Document ID: SEC-2021-0368-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2021-03-16T04:00Z

[Federal Register Volume 86, Number 49 (Tuesday, March 16, 2021)]
[Notices]
[Pages 14484-14493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05343]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91286; File Nos. SR-NASDAQ-2020-081; SR-NASDAQ-2020-
082]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Amendments No. 1 and Order Instituting Proceedings 
To Determine Whether To Approve or Disapprove 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 Solution To Help Advance Diversity on 
Company Boards

March 10, 2021.

I. Introduction

    On December 1, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ 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 January 
19, 2021, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
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.\5\ 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rule change, which replaced and superseded the proposed rule change as 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.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \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.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90951, 86 FR 7135 
(January 26, 2021). The Commission 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.
    \6\ In Amendment No. 1, the Exchange amended the Board Diversity 
Proposal to: (1) Add a defined term for ``Two or More Races or 
Ethnicities'' to proposed Rule 5605(f)(1); (2) modify the 
application of proposed Rule 5605(f) to Foreign Issuers and clarify 
the scope of Exempt Companies; (3) provide a lower diversity 
objective for a company with five or fewer members on its board; (4) 
modify the disclosures required by proposed Rule 5606; (5) modify 
the process by which a company may provide public disclosure if it 
does not meet the applicable board diversity objectives of proposed 
Rule 5605(f)(2) and similarly conform the process for providing the 
public disclosures under proposed Rule 5606; (6) modify the phase-in 
periods for companies subject to proposed Rules 5605(f) and 5606; 
(7) provide a grace period for a company that no longer meets the 
board diversity objectives of proposed Rule 5605(f)(2) due to a 
vacancy on its board and clarify the cure period for a company that 
does not satisfy proposed Rule 5605(f); (8) modify the effective 
dates and transition periods applicable to proposed Rules 5605(f) 
and 5606; (9) make conforming and clarifying changes throughout the 
description of the proposed rule change and the proposed rule text; 
and (10) provide additional justification and support for the 
proposed rule change. 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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[[Page 14485]]

    On December 1, 2020, the Exchange also filed with the Commission, 
pursuant to Section 19(b)(1) of the Act \7\ and Rule 19b-4 
thereunder,\8\ a proposed rule change to offer certain listed companies 
access to a complimentary board recruiting solution to help advance 
diversity on company boards (``Board Recruiting Service Proposal''). 
The proposed rule change was published for comment in the Federal 
Register on December 10, 2020.\9\ On January 19, 2021, pursuant to 
Section 19(b)(2) of the Act,\10\ the Commission 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.\11\ 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.\12\
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    \7\ 15 U.S.C. 78s(b)(1).
    \8\ 17 CFR 240.19b-4.
    \9\ 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.
    \10\ 15 U.S.C. 78s(b)(2).
    \11\ See Securities Exchange Act Release No. 90952, 86 FR 7148 
(January 26, 2021). The Commission 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.
    \12\ In Amendment No. 1, the Exchange amended the Board 
Recruiting Service Proposal to: (1) Make conforming changes to the 
proposal based on Amendment No. 1 to the Board Diversity Proposal; 
(2) specify the application of the proposal to a company with five 
or fewer members on its board; (3) provide additional justification 
for the proposal to allow eligible companies until December 1, 2022 
to begin using the complimentary board recruiting solution; and (4) 
make additional clarifying changes throughout the description of the 
proposed rule change. 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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    The Commission is publishing this notice and order to solicit 
comments on the proposed rule changes, as modified by Amendments No. 1, 
from interested persons and to institute proceedings pursuant to 
Section 19(b)(2)(B) of the Act \13\ to determine whether to approve or 
disapprove the proposed rule changes, as modified by Amendments No.1.
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    \13\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Changes, as Modified by Amendments 
No. 1

