counter market, in connection 
with a spin-off or carve-out from a company listed on the Exchange 
or another exchange, or through a merger with an acquisition company 
listed under IM-5101-2 (``acquisition company'')) that was not 
previously subject to a substantially similar requirement of another 
national securities exchange, and any company that ceases to be a 
Foreign Issuer, a Smaller Reporting Company, or an Exempt Company. 
In particular, any newly-listed company on the Nasdaq Global Select 
Market (``NGS'') or Nasdaq Global Market (``NGM'') would be 
permitted to satisfy the requirement to have, or explain why it does 
not have: (i) At least one Diverse director by the later of (a) one 
year from the date of listing or (b) the date the company files its 
proxy statement or information statement (or, if the company does 
not file a proxy, its Form 10-K or 20-F) for the company's first 
annual meeting of shareholders subsequent to the company's listing; 
and (ii) at least two Diverse directors by the later of (a) Two 
years from the date of listing or (b) the date the company files its 
proxy statement or information statement (or, if the company does 
not file a proxy, its Form 10-K or 20-F) for the company's second 
annual meeting of shareholders subsequent to the company's listing. 
See proposed Rule 5605(f)(5)(A). In addition, any newly-listed 
company on the Nasdaq Capital Market (``NCM'') would be permitted to 
satisfy the requirement to have, or explain why it does not have, at 
least two Diverse directors by the later of: (i) Two years from the 
date of listing; or (ii) the date the company files its proxy 
statement or information statement (or, if the company does not file 
a proxy, its Form 10-K or 20-F) for the company's second annual 
meeting of shareholders subsequent to the company's listing. See 
proposed Rule 5605(f)(5)(B). Moreover, any newly listed Company with 
a Smaller Board would be permitted to satisfy the requirement to 
have, or explain why it does not have, at least one Diverse director 
by the later of: (i) Two years from the date of listing, or (ii) the 
date the company files its proxy statement or information statement 
(or, if the company does not file a proxy, its Form 10-K or 20-F) 
for the company's second annual meeting of shareholders subsequent 
to the company's listing. See proposed Rule 5605(f)(5)(D). Any 
company that ceases to be a Foreign Issuer, Smaller Reporting 
Company, or Exempt Company would be permitted to satisfy the 
requirements of proposed Rule 5605(f) by the later of: (i) One year 
from the date that the company no longer qualifies as a Foreign 
Issuer, Smaller Reporting Company, or Exempt Company; or (ii) the 
date the company files its proxy statement or information statement 
(or, if the company does not file a proxy, its Form 10-K or 20-F) 
for the company's first annual meeting of shareholders subsequent to 
such event. See proposed Rule 5605(f)(5)(C).
    \141\ Proposed Rule 5605(f)(7) would specify the transition 
period for the implementation of proposed Rule 5605(f). As proposed, 
each company listed on the Exchange (including a Company with a 
Smaller Board) would be required to have, or explain why it does not 
have, at least one Diverse director by the later of: (i) Two 
calendar years after the approval date of the proposal (``First 
Effective Date''); or (ii) the date the company files its proxy 
statement or information statement (or, if the company does not file 
a proxy, its Form 10-K or 20-F) for the company's annual 
shareholders meeting during the calendar year of the First Effective 
Date. See proposed Rule 5605(f)(7)(A). In addition, each company 
listed on NGS or NGM must have, or explain why it does not have, at 
least two Diverse directors by the later of: (i) Four calendar years 
after the approval date of the proposal (``Second NGS/NGM Effective 
Date''); or (ii) the date the company files its proxy statement or 
information statement (or, if the company does not file a proxy, its 
Form 10-K or 20-F) for the company's annual shareholders meeting 
during the calendar year of the Second NGS/NGM Effective Date. See 
proposed Rule 5605(f)(7)(B). Moreover, each company listed on NCM 
must have, or explain why it does not have, at least two Diverse 
directors by the later of: (i) Five calendar years after the 
approval date of the proposal (``Second NCM Effective Date''); or 
(ii) the date the company files its proxy statement or information 
statement (or, if the company does not file a proxy, its Form 10-K 
or 20-F) for the company's annual shareholders meeting during the 
calendar year of the Second NCM Effective Date. See proposed Rule 
5605(f)(7)(C).
    \142\ See Amendment No. 1 to the Board Diversity Proposal at 
Section 3.b.II.D. According to the Exchange, the proposed transition 
and phase-in periods are intended to provide newly listed public 
companies with additional time to meet the diversity objectives of 
proposed Rule 5605(f)(2), as newly listed public companies may have 
unique governance structures, such as staggered boards or director 
seats held by venture capital firms, that require additional timing 
considerations when adjusting the board's composition. See id. at 
79. The Exchange further states that the proposed transition and 
phase-in periods are intended to provide additional flexibility to 
companies listed on NCM, as such companies are typically smaller and 
may face additional challenges and resource constraints when 
identifying additional director nominees who self-identify as 
Diverse. See id. The Exchange also states that its proposed phase-in 
periods are consistent with the phase-in periods it provides to 
companies for other board composition requirements. See id. at 81. 
See also, e.g., Rules 5615(b)(1), 5615(b)(3), and 5620.
    \143\ See Amendment No. 1 to the Board Diversity Proposal at 83.
    \144\ The definition of Underrepresented Individual is based on 
the United Nations Declaration on the Rights of Persons Belonging to 
National or Ethnic, Religious and Linguistic Minorities and the 
United Nations Declaration on the Rights of Indigenous Peoples. See 
id. at 69, 140-41.
    \145\ See id. at 81-82.
    \146\ See id. at 84-85.
    \147\ See id. at 86.
    \148\ See id. The Exchange also states that proposed Rule 
5605(f)(2)(D) would avoid complexity for Companies with a Smaller 
Board that attempt to satisfy the diversity objectives by adding a 
Diverse director to their board, and prevent such companies from 
thereby being subject to a higher threshold (i.e., that of proposed 
Rule 5605(f)(2)(A), (B), or (C)) as a result. See id. at 86-87.
    \149\ Proposed Rule 5605(f)(4) would exempt the following types 
of companies from the requirements of proposed Rule 5605(f) 
(``Exempt Companies''): (1) Acquisition companies; (2) asset-backed 
issuers and other passive issuers (as set forth in Rule 5615(a)(1)); 
(3) cooperatives (as set forth in Rule 5615(a)(2)); (4) limited 
partnerships (as set forth in Rule 5615(a)(4)); (5) management 
investment companies (as set forth in Rule 5615(a)(5)); (6) issuers 
of non-voting preferred securities, debt securities, and derivative 
securities (as set forth in Rule 5615(a)(6)) that do not have equity 
securities listed on the Exchange; and (7) issuers of securities 
listed under the Rule 5700 series.
    \150\ See Amendment No. 1 to the Board Diversity Proposal at 90, 
150. The Exchange states that, although it is exempting acquisition 
companies from the requirements of proposed Rule 5605(f), upon such 
a company's completion of a business combination with an operating 
company, the post-business combination entity would be provided the 
same phase-in period as other newly listed companies to satisfy the 
requirements of proposed Rule 5605(f). See id. at 90-91, 151.
    \151\ See id. at 115-16. The Exchange recognizes that some 
Foreign Issuers may have their principal executive offices located 
outside of the U.S. and in jurisdictions that may impose laws 
limiting or prohibiting self-identification questionnaires. See id. 
at 68. The Exchange also states that the proposed definition of 
Underrepresented Minority may be inapplicable to a Foreign Issuer 
and make the Board Diversity Matrix data less relevant for such 
companies and not useful for investors. See id.
    \152\ See id. at 117-18.
---------------------------------------------------------------------------

    Some commenters express support for the proposed additional 
flexibility for foreign or smaller companies, or ``other groups of 
issuers that are more constrained for valid reasons.'' \153\ Another 
commenter contends, however, that the proposal is inconsistent with 
Section 6(b)(5) of the Act because it appears to be designed to permit 
unfair discrimination between issuers and impose burdens on competition 
that are not necessary or appropriate in furtherance of the applicable 
provisions of the Act.\154\ One commenter further asserts that the 
proposal is inconsistent with Section 6(b)(5) of the Act because it 
unfairly discriminates among issuers by giving foreign issuers 
flexibility that is not available to domestic issuers.\155\ One 
commenter also argues that the proposal would unnecessarily burden 
competition and unfairly discriminate between issuers who meet the 
proposed diversity objectives and those who do not,\156\ and one 
commenter argues that the proposal would burden competition between 
exempt and non-exempt companies.\157\
---------------------------------------------------------------------------

    \153\ See AllianceBernstein Letter at 2. See also, e.g., 
Stardust Letter at 2; letter from Gary A. LaBranche, FASAE, CAE, 
President & CEO, National Investor Relations Institute, to Vanessa 
Countryman, Secretary, Commission, dated December 30, 2020, at 4.
    \154\ See Guzik Letter at 1, 7-10.
    \155\ See Alliance for Fair Board Recruitment Letter at 47-49.
    \156\ See Guzik Letter at 8.
    \157\ See Project on Fair Representation Letter at 6.
---------------------------------------------------------------------------

    In response to comments, the Exchange states that the Board 
Diversity Proposal would provide companies with a flexible, attainable 
approach to achieving a reasonable objective that is not overly 
burdensome or coercive.\158\ The Exchange also states that the Board 
Diversity Proposal would align investors' demands for increased 
diversity with companies' needs for a flexible approach that 
accommodates each company's unique circumstances.\159\
---------------------------------------------------------------------------

    \158\ See Nasdaq Response Letter II at 4.
    \159\ See id. The Exchange also states that companies are not 
precluded from striving to achieve higher or lower diversity 
objectives. See id.
---------------------------------------------------------------------------

    The Board Diversity Proposal is consistent with Sections 6(b)(5) 
and 6(b)(8) of the Act. As discussed below, the proposal is not 
designed to permit unfair discrimination between issuers and would not 
impose a burden on competition between issuers that is not necessary or 
appropriate in furtherance of the purposes of the Act.\160\ As an 
initial matter, even though the Board Diversity Proposal would 
establish different diversity objectives and disclosures for different 
types of Nasdaq-listed companies, it would not mandate any particular 
board composition for Nasdaq-listed companies, companies that do not 
meet the applicable diversity objectives would only need to explain 
their reason(s) for not meeting the objectives and would have 
substantial flexibility in crafting such an explanation, and directors 
would not be required to self-identify their Diverse characteristics 
for purposes of the Board Diversity Matrix.
---------------------------------------------------------------------------

    \160\ Exchanges currently provide flexibilities to certain 
issuers under their listing standards. See, e.g., Nasdaq Rule 
5615(a)(3) (providing certain flexibility to foreign private 
issuers); Nasdaq Rule 5605(d)(5) (providing certain flexibility to 
smaller reporting companies); NYSE Listed Company Manual Section 
303A.00 (providing certain flexibility to foreign private issuers 
and smaller reporting companies).
---------------------------------------------------------------------------

    Moreover, it is not unreasonable for the Exchange, in crafting 
board diversity disclosures, to recognize that the proposed definition 
of ``Underrepresented Minority'' for domestic companies may not be as 
effective in identifying underrepresented board members in foreign 
countries that have differing ethnic and racial compositions, and may 
therefore result in disclosures that are less useful for investors who 
seek board diversity information for Foreign Issuers. It is therefore 
not unreasonable for the Exchange to require Foreign Issuers to provide 
disclosures relating to underrepresented individuals based on national, 
racial, ethnic, indigenous, cultural, religious, or linguistic identity 
in the country of the issuer's principal executive offices. Similarly, 
to the extent Foreign Issuers choose to meet the proposed diversity 
objectives, it is not unreasonable for the Exchange to take into 
account the differing demographic compositions of foreign countries and 
to provide Foreign Issuers flexibility in recognition of the different 
circumstances associated with Foreign Issuers hiring Diverse directors. 
Moreover, investors would still have access to a Foreign Issuer's Board 
Diversity Matrix and any disclosures explaining why it does not meet 
the applicable diversity objective, and this information may still be 
important to investors' investment and voting decisions notwithstanding 
the flexibility provided to Foreign Issuers. Accordingly, it is not 
unfairly discriminatory, and does not impose an unnecessary or 
inappropriate burden on competition, for the Exchange to provide this 
flexibility to Foreign Issuers.
    In addition, it is not unreasonable for the Exchange to recognize 
the unique challenges (including potential resource constraints) faced 
by Smaller Reporting Companies and Companies with a Smaller Board in 
meeting the proposed diversity objectives and to provide more 
flexibility to these companies to the extent they choose to meet the 
diversity objectives (i.e., two Diverse directors, which could be 
satisfied with two Female directors, for a Smaller Reporting Company 
and one Diverse director for a Company with a Smaller Board). And, as 
with Foreign Issuers, investors would still have access to the Board 
Diversity Matrix from Smaller Reporting Companies and Companies with a 
Smaller Board, as well as any disclosures explaining why such companies 
do not meet their applicable board diversity objectives, and this

[[Page 44436]]

information may still be important to investors' investment and voting 
decisions even though these companies have more flexible diversity 
objectives. Accordingly, it is not unfairly discriminatory, and does 
not impose an unnecessary or inappropriate burden on competition for 
the Exchange to provide more flexible diversity objectives for Smaller 
Reporting Companies and Companies with a Smaller Board.
    Moreover, the Board Diversity Proposal would not unfairly 
discriminate against companies that make disclosures under proposed 
Rule 5605(f)(3) or impose an unnecessary or inappropriate burden on 
competition between companies that choose to meet the diversity 
objectives and companies that make the disclosures under proposed Rule 
5605(f)(3). Specifically, as discussed below, the Board Diversity 
Proposal is designed to not unduly burden Nasdaq-listed companies and 
would provide companies flexibility in formulating an explanation for 
not meeting the diversity objectives,\161\ thereby minimizing any 
potential burdens on competition. In addition, it is not unreasonable, 
and mitigates the impact of different circumstances on how companies 
respond to the proposal, to only require companies that do not meet the 
proposed diversity objectives to disclose why they have not met such 
objectives, rather than to require all Nasdaq-listed companies 
(including those that already have Diverse directors on their boards 
sufficient to satisfy the objectives) to more generally disclose their 
approaches to board diversity. In addition, the proposal would not 
mandate any particular board composition, and there is competition 
among the exchanges for listings. A company may choose to meet the 
proposed diversity objectives or explain its reasons for not doing so, 
or the company may transfer its listing to another exchange if it does 
not wish to comply with the proposed listing rules.
---------------------------------------------------------------------------

    \161\ See infra Section II.D.
---------------------------------------------------------------------------

    Finally, the proposal would not unfairly discriminate against 
companies that are not exempt from the proposal or impose an 
unnecessary or inappropriate burden on competition between Exempt 
Companies and companies that are not exempt. It is not unreasonable for 
the Exchange to recognize the differences between operating companies 
that issue equity securities with voting rights that are listed on the 
Exchange and Exempt Companies.\162\
---------------------------------------------------------------------------

    \162\ The Exchange currently exempts certain types of issuers 
from certain corporate governance requirements. See Nasdaq Rule 
5615.
---------------------------------------------------------------------------

D. Burdens Associated With Complying With the Board Diversity Rules and 
Other Economic Impacts Associated With the Board Diversity Rules

    In the Board Diversity Proposal, the Exchange states that 
collecting and disclosing the statistical data under proposed Rule 5606 
would impose a minimal time and economic burden on listed 
companies,\163\ and any such burden would be counterbalanced by the 
benefits that the information would provide to a company's 
investors.\164\
---------------------------------------------------------------------------

    \163\ See Amendment No. 1 to the Board Diversity Proposal at 159 
(stating that, while the time and economic burden may vary based on 
a company's board size, the Exchange does not believe that there is 
any significant burden associated with gathering, preparing, and 
reporting this data).
    \164\ See id. at 159-60.
---------------------------------------------------------------------------

    The Exchange also argues that because proposed Rule 5605(f) would 
allow a company to explain why it does not meet the proposed diversity 
objectives, it would mitigate any burdens on companies for which 
meeting those objectives is not cost effective, appropriate, feasible, 
or desirable.\165\ Moreover, the Exchange states that the costs of 
identifying director candidates and total annual director compensation 
can range widely.\166\ The Exchange states, however, that most, if not 
all, of these costs would be borne in the search for new directors 
regardless of the proposed rule.\167\ The Exchange also notes that 
while the proposal may 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 benefits of a broader 
search.\168\ Moreover, the Exchange states, the proposed compliance 
periods would allow companies to avoid incurring immediate costs, and 
the proposed flexibilities for certain types of companies would reduce 
their compliance burden.\169\
---------------------------------------------------------------------------

    \165\ See id. at 160-61.
    \166\ See id. at 161.
    \167\ See id.
    \168\ See id. at 161-62 (also stating that the Board Recruiting 
Service Proposal would reduce costs for companies that do not 
currently meet the separately proposed diversity objectives, that 
the Exchange has published FAQs on its Listing Center to provide 
guidance to companies on the application of the proposed rules in 
the Board Diversity Proposal, and that the Exchange will establish a 
dedicated mailbox for companies and their counsel to email 
additional questions to the Exchange regarding the application of 
such proposed rules).
    \169\ See id. at 162.
---------------------------------------------------------------------------

    Some commenters believe that the Board Diversity Proposal would not 
be burdensome because companies are already familiar with the type of 
disclosures required,\170\ disclosures are required on an aggregate 
basis, and the disclosures are based on voluntary self-
identification.\171\ One commenter asserts that the proposal would not 
be burdensome, as companies could expand the size of their boards to 
add Diverse directors instead of replacing existing directors or could 
simply explain why they have not met the proposed diversity 
objectives.\172\ Some commenters also state that finding qualified 
Diverse directors would not be unduly difficult.\173\
---------------------------------------------------------------------------

    \170\ Some commenters point out that the Board Diversity 
Proposal would require disclosure based on the same categories that 
companies already use to report workforce diversity data to the EEOC 
on the EEO-1 report. See, e.g., Morningstar Letter at 1-2; Fairfax 
Letter at 7-8; Ideanomics Letter at 4; Goodman and Olson Letter at 
2.
    \171\ See, e.g., Olshan Letter at 3-4; CFA Letter at 5; Fairfax 
Letter at 7-8; Stardust Letter at 1-2; TIAA Letter at 3; Soundboard 
Letter at 2-3. See also letter from Theresa Whitmarsh, Executive 
Director, Washington State Investment Board, to Vanessa A. 
Countryman, Secretary, Commission, dated December 23, 2020 
(``Washington State Investment Board Letter''), at 2.
    \172\ See Akin Gump Letter at 5 (also stating that boards of 
directors of Nasdaq-listed companies will not be confronted with any 
undue hardship, other than the ordinary course onboarding hurdles or 
drafting of requisite disclosure).
    \173\ See, e.g., letter from Rosie Bichard and Patricia 
Rodriguez Christian, Co-Presidents, WomenExecs on Boards, to Jay 
Clayton, Chairman, Commission, dated January 4, 2021 (``WomenExecs 
Letter''); Ariel Letter at 1. See also Goodman and Olson Letter at 
2-3.
---------------------------------------------------------------------------

    Other commenters express concern with the economic impacts of 
proposed Rule 5605(f), however.\174\ One argues that the proposal could 
harm economic growth by imposing costs on public corporations, 
discouraging private corporations from going public, and enabling 
certain groups to initiate pressure campaigns against corporations with 
non-Diverse boards; the same commenter expresses concern that the 
Exchange has not undertaken a serious effort to quantify the proposal's 
costs and benefits.\175\
---------------------------------------------------------------------------

    \174\ See, e.g., CEI Letter at 4-5; Quigley Letter; IBC Letter 
at 1-4; letter from Matthew Glen dated December 31, 2020 (noting the 
need for additional services to seek Diverse candidates).
    \175\ See Toomey Letter at 1, 5-6. See also, e.g., Alliance for 
Fair Board Recruitment Letter at 31-32 (stating that failure to cure 
a deficiency would result in a staff delisting determination, that 
the proposal would create a target for activist divestment campaigns 
or shareholder lawsuits alleging misrepresentations and breach of 
fiduciary duties, and that companies will need to spend limited 
resources to hire communications consultants and attorneys to 
evaluate the marketing and legal risks of providing an explanation 
for not having the applicable number of Diverse directors); Guzik 
Letter at 8 (expressing concern regarding pressure from activist 
groups, as well as litigation, for issuers that are unwilling or 
unable to meet the proposed diversity objectives); letter from Art 
Ally, President and CEO, Timothy Plan, dated March 25, 2021 
(``Timothy Plan Letter''), at 1-2 (stating that the proposal may 
subject certain firms to harassment, including legal threats); 
letter from Tom Quaadman, Executive Vice President, U.S. Chamber of 
Commerce's Center for Capital Markets Competitiveness, to Vanessa 
Countryman, Secretary, Commission, dated January 4, 2021, at 2 
(expressing support for the Board Diversity Proposal while 
suggesting ongoing careful assessment of how the proposal could 
affect Emerging Growth Companies, as well as the potential effect 
that the proposed new listing standards could have on the future of 
initial public offerings).