A. The Board Diversity Proposal

1. Proposed Rule 5605(f)
    The Exchange proposes to adopt new Rule 5605(f)(2), which would 
require each Nasdaq-listed company (other than a Foreign Issuer, 
Smaller Reporting Company, or 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,\14\ 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+.\15\ 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; \16\ 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.\17\
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    \14\ The Exchange states that it has published an FAQ on its 
Listing Center clarifying that ``two members of its board of 
directors who are Diverse'' would exclude emeritus directors, 
retired directors, and members of an advisory board. See Amendment 
No. 1 to the Board Diversity Proposal at 73 n.187.
    \15\ See proposed Rule 5605(f)(2)(A). The Exchange also states 
that it does not intend for the Board Diversity Proposal to preclude 
companies from considering additional diverse attributes, such as 
nationality, disability, or veteran status, in selecting board 
members; however, the company would still have to provide the 
required disclosure under proposed Rule 5605(f)(3) if the company 
does not meet the diversity objectives of proposed Rule 5605(f)(2). 
See Amendment No. 1 to the Board Diversity Proposal at 64. The 
Exchange also states that, although non-binary is included as a 
category in the Board Diversity Matrix under proposed Rule 5606 (as 
discussed in Section II.A.2 below), a company would not satisfy the 
diversity objectives in proposed Rule 5605(f)(2) to have a minimum 
number of Diverse directors if a director self-identifies solely as 
non-binary. See id. at 66 n.173.
    \16\ ``Black or African American'' would be defined to mean a 
person having origins in any of the Black racial groups of Africa 
(not of Hispanic or Latinx origin). See Amendment No. 1 to the Board 
Diversity Proposal at 327. ``Hispanic or Latinx'' would be defined 
to mean a person of Cuban, Mexican, Puerto Rican, South or Central 
American, or other Spanish culture or origin, regardless of race. 
See id. ``Asian'' would be defined to mean a person having origins 
in any of the original peoples of the Far East, Southeast Asia, or 
the Indian subcontinent, including, for example, Cambodia, China, 
India, Japan, Korea, Malaysia, Pakistan, the Philippine Islands, 
Thailand, and Vietnam. See id. ``Native American or Alaska Native'' 
would be defined to mean a person having origins in any of the 
original peoples of North and South America (including Central 
America) and who maintains cultural identification through tribal 
affiliation or community recognition. See id. ``Native Hawaiian or 
Pacific Islander'' would be defined to mean a person having origins 
in any of the peoples of Hawaii, Guam, Samoa, or other Pacific 
Islands. See id. ``Two or More Races or Ethnicities'' would be 
defined to mean a person who identifies with more than one of the 
following categories: White (not of Hispanic or Latinx origin), 
Black or African American, Hispanic or Latinx, Asian, Native 
American or Alaska Native, Native Hawaiian or Pacific Islander. See 
id.; proposed Rule 5605(f)(1). ``White (not of Hispanic or Latinx 
origin)'' would be defined to mean a person having origins in any of 
the original peoples of Europe, the Middle East, or North Africa. 
See Amendment No. 1 to the Board Diversity Proposal at 327.
    \17\ See proposed Rule 5605(f)(1). The Exchange 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'') and should be construed in accordance 
with the EEOC's definitions. See Amendment No. 1 to the Board 
Diversity Proposal at 9-10, 61. The Exchange also 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, including 
individuals who self-identify as Latino/a/e. 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.
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    The Exchange proposes to define a Foreign Issuer under proposed 
Rule 5605(f)(1) as: (a) A Foreign Private Issuer (as defined in Rule 
5005(a)(19)); \18\ or (b) a company that (i) is considered a ``foreign 
issuer'' under Rule 3b-4(b) under the Act \19\ and (ii)

[[Page 14486]]