---------------------------------------------------------------------------

[[Page 44437]]

    In response to such comments, the Exchange states that companies 
may decide where to list and that listings contracts and fees do not 
impede issuers from switching listing markets.\176\ The Exchange also 
asserts that many long-term, newer, and potential public companies 
strongly support and value the objectives of the proposal and may 
affirm their choice or choose to list on Nasdaq because of it.\177\ The 
Exchange further contends that private companies recognize the value of 
board diversity for public companies and would not have any misgivings 
about going public as a result of the proposal.\178\ The Exchange 
additionally states that the proposal's framework would allow companies 
with non-Diverse boards to simply explain their approach, which would 
limit pressure campaigns.\179\ Further, the Exchange states that it has 
carefully considered the potential costs on listed companies (and those 
considering listing), including the costs of retaining a director 
search firm to conduct the search for new or replacement directors, the 
time employees spend conducting the search and completing and providing 
the required disclosures, and the potential disruption to the board 
from these activities.\180\ The Exchange states, however, because 
existing, new, and potential public companies would experience those 
costs in vastly different ways and combinations, those costs cannot be 
quantified with meaningful certainty.\181\
---------------------------------------------------------------------------

    \176\ See Nasdaq Response Letter II at 28-29.
    \177\ See id. at 29.
    \178\ See id. The Exchange specifically states that, among the 
many elements companies consider when becoming public, board 
composition is growing in importance among pre-public company 
stakeholders. See id. (noting Goldman Sach's new standard for taking 
companies public (i.e., the company must have at least one diverse 
board member), and citing Washington State Investment Board Letter 
at 2, which states that many private equity general partners are 
already moving toward ``new and improved'' diversity standards, and 
Institutional Limited Partners Association Letter at 2, which states 
that, given the frequency of private equity and venture-backed 
companies exiting through an IPO, the proposal will likely result in 
positive movement on board diversity of portfolio companies owned by 
private funds). The Exchange also states that Amendment No. 1 to the 
Board Diversity Proposal would provide a newly listed company with a 
reasonable amount of time to publish its board disclosure and to 
have Diverse directors in alignment with the proposed diversity 
objectives after going public. See id.
    \179\ See id. at 30.
    \180\ See id.
    \181\ See id. The Exchange states that it has taken multiple 
steps to mitigate the potential costs of the proposal (e.g., 
proposing to offer the complimentary recruiting service, proposing 
the alternative of an explanation if a company chooses to not meet 
the proposed diversity objectives). See id.
---------------------------------------------------------------------------

    In approving the Board Diversity Proposal, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation and finds that it would not have a material impact on 
efficiency, that it is reasonably designed not to unduly burden Nasdaq-
listed companies, and that it would not unduly deter capital formation 
(e.g., by affecting companies' decisions to go public and list on the 
Exchange).\182\ As proposed, companies that choose not to meet the 
diversity objectives would not be required to meet those objectives. 
Any company that neither wishes to meet the diversity objectives nor 
disclose its reasons for not doing so may transfer its listing to a 
competing listing exchange. Moreover, the Board Diversity Proposal 
would provide directors with the option to not self-identify.
---------------------------------------------------------------------------

    \182\ See 15 U.S.C. 78c(f). See also Section II.A.2. (discussing 
the efficiencies that could result from the Board Diversity 
Proposal).
---------------------------------------------------------------------------

    Further, various aspects of the two proposals would mitigate any 
burdens associated with compliance, as well as any related impact on 
capital formation. In particular, the Board Diversity Proposal would 
provide: Flexibility in formulating an explanation for not meeting the 
diversity objectives; flexibility for Foreign Issuers, Smaller 
Reporting Companies, and Companies with a Smaller Board; Flexibility 
with respect to the location of the required disclosures (i.e., in the 
company's proxy statement or information statement (or if the company 
does not file a proxy, in its Form 10-K or 20-F),\183\ or on the 
company's website); phase-in periods for companies newly listing on the 
Exchange, companies switching listing tiers on the Exchange, and 
companies that cease to be Foreign Issuers, Smaller Reporting 
Companies, or Exempt Companies to comply with the proposed rules; a 
cure period for a company that previously satisfied proposed Rule 
5605(f) but subsequently ceases to meet the diversity objective due to 
a vacancy on its board; and transition periods for companies to comply 
with the proposals after they are approved.\184\ Additionally, the 
Board Recruiting Service Proposal--which is separately approved by this 
order--would offer a one-year complimentary board recruiting service 
that would mitigate costs associated with hiring additional Diverse 
directors.\185\ Moreover, the Board Diversity Proposal would provide 
reasonable time periods for companies that fail to maintain compliance 
to regain compliance and avoid being delisted from the Exchange: A 
company that does not comply with proposed Rule 5605(f)(2) would be 
provided until the later of its next annual shareholders meeting or 180 
days from the event that caused the deficiency to cure the deficiency, 
and a company that does not comply with proposed Rule 5606 would have 
45 calendar days to submit a plan of compliance to the Exchange and 
upon review of such plan, Exchange staff may provide the company with 
up to 180 days to regain compliance.
---------------------------------------------------------------------------

    \183\ To account for the fact that not every company files a 
proxy statement, the Exchange amended the Board Diversity Proposal 
in Amendment No. 1 to allow such companies to provide the 
disclosures in a Form 10-K or 20-F.
    \184\ In response to comments, the Exchange amended the Board 
Diversity Proposal to provide a grace period under proposed Rule 
5605(f)(6)(B) for a company that satisfied the objectives of 
proposed Rule 5605(f)(2) but ceases to meet the objectives due to a 
vacancy on its board of directors, to provide additional time for 
newly listed companies to satisfy the requirements of proposed Rule 
5605(f) and to better align the phase-in and transition periods with 
a company's proxy season. See also letter from Stephen J. 
Kastenberg, Ballard Spahr LLP, to Vanessa Countryman, Secretary, 
Commission, dated January 14, 2021 (``Ballard Spahr Letter''), at 1-
2 (submitted on behalf of the Exchange) (stating that the Exchange 
has received requests to: allow additional time for companies listed 
on the NGS, NGM, and NCM to comply with the diversity objectives of 
proposed Rule 5605(f)(2); provide a ``cure'' period for a listed 
company that does not comply with the diversity objectives of 
proposed Rule 5605(f)(2) as a result of an unanticipated departure 
of a Diverse director; and amend the effective date of the proposed 
rules to better align disclosure requirements with annual meetings 
and proxy requirements).
    \185\ The Exchange proposes to provide certain Nasdaq-listed 
companies with one-year of complimentary access for two users to a 
board recruiting service, which would provide access to a network of 
board-ready diverse candidates, allowing companies to identify and 
evaluate Diverse board candidates. See proposed IM-5900-9; Amendment 
No. 1 to the Board Recruiting Service Proposal at 10-11. According 
to the Exchange, this service has an approximate retail value of 
$10,000 per year. See proposed IM-5900-9. As proposed, until 
December 1, 2022, any Eligible Company that requests access to this 
service through the Nasdaq Listing Center will receive complimentary 
access for one year from the initiation of the service. See id.
---------------------------------------------------------------------------

    Finally, the proposals may promote competition for listings among 
exchanges by allowing the Exchange to update its disclosure rules and 
related listing services in a way that better attracts and retains the 
listings of companies that prefer to be listed on an exchange that 
provides investors with the information required by the Board Diversity 
Proposal. While some companies that do not prefer the Board Diversity 
Proposal's required

[[Page 44438]]

disclosures may choose to not go public and list on the Exchange, or 
they may delist from the Exchange, the proposal contains terms to 
mitigate adverse effects. Moreover, some companies may shift their 
listings to the Exchange, or may choose to go public on the Exchange 
rather than remain private, in response to the Board Diversity 
Proposal's requirements because of the interest shown in comparable and 
consistent board diversity information, which could benefit investors 
by increasing the number of publicly listed companies.

E. The Exchange's Authority for the Board Diversity Rules

    Section 6(b)(5) of the Act requires, among other things, that the 
rules of a national securities exchange not be 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. In the Board 
Diversity Proposal, the Exchange argues that the proposal is related to 
corporate governance standards for listed companies and is therefore 
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.\186\ While the Exchange recognizes that 
U.S. states are increasingly proposing and adopting board diversity 
requirements, the Exchange states that certain of its current corporate 
governance listing rules relate to areas that are also regulated by 
states (e.g., quorums, shareholder approval of certain 
transactions).\187\ The Exchange states that adopting Exchange rules 
relating to such matters (and the proposed rule changes described 
herein) would ensure uniformity of such rules among its listed 
companies.\188\
---------------------------------------------------------------------------

    \186\ See Amendment No. 1 to the Board Diversity Proposal at 
Section 3.b.II.E.
    \187\ See id. at 155-56. The Exchange recognizes that several 
states have enacted or proposed legislation relating to board 
diversity and that Congress is considering legislation to require 
Commission-registered companies to provide board diversity 
statistics and disclose whether they have a board diversity policy. 
See id. at 16.
    \188\ See id. at 156.
---------------------------------------------------------------------------

    The Exchange also states that it can establish practices that would 
assist in carrying out its mandate to protect investors and remove 
impediments from the market through the Board Diversity Proposal.\189\ 
The Exchange believes that it is within its delegated authority to 
propose listing rules designed to enhance transparency, provided that 
they do not conflict with existing federal securities laws.\190\ The 
Exchange states that, for example, it already requires its listed 
companies to publicly disclose compensation or other payments by third 
parties to a company's directors or nominees, notwithstanding that such 
disclosure is not required by federal securities laws.\191\ The 
Exchange further states that it has 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, in their proxy 
statement or information statement, or, if a company does not file a 
proxy, in its Form 10-K or 20-F, and by not requiring companies to 
adopt a diversity policy.\192\
---------------------------------------------------------------------------

    \189\ See id. at 53.
    \190\ See id. at 58.
    \191\ See id. at 58-59. Various provisions under the federal 
securities laws may require disclosure of third party compensation 
arrangements with or payments to nominees and/or board members. See 
Securities Exchange Act Release No. 78223 (July 1, 2016), 81 FR 
44400, 44403 (July 7, 2016).
    \192\ See Amendment No. 1 to the Board Diversity Proposal at 60.
---------------------------------------------------------------------------

    Some commenters argue that the Board Diversity Proposal is 
impermissibly designed to address political and social issues and would 
redefine the purpose of businesses in a way that is unrelated to 
traditional business purposes (e.g., profitability, obligation to 
shareholders, satisfying customers, and treating workers and suppliers 
fairly).\193\ One commenter also asserts that the proposal does not 
relate to any traditional corporate governance matter.\194\ Moreover, 
some commenters argue that the proposal is not within the purposes of 
the Act and exceeds the authority of national securities exchanges 
under the Act.\195\
---------------------------------------------------------------------------

    \193\ See, e.g., Timothy Plan Letter at 1-2 (also supporting 
Toomey Letter); CEI Letter at 1; Toomey Letter at 4; Heritage 
Foundation Letter at 3-5, 17-18; Guess Letter at 1. Another 
commenter argues that the Board Diversity Proposal raises concerns 
about increasing costs and parallels to socialism. See letter from 
Henryk A Kowalczyk dated January 6, 2021 (``Kowalczyk Letter'') 
(reproducing a December 18, 2020 article published in Medium titled 
``Socialists Are Taking Over Wall Street'').
    \194\ See Alliance for Fair Board Recruitment Letter at 49-50.
    \195\ See, e.g., Guzik Letter at 1; Alliance for Fair Board 
Recruitment Letter at 49-50; Heritage Foundation Letter at 2; 
Project on Fair Representation Letter at 7-11; letter from 
Christopher A. Iacovella, Chief Executive Officer, American 
Securities Association, to Vanessa Countryman, Secretary, 
Commission, dated December 31, 2020, at 1-2; Publius Letter at 4-5.
---------------------------------------------------------------------------

    In response, the Exchange states that the Act provides the 
standards for approval of rules proposed by SROs, which are different 
from rulemaking by the Commission.\196\ The Exchange states that it is 
performing its duties as an exchange to fashion listing rules that 
promote good corporate governance.\197\ The Exchange also notes that it 
is expected and required, in its role operating an exchange, to develop 
and enforce listing rules that, among other things, ``remove 
impediments to and perfect the mechanisms of a free and open market'' 
and ``protect investors and the public interest.'' \198\ With respect 
to the comment that the proposal contributes to the federalization of 
corporate governance, the Exchange states that it develops listing 
rules regarding corporate governance standards to promote uniformity 
among its listed companies, even if the same areas are regulated by 
states.\199\ In addition, the Exchange states that companies 
voluntarily list on the Exchange, as a private entity, and choose to 
submit to the Exchange's listing rules.\200\ Moreover, national 
securities exchanges may adopt different approaches.\201\
---------------------------------------------------------------------------

    \196\ See Nasdaq Response Letter II at 22.
    \197\ See id. at 23-24.
    \198\ See id. at 24.
    \199\ See id.
    \200\ See id.
    \201\ See id.
---------------------------------------------------------------------------

    The Board Diversity Proposal would make consistent and comparable 
information relating to the corporate governance of Nasdaq-listed 
companies (i.e., information regarding board diversity) widely 
available on the same basis to investors, which would increase 
efficiency for investors that gather and use this information. In 
addition, the proposal would not redefine the purpose of Nasdaq-listed 
companies' businesses in a way that is unrelated to traditional 
business purposes, as claimed by certain commenters. Rather, it could 
enhance investors' investment and voting decisions and, as discussed 
throughout this order, is consistent with Section 6 of the Act, which 
requires that the rules of an exchange be designed to, among other 
things, remove impediments to and perfect the mechanism of a free and 
open market and a national market system and protect investors and the 
public interest.
    Exchanges have historically adopted listing rules that require 
disclosures in addition to those required by Commission rules.\202\ 
National securities exchanges may choose to

[[Page 44439]]

adopt disclosure requirements in their listing rules that supplement or 
overlap with disclosure requirements otherwise imposed under the 
federal securities laws, and disclosure-related listing standards that 
provide investors with information that facilitates informed investment 
and voting decisions contribute to the maintenance of fair and orderly 
markets.\203\ Accordingly, the proposal would not cause the Exchange 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.
---------------------------------------------------------------------------

    \202\ See, e.g., Nasdaq IM-5250-2 (requiring Nasdaq-listed 
companies to publicly disclose the material terms of all agreements 
and arrangements between any director or nominee and any person or 
entity (other than the listed company) relating to compensation or 
other payment in connection with that person's candidacy or service 
as a director); LTSE Rule 14.425(a)(1)(C) (requiring LTSE-listed 
issuers to adopt and publish a policy on the company's approach to 
diversity and inclusion).
    \203\ See 2016 Approval Order, supra note 23.
---------------------------------------------------------------------------

F. Comments on Constitutional Scrutiny of the Board Diversity Proposal

    Some commenters argue that the Board Diversity Proposal, if 
approved by the Commission, would constitute impermissible government 
action,\204\ is discriminatory as it is based on sex, race, ethnicity, 
and sexual orientation,\205\ and would require Nasdaq-listed companies 
to discriminate in hiring and, if approved, would violate the Fifth 
Amendment to the U.S. Constitution.\206\ According to one commenter, 
all racial classifications, both disadvantaging and benefitting 
minorities, are subject to strict scrutiny, and the government must 
demonstrate that the racial classifications are narrowly tailored to 
further a compelling government interest.\207\ This commenter asserts 
that ``Diversity'' itself and ``outright racial balancing'' are not 
compelling interests.\208\ In addition, this commenter argues that the 
proposed objective to have at least one director who self-identifies as 
a female is a gender quota that, like the racial quota, if adopted, 
would violate the Fifth Amendment.\209\ Other commenters argue that the 
Board Diversity Proposal is akin to affirmative action or is 
distinguishable from permissible affirmative action plans.\210\ 
Finally, some commenters argue that the Board Diversity Proposal would 
violate the First Amendment because it would require companies to 
engage in compelled disclosure.\211\
---------------------------------------------------------------------------

    \204\ See, e.g., letter from Thomas J. Fitton, President, 
Judicial Watch, Inc., to Vanessa Countryman, Secretary, Commission, 
dated December 29, 2020 (``Judicial Watch Letter''), at 5-6; Project 
on Fair Representation Letter at 12-13. One commenter argues that 
the proposal constitutes state action, and that even if the proposal 
of the board diversity rules is free from government coercion or 
encouragement, the enforcement of the rules is not. See Alliance for 
Fair Board Recruitment Letter at 59-64.
    \205\ See, e.g., letter from Colin Gallagher dated January 8, 
2021; Heritage Foundation Letter at 12-16; letter from Eugene Kelly 
to Jay Clayton, Chairman, Commission, dated December 29, 2020; 
Richter Letter at 3.
    \206\ See, e.g., NLPC Letter at 4-6; Project on Fair 
Representation Letter at 12-15; Judicial Watch Letter at 2-7.
    \207\ See Judicial Watch Letter at 3-4. See also, e.g., Free 
Enterprise Project Letter at 2 (arguing that the Board Diversity 
Proposal is impermissibly vague).
    \208\ See Judicial Watch Letter at 3-4. See also Alliance for 
Fair Board Recruitment Letter at 67-68.
    \209\ See Judicial Watch Letter at 4. See also Alliance for Fair 
Board Recruitment Letter at 64-66 (arguing that the proposal 
relating to female directors would not satisfy heightened scrutiny); 
NLPC Letter at 4-6.
    \210\ See, e.g., Richter Letter at 3; NLPC Letter at 5; Judicial 
Watch Letter at 3.
    \211\ See Alliance for Fair Board Recruitment Letter at 70-72; 
Project on Fair Representation Letter at 15-16.
---------------------------------------------------------------------------

    The Exchange states that it is not a state actor, and the proposal 
does not constitute state action subject to constitutional 
scrutiny.\212\ As support, the Exchange notes that courts have 
uniformly concluded that SROs like the Exchange are not state 
actors.\213\ The Exchange also argues that the Board Diversity Proposal 
does not satisfy the test for determining whether actions are fairly 
attributable to the government because there is no Commission rule or 
action requiring or encouraging the Exchange to adopt the proposed 
Exchange rules, and the Commission's approval of a private entity's 
action does not convert private action into state action.\214\
---------------------------------------------------------------------------

    \212\ See Nasdaq Response Letter I at 2, 9-13.
    \213\ See id. at 9-10.
    \214\ See id. at 11-12.
---------------------------------------------------------------------------

    With respect to concerns expressed by commenters regarding Equal 
Protection under the Fifth Amendment to the U.S. Constitution, the 
Exchange states that, even if it were found to be a state actor, the 
proposal would not mandate any particular number of Diverse directors 
and would therefore survive scrutiny.\215\ The Exchange further notes 
that proposed Rule 5605(f) establishes aspirational diversity 
objectives, and proposed Rule 5606 is a disclosure requirement for 
demographic data on all directors serving on the boards of Nasdaq-
listed companies.\216\ The Exchange states that, accordingly, the 
proposal does not impose a burden on or confer a benefit to the 
exclusion of others based on a suspect classification, and ``rational 
basis'' would be the appropriate standard of review.\217\ The Exchange 
also states that the proposal reflects several legitimate government 
interests, such as increasing transparency about board diversity so 
that investors can make investment decisions based on consistent and 
readily accessible data.\218\
---------------------------------------------------------------------------