has its principal executive offices located outside of the United 
States.\20\ 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'').\21\ For a Foreign Issuer that has a 
two-tiered board system, the Exchange proposes to define ``board of 
directors'' to mean the company's supervisory or non-management 
board.\22\ Proposed Rule 5605(f)(2)(B) would require each Foreign 
Issuer (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. As proposed, the second Diverse 
director may include an individual who self-identifies as one or more 
of the following: Female, LGBTQ+, or an Underrepresented 
Individual.\23\
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    \18\ Under Rule 5005(a)(19), the term Foreign Private Issuer has 
``the same meaning as under Rule 3b-4 under the Act.''
    \19\ See 17 CFR 240.3b-4(b) (``The term foreign issuer means any 
issuer which is a foreign government, a national of any foreign 
country or a corporation or other organization incorporated or 
organized under the laws of any foreign country.'').
    \20\ According to the Exchange, this definition 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. See 
Amendment No. 1 to the Board Diversity Proposal at 83.
    \21\ See proposed Rule 5605(f)(2)(B)(i). The Exchange states 
that its proposed definition of an 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 Amendment No. 1 to the Board Diversity Proposal at 69 
(citing G.A. Res. 47/135, art. 1.1 (December 18, 1992); G.A. Res. 
61/295 (September 13, 2007)). The Exchange also states that, 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)(ii) would allow Foreign Issuers to satisfy the 
diversity objectives by having two Female directors. See id. at 81-
82.
    \22\ See proposed Rule 5605(f)(2)(B)(i). The Exchange states 
that this is consistent with Rule 10A-3(e)(2) under the Act. See 
Amendment No. 1 to the Board Diversity Proposal at 84 (citing 17 CFR 
240.10A-3(e)(2)).
    \23\ The Exchange also proposes to amend Rule 5615 and IM-5615-
3, which currently permit a Foreign Private Issuer to follow home 
country practices in lieu of the requirements set forth in the Rule 
5600 series, subject to several exclusions. Specifically, the 
Exchange proposes to amend Rule 5615 and IM-5615-3 to add proposed 
Rule 5605(f) to the list of excluded corporate governance rules. The 
Exchange also proposes to amend Rule 5615 and IM-5615-3 to add 
proposed Rule 5606 (as discussed in Section II.A.2 below) to the 
list of excluded corporate governance rules. However, the Exchange 
states that Foreign Private Issuers that elect to follow an 
alternative diversity objective in accordance with home country 
practices, or are located in jurisdictions that restrict the 
collection of personal data, may satisfy the requirements of 
proposed Rule 5605(f) by explaining their reasons for doing so 
instead of meeting the diversity objectives of the rule. See 
Amendment No. 1 to the Board Diversity Proposal at 84.
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    The Exchange proposes to define a Smaller Reporting Company as set 
forth in Rule 12b-2 under the Act.\24\ 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. As proposed, the second Diverse director may include an 
individual who self-identifies as one or more of the following: Female, 
LGBTQ+, or an Underrepresented Minority.\25\
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    \24\ See proposed Rule 5605(f)(1). See also 17 CFR 240.12b-2 
(defining a Smaller Reporting Company as ``an issuer that is not an 
investment company, an asset-backed issuer . . ., or a majority-
owned subsidiary of a parent that is not a smaller reporting company 
and that: (1) Had a public float of less than $250 million; or (2) 
Had annual revenues of less than $100 million and either: (i) No 
public float; or (ii) A public float of less than $700 million'').
    \25\ The Exchange states that, because smaller 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 each Smaller Reporting Company with additional 
flexibility (i.e., proposed Rule 5605(f)(2)(C) would allow these 
companies to satisfy the objective to have two Diverse directors by 
having two Female directors). See Amendment No. 1 to the Board 
Diversity Proposal at 84-85.
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    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.\26\ As proposed, if a company 
had five members on its board of directors before becoming subject to 
proposed Rule 5605(f), it would not become subject to the objectives of 
proposed Rule 5605(f)(2)(A), (B), or (C) to have at least two Diverse 
directors if it then added one director to its board in order to 
satisfy proposed Rule 5605(f)(2)(D), thereby becoming a six-member 
board.\27\ However, a Company with a Smaller Board would become subject 
to proposed Rule 5605(f)(2)(A), (B), or (C) if it subsequently expands 
its board.\28\
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    \26\ The Exchange proposes this alternative diversity objective 
for Companies with a Smaller Board because, according to the 
Exchange, 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. See id. at 86. The 
Exchange further states that Companies with a Smaller Board may be 
disproportionately impacted by the proposed rule change if they plan 
to satisfy proposed Rule 5605(f)(2) by adding additional directors, 
which may impose additional costs in the form of director 
compensation and D&O insurance. See id.
    \27\ See proposed Rule 5605(f)(2)(D). The Exchange proposes this 
exception to avoid complexity for Companies with a Smaller Board 
that attempt to satisfy the diversity objectives by adding a Diverse 
director to their board, and to 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 Amendment No. 1 to the 
Board Diversity Proposal at 86-87.
    \28\ See proposed Rule 5605(f)(2)(D).
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    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 of proposed Rule 5605(f)(2), proposed Rule 5605(f)(3) would 
require the company to: (i) Specify the requirements of proposed Rule 
5605(f)(2) that are applicable (e.g., the applicable subparagraph and 
the applicable diversity objectives); and (ii) explain the reasons why 
it does not have two Diverse directors (or one Diverse director for a 
Company with a Smaller Board).\29\ 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.\30\ 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.\31\
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    \29\ As proposed, a company would not need to provide any public 
disclosures pursuant to proposed Rule 5605(f) if the company 
demonstrates under proposed Rule 5606 (as discussed in Section 
II.A.2 below) that it meets the applicable diversity objectives of 
proposed Rule 5605(f)(2); however, if a company does not meet its 
applicable diversity objectives, it would be required to provide the 
additional public disclosure explaining why it does not meet the 
applicable objectives. See Amendment No. 1 to the Board Diversity 
Proposal at 73.
    \30\ See proposed Rule 5605(f)(3).
    \31\ See id. The Exchange states that it would not evaluate the 
substance or merits of a company's explanation provided pursuant to 
proposed Rule 5605(f)(3), but would verify that the company has 
provided one at the time it files its proxy statement or information 
statement (or, if the company does not file a proxy, at the time it 
files its Form 10-K or 20-F). See Amendment No. 1 to the Board 
Diversity Proposal at 74. If the company does not meet the 
applicable diversity objectives and has not provided any 
explanation, or has provided an explanation that does not satisfy 
proposed Rule 5605(f)(3)(i) and (ii), the company will be considered 
deficient with the requirements of proposed Rule 5605(f)(3). See id. 
at 74-75.
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    Proposed Rule 5605(f)(5) would specify the phase-in period for any