    \215\ See id. at 14.
    \216\ See id. at 15.
    \217\ See id.
    \218\ See id. at 15-16.
---------------------------------------------------------------------------

    The Exchange also argues that even if the proposal triggered 
heightened scrutiny, proposed Rule 5605(f) would survive strict 
scrutiny because it is necessary to achieve a compelling state interest 
\219\ and is narrowly tailored to achieve that interest.\220\ The 
Exchange further contends that, with respect to gender and LGBTQ+ 
status, proposed Rule 5605(f) would satisfy intermediate scrutiny 
because it is necessary to achieve an important government 
interest,\221\ and is substantially related to that important 
interest.\222\
---------------------------------------------------------------------------

    \219\ See id. at 17-18.
    \220\ See id. at 18-22.
    \221\ See id. at 22-24.
    \222\ See id. at 24.
---------------------------------------------------------------------------

    The Exchange also argues that the proposal is not a form of 
affirmative action because proposed Rule 5605(f) would allow for 
explanation as a path to compliance.\223\ Even assuming the proposal 
constitutes affirmative action, the Exchange contends, comparable 
programs that do not include mandates are lawful.\224\
---------------------------------------------------------------------------

    \223\ See id. at 8.
    \224\ See id.
---------------------------------------------------------------------------

    With respect to commenters' concerns that the proposal would 
violate the First Amendment because it would require companies to 
engage in compelled speech, the Exchange again argues that it is not a 
state actor.\225\ The Exchange also argues that the proposal does not 
result in compelled speech because it allows a voluntary association of 
private companies bound together by contract to engage in truthful and 
lawful speech on the subject of board diversity.\226\ The Exchange also 
states that, even if it were a state actor and the proposal were 
interpreted as the government requiring speech, the particular speech 
at issue would not constitute compelled speech.\227\ According to the 
Exchange, proposed Rule 5606's disclosures about board composition are 
the kinds of disclosures that are routinely permitted,\228\ and the 
proposed Rule 5605(f) disclosures containing a company's explanation 
for not meeting the proposed diversity objectives do not compel a 
company to convey any specific message.\229\ Moreover, the Exchange 
states that even if it were a state actor and the proposal implicated 
the compelled speech doctrine, the proposal would be constitutional in 
light of the substantial body of studies

[[Page 44440]]

showing the benefits of diverse boards.\230\
---------------------------------------------------------------------------

    \225\ See id. at 25.
    \226\ See id. at 25-26.
    \227\ See id. at 27.
    \228\ See id.
    \229\ See id.
    \230\ See id.
---------------------------------------------------------------------------

    Numerous courts (and the Commission) have repeatedly held that SROs 
generally are not state actors,\231\ and commenters identify no 
persuasive basis for reaching a different conclusion with respect to 
the Exchange's Board Diversity Proposal. The Commission's ``[m]ere 
approval'' of the proposal as consistent with the requirements of the 
Act is ``not sufficient'' to convert it into state action.\232\ 
Similarly, the fact that the Exchange is subject to ``extensive and 
detailed'' regulation by the Commission--including, for example, the 
Commission's role in reviewing the Exchange's enforcement of its 
listing standards--``does not convert [its] actions into those of the 
[Commission].'' \233\ In any event, the proposal would survive 
constitutional scrutiny because the objectives set forth in the 
proposal are not mandates, and the disclosures that the proposal 
requires are factual in nature and advance important interests as 
described throughout this order.
---------------------------------------------------------------------------

    \231\ See, e.g., Charles C. Fawcett, IV, Securities Exchange Act 
Release No. 56770, 91 SEC. Docket 2594 (November 8, 2007); D.L. 
Cromwell Invs., Inc. v. NASD Regulation, Inc., 279 F.3d 155, 162 (2d 
Cir. 2002); Desiderio v. National Ass'n of Secs. Dealers, Inc., 191 
F.3d 198, 206-07 (2d Cir. 1999); Jones v. SEC, 115 F.3d 1173, 1183 
(4th Cir. 1997); First Jersey Secs., Inc. v. Bergen, 605 F.2d 690, 
698 (3d Cir. 1979).
    \232\ Blum v. Yaretsky, 457 U.S. 991, 1004 (1982). See also 
Desiderio, 191 F.3d at 207 (Commission's approval of FINRA's Form U-
4).
    \233\ Desiderio, 191 F.3d at 207 (quoting Jackson v. 
Metropolitan Edison Co., 419 U.S. 345, 350 (1974)).
---------------------------------------------------------------------------

G. Comments on the Applicability of Other Laws to the Board Diversity 
Proposal

1. Comments on the Materiality Standard
    One commenter argues that the Board Diversity Proposal would 
violate materiality principles that the commenter believes govern 
securities disclosures because the disclosures would not help a 
reasonable investor evaluate a company's performance.\234\ Another 
commenter argues that the proposal would conflict with the Commission's 
existing regulatory framework for diversity disclosures.\235\ In 
response, the Exchange notes the Commission's statement 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.'' \236\ The Exchange also states its concern that 
the current lack of transparency and consistency in board diversity 
information makes it difficult for investors to determine the state of 
diversity among listed companies and boards' philosophy regarding 
diversity.\237\ The Exchange believes that it is within its authority 
to propose listing rules designed to enhance transparency, provided 
that they do not conflict with existing federal securities laws.\238\
---------------------------------------------------------------------------

    \234\ See Toomey Letter at 1, 3-4.
    \235\ See Alliance for Fair Board Recruitment at 54-56.
    \236\ See Nasdaq Response Letter II at 13.
    \237\ See id.
    \238\ See id.
---------------------------------------------------------------------------

    As the Commission has previously stated, national securities 
exchanges may adopt disclosure requirements in their listing rules 
designed to improve governance, as well as transparency and 
accountability into corporate decision making for listed issuers, 
including imposing heightened standards over that which the Commission 
currently requires.\239\ Disclosure-related listing standards that 
provide investors with information that facilitates informed investment 
and voting decisions contribute to the maintenance of fair and orderly 
markets.\240\ Accordingly, to the extent the proposal would result in 
disclosures that are not currently required by Commission rules, such 
disclosures would not conflict with the Commission's regulatory 
framework for diversity disclosures.
---------------------------------------------------------------------------

    \239\ See 2016 Approval Order, supra note 23 at 44403.
    \240\ See id.
---------------------------------------------------------------------------

2. Comments on Reporting Fraud
    One commenter argues that the proposal would be subject to 
reporting fraud,\241\ and another commenter argues that reliance on 
self-identification for board diversity disclosures would pose unique 
liability concerns under the antifraud and reporting provisions of the 
federal securities laws.\242\ In response, the Exchange states that 
voluntary self-identification of personal characteristics is generally 
accepted as accurate without a ``truth test'' and that the Exchange 
would not judge the accuracy of a director's self-identification.\243\ 
The Exchange also states that some directors may feel that a ``truth 
test'' would violate their privacy rights and right to choose their 
self-identification.\244\ Moreover, the Exchange states that any legal 
risk that may arise from the proposed disclosures would be nominal and 
are outweighed by transparency benefits.\245\
---------------------------------------------------------------------------

    \241\ See Richter Letter at 2.
    \242\ See Toomey Letter at 4-5.
    \243\ See Nasdaq Response Letter II at 19.
    \244\ See id.
    \245\ See id. at 19-20.
---------------------------------------------------------------------------

    The Board Diversity Proposal would not pose unique liability 
concerns as a result of its requirement for companies to disclose their 
directors' self-identified Diverse characteristics, and the proposed 
disclosures would not cause a company to be subject to reporting fraud 
any differently from other types of company disclosures required by an 
exchange rule. Rather, a company would be obligated to accurately 
disclose the self-reported information it receives from its directors, 
and any failure to do so would be comparable to a failure to accurately 
disclose any other information the company is obligated to disclose.
3. Comments on Director Privacy
    Some commenters believe that the proposed aggregated board-level 
diversity statistics disclosures would respect individual directors' 
privacy,\246\ including in particular because no individual directors 
would be identified as members of an underrepresented minority group or 
as LGBTQ+.\247\ Some commenters also point out that directors would not 
be required to disclose information about their diversity attributes 
and, in cases where they did not, companies would note their status as 
``undisclosed.'' \248\ Other commenters, however, express concern that 
the proposed disclosures would violate directors' privacy.\249\ Some 
also argue that individuals do not wish to be characterized by their 
ethnicity, gender, or sexual orientation \250\ and suggest that 
requiring certain board seats to be filled by specific demographic 
groups could invite criticism of such board members' achievements and 
potentially worsen

[[Page 44441]]

stereotypes and prejudices against these groups.\251\
---------------------------------------------------------------------------

    \246\ See, e.g., Skadden Letter at 3; CFA Letter at 5; letter 
from Gary A. LaBranche, President & CEO, National Investor Relations 
Institute, to Vanessa Countryman, Secretary, Commission, dated 
December 30, 2020 (``NIRI Letter''), at 3; Ideanomics Letter at 3.
    \247\ See NIRI Letter at 3.
    \248\ See, e.g., Fairfax Letter at 7-8; Ideanomics Letter at 3; 
Goodman and Olson Letter at 2. See also letter from Heidi W. Hardin, 
MFS Investment Management, to Vanessa Countryman, Secretary, 
Commission, dated January 4, 2021.
    \249\ See, e.g., CEI Letter at 4; Kowalczyk Letter at 3; IBC 
Letter at 5 (expressing particular concern for small boards where 
aggregated data would provide little protection); Publius Letter at 
10; Richter Letter at 2.
    \250\ See, e.g., Kowalczyk Letter at 3; Publius Letter at 10-11; 
letter from John P. Reddy to Adena Friedman, President and CEO, 
Nasdaq, dated December 5, 2020 (``Reddy Letter'').
    \251\ See CEI Letter at 2-3; Quigley Letter; Kowalczyk Letter at 
3; Publius Letter at 10-11; Independent Women's Forum Letter at 1-2.
---------------------------------------------------------------------------