[[Page 14487]]

company newly listing on the Exchange that was not previously subject 
to a substantially similar requirement of another national securities 
exchange (including 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'')) and any 
company that ceases to be a Foreign Issuer, a Smaller Reporting 
Company, or an Exempt Company.\32\
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    \32\ See infra note 46 and accompanying text (describing Exempt 
Companies).
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    As proposed, any newly-listed company on the Nasdaq Global Select 
Market (``NGS'') or Nasdaq Global Market (``NGM'') would be permitted 
to satisfy the requirement of proposed Rule 5605(f)(2) 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.\33\ 
In addition, any newly-listed company on the Nasdaq Capital Market 
(``NCM'') would be permitted to satisfy the requirement of proposed 
Rule 5605(f)(2) 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.\34\ As proposed, any 
newly listed Company with a Smaller Board would be permitted to satisfy 
the requirement of proposed Rule 5605(f)(2) 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.\35\
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    \33\ See proposed Rule 5605(f)(5)(A).
    \34\ See proposed Rule 5605(f)(5)(B).
    \35\ See proposed Rule 5605(f)(5)(D).
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    Proposed Rule 5605(f)(5)(C) would provide that 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.
    Proposed Rule 5605(f)(6)(A) would provide that if a company (i) 
does not meet the applicable diversity objectives under proposed Rule 
5605(f)(2) and fails to provide the disclosure required by proposed 
Rule 5605(f)(3), or (ii) fails to hold an annual meeting of 
shareholders during the applicable periods in proposed Rule 5605(f)(5) 
or (7) and therefore fails to meet, or explain why it does not meet, 
the diversity objectives of proposed Rule 5605(f)(2), 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.\36\ If a company does not regain compliance within the 
applicable cure period, the Listings Qualifications Department would 
issue a Staff Delisting Determination Letter.\37\
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    \36\ The Exchange proposes to add a similar provision as Rule 
5810(c)(3)(F). The Exchange also proposes to renumber existing Rules 
5810(c)(3)(F) and (G) as Rules 5810(c)(3)(G) and (H), respectively, 
and to make a non-substantive change in Rule 5810(c)(2)(A)(iv) to 
clarify that Rule 5250(b)(3) is related to ``Disclosure of Third 
Party Director and Nominee Compensation.''
    \37\ 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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    Moreover, proposed Rule 5605(f)(6)(B) would provide that a company 
that has satisfied the diversity objectives of proposed Rule 5605(f)(2) 
within the timeframes set forth in proposed Rule 5605(f)(7), but later 
ceases to meet the diversity objectives of proposed Rule 5605(f)(2) due 
to a vacancy on its board of directors, would have until the later of 
(i) one year from the date of vacancy or (ii) the date the company 
files its proxy statement or its information statement (or, if the 
company does not file a proxy, its Form 10-K or 20-F) in the calendar 
year following the year of the date of vacancy, to satisfy proposed 
Rule 5605(f)(2) or (3). As proposed, in lieu of providing the 
disclosure required by proposed Rule 5605(f)(3), a company relying on 
this rule may publicly disclose that it is relying on the grace period 
provided by proposed Rule 5605(f)(6)(B).\38\ This 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 the company does not file a proxy, in its Form 10-K or 20-F); 
or (b) on the company's website.\39\ If the company provides such 
disclosure on its website, then the company must submit such disclosure 
concurrently with the filing made pursuant to (a) and submit a URL link 
to the disclosure through the Nasdaq Listing Center, within one 
business day after such posting.\40\
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    \38\ See proposed Rule 5605(f)(6)(B).
    \39\ See id.
    \40\ See id.
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    Proposed Rule 5605(f)(7) would specify the transition period for 
the implementation of the requirements 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.\41\ 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.\42\ 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