    In response, the Exchange states that directors may choose not to 
disclose their race, gender, or LGBTQ+ status.\252\ The Exchange 
further notes that when directors choose to self-identify, the Board 
Diversity Matrix requires aggregated disclosures only.\253\
---------------------------------------------------------------------------

    \252\ See Nasdaq Response Letter II at 27. See also Nasdaq 
Response Letter I at 13-14.
    \253\ See Nasdaq Response Letter II at 27.
---------------------------------------------------------------------------

    The proposed disclosures are reasonably designed to address 
potential privacy concerns. Specifically, the disclosures under 
proposed Rule 5606 would be based on directors' voluntary self-
identification and would be provided on an aggregated basis. Moreover, 
for domestic issuers, while the number of directors who fall under a 
specific race and ethnicity would be broken down by gender categories, 
information regarding the number of directors who self-identify as 
LGBTQ+ would not be broken down, which would further lower the 
likelihood that a specific director's Diverse characteristics could be 
identified from the Board Diversity Matrix and further mitigate privacy 
concerns. Similarly, Foreign Issuers would not be required to break 
down the number of directors who are Underrepresented Individuals or 
who self-identify as LGBTQ+ by gender, which again would further 
mitigate privacy concerns.
4. Other Comments
    Some commenters argue that the Board Diversity Proposal would be 
inconsistent with the principles underpinning the Civil Rights Act of 
1964, which makes it an unlawful employment practice for an employer to 
limit, segregate, or classify its employees because of such 
individual's race, color, religion, sex, or national origin.\254\ One 
commenter also states that even if independent directors are not 
covered by Title VII of the Civil Rights Act, directors selected from 
among the company's employees are covered; and a company employee who 
is denied a board position because he or she lacks a particular sex, 
race, or sexual orientation trait would have a cognizable Title VII 
claim.\255\ In response, the Exchange argues that Title VII does not 
apply to most directors of Nasdaq-listed companies because they are not 
employees and, even if Title VII applied, the proposal would not 
discriminate or encourage discrimination because the proposed board 
diversity objectives are not mandatory.\256\
---------------------------------------------------------------------------

    \254\ See, e.g., Alliance for Fair Board Recruitment Letter at 
56-58; letter from A. Christians to Vanessa Countryman, Secretary, 
Commission, dated February 2, 2021 (``A. Christians Letter''); 
Heritage Foundation Letter at 12-15; letter from Concerned American 
Executives dated January 2, 2021. Other commenters also generally 
assert discrimination concerns. See, e.g., Donnellan Letter at 2; 
letter from Samuel Sloniker, dated December 17, 2020 (comment letter 
submitted to File No. SR-NASDAQ-2020-082).
    \255\ See Alliance for Fair Board Recruitment at 57-58.
    \256\ See Nasdaq Response Letter I at 1, 6-8. The Exchange 
states that only one of the comment letters that raises 
constitutional or discrimination concerns with the Board Diversity 
Proposal was submitted by a Nasdaq-listed company that would be 
subject to the proposal. See id. at 4-5.
---------------------------------------------------------------------------

    Commenters' concerns that the proposal is inconsistent with the 
principles underlying Title VII are unwarranted in light of the 
proposal's framework. Moreover, individual employment decisions would 
continue to be governed by Title VII to the extent they are covered by 
that statute.
    Additionally, although some commenters also express concern that 
the Board Diversity Proposal may cause Nasdaq-listed companies to 
violate their legal fiduciary obligations to their shareholders \257\ 
and argue that corporate governance is a matter of state law,\258\ the 
proposal would not cause companies to violate their fiduciary 
obligations or violate state laws because, as discussed above, the 
proposal would not mandate any particular board composition and would 
not require Nasdaq-listed companies to hire directors based solely on 
whether they fall within the proposed definition of ``Diverse.'' If a 
company believes that it cannot meet the proposed diversity objectives 
because it has concerns regarding compliance with other laws, rules, or 
obligations, then the company would only need to disclose its reasons 
for not meeting the objectives.\259\ In addition, companies that choose 
not to meet the diversity objectives and not explain their reasons for 
not meeting the objectives may transfer their listings to a different 
exchange.
---------------------------------------------------------------------------

    \257\ See, e.g., Toomey Letter at 1-3; Free Enterprise Project 
Letter at 3.
    \258\ See NLPC Letter at 7-8; Heritage Foundation Letter at 20.
    \259\ Similarly, the disclosures under proposed Rule 5606 would 
be required only ``to the extent permitted by applicable law.''
---------------------------------------------------------------------------

    One commenter argues that the Board Diversity Proposal violates the 
Paperwork Reduction Act.\260\ The Board Diversity Proposal, however, 
contains no ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act, because the disclosure 
contemplated under the Board Diversity Proposal is not being done ``by 
or for an agency.'' \261\ Other commenters believe that the proposal 
could violate various federal statutes, including the federal RICO 
statute, the Equal Pay Act, and the Genetic Information 
Nondiscrimination Act.\262\ Nothing contemplated in the Board Diversity 
Proposal constitutes impermissible activity under the federal RICO 
statute,\263\ wage discrimination between employees on the basis of sex 
under the Equal Pay Act,\264\ or discrimination based on genetic 
information under the Genetic Information Nondiscrimination Act.\265\
---------------------------------------------------------------------------

    \260\ See NLPC Letter at 6-7.
    \261\ 44 U.S.C. 3502(3) and 5 CFR 1320.3(c).
    \262\ See letter from Werner Lind to Vanessa Countryman, 
Secretary, Commission, dated February 6, 2021; A. Christians Letter.
    \263\ 18 U.S.C. 1961(1).
    \264\ 29 U.S.C. 206(d).
    \265\ 42 U.S.C. 2000ff-1(a).
---------------------------------------------------------------------------

    One commenter argues that approval of the Board Diversity Proposal 
would be unconstitutional because the Commission's commissioners are 
unlawfully insulated from Presidential control.\266\ But the 
Commission's independent structure complies with constitutional 
requirements.\267\ Contrary to the views of one commenter, the Supreme 
Court's decision in Seila Law LLC v. CFPB, 140 S. Ct. 2183 (2020), does 
not alter that conclusion. There, the Court--twice--expressly declined 
to ``revisit'' its earlier decisions affirming Congress's authority to 
``create expert agencies led by a group of principal officers removable 
by the President only for good cause.'' \268\ Instead, the Court made 
clear that it was ``the CFPB's leadership by a single independent 
Director'' that ``violate[d] the separation of powers.'' \269\ And the 
Court invited Congress to remedy the ``problem'' by ``converting the 
CFPB into a multimember agency'' like the Commission.\270\
---------------------------------------------------------------------------

    \266\ See Alliance for Fair Board Recruitment Letter at 77-78. 
This commenter also argues that by making certain public statements 
related to diversity, some Commissioners have prejudged the Board 
Diversity Proposal and must recuse themselves. See id. at 75-77. But 
recusal is unwarranted. It is settled law that an official may take 
public positions like the statements cited by the commenter without 
diminishing the presumption that the official will act fairly and 
impartially in any particular matter. See, e.g., Nuclear Info. & 
Res. Serv. v. NRC, 509 F.3d 562, 571 (DC Cir. 2007).
    \267\ See, e.g., Free Enter. Fund v. Pub. Co. Accounting 
Oversight Bd., 561 U.S. 477, 487, 509 (2010).
    \268\ Seila Law LLC, 140 S. Ct. at 2192, 2206.
    \269\ Id. at 2207.
    \270\ Id. at 2211. The same commenter's challenge based on the 
supposition that the proposals would be approved by the acting 
director of the Commission's Division of Trading and Markets, see 
Alliance for Fair Board Recruitment Letter at 74-75, is inapplicable 
because the Commission, not the Division of Trading and Markets 
pursuant to delegated authority, is approving the proposed rule 
change.

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[[Page 44442]]

H. Commenter Suggestions on the Board Diversity Proposal

    The Exchange revised the Board Diversity Proposal in response to 
certain commenter suggestions and explained why it did not revise the 
proposal in response to others. The Exchange's decision not to 
incorporate certain suggestions does not render the current proposal 
without a rational basis or inconsistent with the Act. As described 
throughout this order, the Board Diversity Proposal satisfies the 
statutory and regulatory requirements for approval. The comments the 
Exchange did not incorporate into its proposal are nonetheless briefly 
described below.
    Some commenters suggest that the Board Diversity Proposal should 
impose a diversity requirement rather than provide for a ``comply-or-
disclose'' framework.\271\ As discussed above, the Exchange asserts 
that its proposal appropriately balances the calls of investors for 
companies to increase diverse representation on their boards with the 
need for companies to maintain flexibility and decision-making 
authority over their board composition.\272\
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    \271\ See, e.g., letter from Marc H. Morial, President and CEO, 
National Urban League, to Vanessa Countryman, Secretary, Commission, 
dated January 4, 2021 (``NUL Letter''), at 4-5; CtW Letter at 2.
    \272\ See Nasdaq Response Letter II at 6-7.
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    One commenter suggests that the concept of cognitive diversity (or 
diversity of thought) should be introduced into the proposed rules and 
disclosures.\273\ Another commenter states that the proposed definition 
of ``Diverse'' is pragmatic, and that it is important that the proposal 
include the flexibility to modify or expand the set of included 
demographic groups.\274\ Another commenter encourages the Exchange to 
assess whether the proposed definition of ``Diverse'' should be 
expanded.\275\ The Exchange responds that companies would not be 
precluded from using a broader definition of diversity, provided that 
the company discloses this under proposed Rule 5605(f)(3).\276\ With 
respect to commenters' views that the definition of Diverse should be 
expanded, the Exchange states that its proposal inherently recognizes 
the cognitive diversity and broader range of experiences that diverse 
directors bring to the boardroom.\277\
---------------------------------------------------------------------------

    \273\ See letter from Snowdon Beinn, Snowdon Beinn Ltd., to 
Vanessa Countryman, Secretary, Commission, dated January 4, 2021.
    \274\ See Carlyle Letter at 2.
    \275\ See Alliance Letter at 2.
    \276\ See Nasdaq Response Letter II at 14.
    \277\ See id.
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    One commenter argues that the Board Diversity Proposal would create 
structural competition among minorities,\278\ and some commenters 
request that the proposal explicitly require two Black or African 
American directors \279\ or require one African American (or another 
racial/ethnic minority) director and a director who is a member of the 
LGBTQ community, one of whom might also be female.\280\ One commenter 
suggests that the proposal be limited to individuals of 
underrepresented racial minorities.\281\ Another commenter states that 
the proposal would not address how a director of Central Asian descent 
would be classified and that the proposal would potentially preclude 
them from being considered ``Diverse,'' as it would with persons of 
North African or Middle Eastern descent.\282\ In response, the Exchange 
states that it chose its definition of ``Diverse'' to ensure that more 
categories of historically underrepresented individuals are included 
and to allow companies the flexibility to diversify their boards in a 
manner that fits their unique circumstances and stakeholders.\283\ The 
Exchange states that companies may choose to meet the proposed 
diversity objectives by, for example, having two directors who self-
identify as Black or African American, or by having two directors who 
self-identify in racial or ethnic categories beyond those included in 
the EEO-1 report (e.g., Middle Eastern, North African, Central Asian) 
and describing that the company considers diversity more broadly than 
the proposed definition of ``Diverse.'' \284\
---------------------------------------------------------------------------

    \278\ See NUL Letter at 2-5.
    \279\ See letter from Aldrin K. Enis, President, One Hundred 
Black Men, Inc., dated January 4, 2021.
    \280\ See NUL Letter at 4.
    \281\ See letter from Omar A. Karim, President, Banneker 
Ventures, and Chairman, The Collective, to Vanessa Countryman, 
Secretary, Commission, dated January 4, 2021 (``Collective 
Letter'').
    \282\ See letter from David A. Bell, Co-Chair, Corporate 
Governance, Fenwick & West LLP, to Vanessa Countryman, Secretary, 
Commission, dated January 4, 2021, at 2.
    \283\ See Nasdaq Response Letter II at 15-16 (also noting that 
the Exchange based its proposed definition of Underrepresented 
Minority on the categories reported to the EEOC through the EEO-1 
report and that the Exchange included a category for LGBTQ+ status 
in recognition of the Supreme Court's decision in Bostock v. Clayton 
Cnty., Ga., 140 S. Ct. 1731, 1742 (2020), which held that sexual 
orientation and gender status are ``inextricably'' intertwined with 
sex).
    \284\ See id. at 16.
---------------------------------------------------------------------------

    One commenter suggests that the Exchange expand the definition of 
``Diverse'' to ensure that companies with operations in other countries 
do not simply use the availability of candidates in those countries to 
fill a director or officer role when the people within those countries 
could be considered a minority in the U.S.\285\ In response, the 
Exchange states that a company is not precluded from satisfying 
proposed Rule 5605(f)(2) with a director who is not a U.S. citizen or 
resident,\286\ and that it is solely in the company's discretion to 
identify qualified director nominees who reflect diverse backgrounds 
that are reflective of the company's communities, employees, investors, 
or other stakeholders, regardless of the director's nationality.\287\
---------------------------------------------------------------------------

    \285\ See Ideanomics Letter at 4.
    \286\ See Nasdaq Response Letter II at 16.
    \287\ See id.
---------------------------------------------------------------------------

    Some commenters suggest that more than two Diverse directors may be 
necessary to have a strong voice in the boardroom.\288\ Another 
commenter believes that two Diverse directors is a reasonable minimum 
standard to escalate market awareness of listed companies with limited 
diversity.\289\ In response, the Exchange states that the Board 
Diversity Proposal would provide companies with a flexible, attainable 
approach to achieving a reasonable objective that is not overly 
burdensome or coercive.\290\ The Exchange also states that the proposed 
objective of two Diverse directors would align investors' demands for 
increased board diversity with companies' needs for a flexible approach 
that accommodates each company's unique circumstances.\291\
---------------------------------------------------------------------------

    \288\ See, e.g., CtW Letter at 2; letter from Mark Ferguson and 
Miguel Nogales, Co-Chief Investment Officers, Global Equity 
Strategy, Generation Investment Management LLP, at 1.
    \289\ See LGIM America Letter at 3.
    \290\ See Nasdaq Response Letter II at 4.
    \291\ See id.
---------------------------------------------------------------------------

    Some commenters suggest that diversity statistics should be 
disclosed on a director-by-director basis,\292\ or that companies 
should at least be permitted to disclose diversity statistics on a 
director-by-director basis.\293\ Some commenters encourage companies to 
also disclose a skills matrix for the board, aligned with the 
companies' strategic needs and succession planning, and a policy on 
board refreshment.\294\

[[Page 44443]]

One commenter also suggests that directors should be subject to regular 
re-election based on satisfactory evaluation of their contribution to 
the board, and that a report from the nomination committee explaining 
how it considered the representation of women and/or other minorities 
in director selection and board evaluation would also be useful.\295\ 
One commenter encourages the Exchange and the Commission to consider 
whether the disclosure requirements should extend to board 
nominees.\296\ In response, the Exchange states that the proposal seeks 
a balance between obtaining key board diversity data and respecting the 
privacy of directors (with respect to the suggestions for director-by-
director disclosures) and that limiting the disclosures to current 
directors optimizes the consistency and comparability of board 
diversity statistical information across companies (with respect to the 
suggestions for disclosures relating to board nominees).\297\ Moreover, 
the Exchange states that a company would not be prohibited from 
disclosing more detail than required by the Board Diversity 
Matrix.\298\
---------------------------------------------------------------------------

    \292\ See, e.g., New York City Controller Letter at 1.
    \293\ See Ropes & Gray Letter at 2-3. See also Skadden Letter at 
3; Trillium Letter at 2.
    \294\ See, e.g., WomenExecs Letter; New York City Comptroller 
Letter at 3; Ropes & Gray Letter at 3. One commenter asserts that if 
the Commission ``chooses to countenance diversity statistical 
reporting, it should require reporting of types of diversity that 
are more relevant to business success than the immutable racial, 
ethnic or sexual characteristics of its directors.'' See Heritage 
Foundation Letter, at 4, 20.
    \295\ See WomenExecs Letter.
    \296\ See CFA Letter at 5-6.
    \297\ See Nasdaq Response Letter II at 18.
    \298\ See id.
---------------------------------------------------------------------------

    Some commenters suggest that the Board Diversity Matrix should be 
included in companies' annual shareholders meeting proxy or information 
statement filed with the Commission, rather than solely posted on the 
web.\299\ In response, the Exchange states that it is in the public 
interest to allow companies the flexibility to publish board diversity 
information through alternatives other than Commission filings, because 
it would avoid imposing additional disclosure and filing obligations on 
companies while providing shareholders with access to information in a 
recognized channel of distribution.\300\
---------------------------------------------------------------------------

    \299\ See, e.g., Thirty Percent Coalition Letter at 2; Boston 
Club Letter at 2; Ropes & Gray Letter at 2.
    \300\ See Nasdaq Response Letter II at 17.
---------------------------------------------------------------------------

    One commenter states that the phase-in periods under proposed Rule 
5605(f) are too long.\301\ Another suggests that companies should have 
two Diverse directors within one calendar year after the approval date 
of proposed Rule 5605(f).\302\ A different commenter suggests reducing 
the proposed two-, four-, and five-year phase-in periods by one year 
each.\303\ Some commenters instead express support for the proposed 
phase-in and transition periods.\304\ In response, the Exchange notes 
that an accelerated timeframe may increase challenges for companies 
seeking to meet the objectives of proposed Rule 5605(f), particularly 
smaller companies.\305\
---------------------------------------------------------------------------

    \301\ See NUL Letter at 5.
    \302\ See Collective Letter at 2.
    \303\ See Olshan Letter at 3.
    \304\ See, e.g., Fairfax Letter at 13; Skadden Letter at 2-3; 
Microsoft Letter at 2; Ariel Letter at 2; T. Rowe Letter at 2; 
Brightcove Letter; Mercy Investment Letter at 2; letter from Faye 
Sahai, Partner, Mirai Global, to Vanessa Countryman, Secretary, 
Commission, dated December 14, 2020.
    \305\ See Nasdaq Response Letter II at 5-6.
---------------------------------------------------------------------------

    One commenter requests that the Exchange commit to publishing a 
study of the impact of the proposals on board diversity and the 
relationship between diversity and corporate governance and financial 
results.\306\ In response, the Exchange states that the greater benefit 
of publicly disclosing board diversity data would be that all 
interested parties can adequately conduct their own analyses of the 
impact of the proposal on board diversity and its relationship with 
company performance and that the Exchange welcomes these analyses.\307\
---------------------------------------------------------------------------

    \306\ See letter from Suzanne Rothwell, Managing Member, 
Rothwell Consulting LLC, to Vanessa Countryman, Secretary, 
Commission, dated December 23, 2020, at 3.
    \307\ See Nasdaq Response Letter II at 16.
---------------------------------------------------------------------------

I. Board Recruiting Service Proposal

    As described above, the Board Recruiting Service Proposal would 
provide certain Nasdaq-listed companies with one year of complimentary 
access for two users to a board recruiting service, which would provide 
access to a network of board-ready diverse candidates for companies to 
identify and evaluate. In the proposal, the Exchange states that 
offering a board recruiting service would assist listed companies with 
increasing diverse board representation, which the Exchange believes 
could result in improved corporate governance, strengthening of market 
integrity, and improved investor confidence.\308\ The Exchange further 
states that offering this service would help companies to achieve 
compliance with the Board Diversity Proposal, if it were approved.\309\ 
The Exchange states that utilization of the complimentary board 
recruiting service would be optional, and no company would be required 
to use the service.\310\
---------------------------------------------------------------------------

    \308\ See Amendment No. 1 to the Board Recruiting Service 
Proposal at 10. The Exchange states that research demonstrates 
diverse boards are positively associated with improved corporate 
governance and company performance. See id. at 6. Moreover, the 
Exchange states that investors and investor groups are calling for 
diversification in the boardroom, and legislators at the federal and 
state level are increasingly taking action to respond to those 
calls. See id. at 9-10.
    \309\ See id. at 10.
    \310\ See id. at 13, 15.
---------------------------------------------------------------------------

    The Exchange further argues that it is reasonable and not unfairly 
discriminatory to offer the board recruiting service only to Eligible 
Companies because the Exchange believes these companies have the 
greatest need to identify diverse board candidates, particularly if 
these companies elect to meet the diversity objectives in the Board 
Diversity Proposal, if approved, rather than disclosing why they have 
not met the objectives.\311\ Additionally, the Exchange believes that 
companies that already have two Diverse directors have demonstrated by 
their current board composition that they do not need additional 
assistance provided by the Exchange to identify diverse candidates for 
their boards.\312\ Finally, the Exchange believes that offering this 
service would help it compete to attract and retain listings.\313\
---------------------------------------------------------------------------

    \311\ See id.
    \312\ See id. at 13-14. Although proposed Rule 5605(f)(2)(D) 
would require a Company with a Smaller Board to have, or explain why 
it does not have, at least one Diverse director on its board, such a 
company would be considered an Eligible Company if it does not have 
at least one director who self-identifies as Female and at least one 
director who self-identifies as an Underrepresented Minority or 
LGBTQ+, which the Exchange believes would help promote greater 
diversity on boards of all sizes. See id. at 11 n.20.
    \313\ See id. at 14.
---------------------------------------------------------------------------

    Some commenters express general support for the Board Recruiting 
Service Proposal,\314\ while others oppose the Board Recruiting Service 
Proposal.\315\ The commenters supporting the proposal state that the 
proposed service would assist companies that choose to diversify their 
boards \316\ and would be of particular benefit to smaller 
companies.\317\ One commenter opposing the proposal argues that the 
Exchange does not identify how it would address the potential conflicts 
of interest between establishing a regulatory standard and concurrently 
promoting a revenue-generating compliance solution.\318\ Another argues 
that the

[[Page 44444]]

Board Recruiting Service Proposal would divert funds from the efficient 
administration of the Exchange, reducing the order and efficiency of 
markets that the Commission was created to promote.\319\ Finally, 
another commenter opposing the proposal argues that the proposed 
complimentary recruiting service would be an extension of the 
``unlawful'' and ``discriminatory'' quota policy contained in the Board 
Diversity Proposal by seeking to move Nasdaq-listed companies towards 
intentionally implementing ``discriminatory hiring practices.'' \320\
---------------------------------------------------------------------------

    \314\ See, e.g., Ideanomics Letter at 4; Goodman and Olson 
Letter at 2-3; Capital Research and Management Company Letter at 2; 
UAW Letter at 3.
    \315\ See, e.g., Toomey Letter at 3; letter from Matthew Glen 
dated December 31, 2020 (comment letter submitted to File No. SR-
NASDAQ-2020-082) (``Glen Letter''); letter from Eugene Kelly to 
Vanessa Countryman, Secretary, Commission, dated December 13, 2020 
(``Kelly Letter'').
    \316\ See, e.g., Ideanomics Letter at 4; Goodman and Olson 
Letter at 2-3; Capital Research and Management Company Letter at 2; 
UAW Letter at 3; California State Treasurer Letter.
    \317\ See UAW Letter at 3.
    \318\ See Toomey Letter at 3.
    \319\ See Glen Letter.
    \320\ See Kelly Letter.
---------------------------------------------------------------------------

    In response, the Exchange states that it is not generating any 
revenue from its partnership with the proposed provider of the board 
recruiting service, Equilar, and instead is offering these services to 
companies at its own expense.\321\ The Exchange also states that the 
complimentary service does not introduce any conflict of interest 
because the Exchange is not in the board recruitment services 
business.\322\ In addition, the Exchange states that there is no 
requirement that listed companies take advantage of the complimentary 
service, and there is no requirement that they pay for the service if 
they choose to utilize it.\323\ Moreover, the Exchange states that 
whether a listed company takes advantage of the complimentary board 
recruiting service has no relationship to how, or whether, the Exchange 
would enforce proposed Rule 5605(f), and there are no circumstances 
under which the Exchange would penalize a company solely for its 
decision to not take advantage of a complimentary board recruiting 
service.\324\
---------------------------------------------------------------------------

    \321\ See Nasdaq Response Letter II at 20-21.
    \322\ See id. at 21.
    \323\ See id. at 21-22.
    \324\ See id.
---------------------------------------------------------------------------

    The Board Recruiting Service Proposal is consistent with the 
requirements of Section 6 of the Act, including Sections 6(b)(4) and 
6(b)(5).\325\ The proposal is designed to provide for the equitable 
allocation of reasonable dues, fees, and other charges among Exchange 
members, issuers, and other persons using the Exchange's facilities, 
and is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. And the proposal is consistent with 
Section 6(b)(8) \326\ because it does not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.
---------------------------------------------------------------------------

    \325\ 15 U.S.C. 78f, 78f(b)(4)-(5). In approving the Board 
Recruiting Service Proposal, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \326\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Commission finds that it is consistent with the Act for the 
Exchange to provide a one-year complimentary board recruiting service 
to Eligible Companies.\327\ The board recruiting service would provide 
access to a network of board-ready diverse candidates, allowing 
companies to identify and evaluate such candidates. The board 
recruiting service would also assist Eligible Companies that choose to 
use the service to increase diverse representation on their boards and 
would help Eligible Companies to meet (or exceed, in the case of a 
Company with a Smaller Board) the proposed diversity objectives under 
the Board Diversity Proposal.\328\
---------------------------------------------------------------------------

    \327\ The Commission has previously approved the provision of 
complimentary services by the Exchange to varying categories of 
eligible listed companies. See, e.g., Securities Exchange Act 
Release Nos. 65963 (December 15, 2011), 76 FR 79262 (December 21, 
2011) (SR-NASDAQ-2011-122) and 72669 (July 24, 2014), 79 FR 44234 
(July 30, 2014) (SR-NASDAQ-2014-058).
    \328\ See Amendment No. 1 to the Board Recruiting Service 
Proposal at 10.
---------------------------------------------------------------------------

    It is also consistent with the Act for the Exchange to offer the 
complimentary board recruiting service only to Eligible Companies 
because, by definition, those companies do not have a specified number 
of Diverse directors and therefore may have a greater interest or feel 
a greater need to identify diverse board candidates by utilizing the 
board recruiting service than non-Eligible Companies.\329\ The 
provision of the service only to Eligible Companies is thus an 
equitable allocation of complimentary services and does not unfairly 
discriminate among issuers.\330\
---------------------------------------------------------------------------

    \329\ See id. at 13-14.
    \330\ The Commission has previously found that the specific 
needs of differently situated categories of listings (e.g., new 
listings, transfers, larger capitalized issuers) is a sufficient 
basis for providing additional services, or varying the types of 
services provided, to different categories of listings, and thereby 
does not raise unfair discrimination issues under the Act. See, 
e.g., Securities Exchange Act Release Nos. 78806 (September 9, 
2016), 81 FR 63523 (September 15, 2016) (order approving SR-NASDAQ-
2016-098); 72669 (July 24, 2014), 79 FR 44234 (July 30, 2014) (order 
approving SR-NASDAQ-2014-058).
---------------------------------------------------------------------------

    Further, offering the one-year complimentary service would help the 
Exchange compete to attract and retain listings, particularly in light 
of the diversity objective in the separately approved Board Diversity 
Proposal. The Exchange has indicated that individual listed companies 
would not be given specially negotiated packages of products or 
services to list, or remain listed; that no other company will be 
required to pay higher fees as a result of the proposal; and that 
providing the complimentary board recruiting service will have no 
impact on the resources available for its regulatory programs.\331\ No 
commenter has provided any reason to doubt these indications as to how 
the service will be run. Accordingly, the proposal reflects the current 
competitive environment for listings among national securities 
exchanges,\332\ does not impose any unnecessary or inappropriate burden 
on competition between individual listed companies, and is therefore 
appropriate and consistent with Section 6(b)(8) of the Act.\333\
---------------------------------------------------------------------------

    \331\ See Amendment No. 1 to the Board Recruiting Service 
Proposal at 12, 15.
    \332\ See supra notes 56-59 (describing this competitive 
environment for exchange listings).
    \333\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    In addition, describing in the Exchange's rules the products and 
services available to listed companies and their associated values also 
adds greater transparency to the rules and applicable fees and will 
ensure that individual listed companies are not given specially 
negotiated packages of products or services to list, or remain listed, 
that would raise unfair discrimination issues under the Act.
    Finally, with respect to concerns that the Exchange's offering of 
the board recruiting service may create a conflict of interest or 
divert funds from the efficient administration of the Exchange, the 
Exchange has indicated that providing the proposed complimentary 
service would have no impact on the resources available for its 
regulatory programs and that it will not generate any revenue from the 
service, nor is it in the board recruitment services business.\334\ The 
Exchange further explains that utilization of the board recruiting 
service will not impact the manner in which it enforces compliance with 
the Board Diversity Proposal.\335\ With respect to a concern that the 
recruiting service may influence a Nasdaq-listed company's hiring 
practice, the Exchange has emphasized that utilization of the service 
would be optional, and no company would be required to use it.\336\ 
Here again, commenters have provided no reason for the Commission to 
doubt the Exchange's indication about how the service will be run. 
Accordingly, the Exchange's representations and the optionality of the 
board recruiting service are sufficient to address commenters' concerns 
that the provision of the complimentary service

[[Page 44445]]

may create a conflict of interest, divert funds from the efficient 
administration of the Exchange, or unduly influence listed companies.
---------------------------------------------------------------------------

    \334\ See supra notes 321-322 and 331 and accompanying text.
    \335\ See supra note 324 and accompanying text.
    \336\ See supra note 310 and accompanying text.
---------------------------------------------------------------------------

III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\337\ that: (1) The proposed rule change (SR-NASDAQ-2020-081), as 
modified by Amendment No. 1, be, and hereby is, approved, and (2) the 
proposed rule change (SR-NASDAQ-2020-082), as modified by Amendment No. 
1, be, and hereby is, approved.
---------------------------------------------------------------------------

    \337\ 15 U.S.C. 78s(b)(2).

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17179 Filed 8-11-21; 8:45 am]
BILLING CODE 8011-01-P