[[Page 14488]]

shareholders meeting during the calendar year of the Second NCM 
Effective Date.\43\ As proposed, a company would not be required to 
comply with the requirements of proposed Rule 5605(f) prior to the end 
of the phase-in periods under proposed Rule 5605(f)(5), if 
applicable.\44\ Furthermore, a company listed on NCM that transfers to 
NGS or NGM after the approval date but prior to the end of the 
transition periods set forth in proposed Rule 5605(f)(7) would be 
required to satisfy the requirements of proposed Rule 5605(f) by the 
later of: (i) The periods set forth in proposed Rule 5605(f)(7)(C); or 
(ii) one year from the date of transfer.\45\
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    \41\ See proposed Rule 5605(f)(7)(A).
    \42\ See proposed Rule 5605(f)(7)(B).
    \43\ See proposed Rule 5605(f)(7)(C).
    \44\ See proposed Rule 5605(f)(7)(D). A company listing after 
the approval date, but prior to the end of the periods set forth in 
proposed Rule 5605(f)(7) would be required to fully satisfy the 
requirements of proposed Rule 5605(f) by the later of the periods 
under proposed Rule 5605(f)(7) or the two year phase-in periods 
under proposed Rule 5605(f)(5). See proposed Rule 5605(f)(7)(E). 
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 Amendment 
No. 1 to the Board Diversity Proposal 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.
    \45\ See proposed Rule 5605(f)(7)(F).
---------------------------------------------------------------------------

    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.\46\
---------------------------------------------------------------------------

    \46\ The Exchange states that these companies do not have 
boards, do not list equity securities, or are not operating 
companies. See Amendment No. 1 to the Board Diversity Proposal at 
90. The Exchange also states that these companies are already exempt 
from certain corporate governance standards related to board 
composition, as described in Rule 5615. See id. The Exchange also 
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. The Exchange states 
that this approach is similar to other phase-in periods currently 
granted to acquisition companies. See id. at 90-91. See also, e.g., 
Rule 5615(b)(1).
---------------------------------------------------------------------------

    The Exchange states that it 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 represents that it 
will establish a dedicated mailbox for companies and their counsel to 
email additional questions to the Exchange regarding the application of 
such proposed rules.\47\
---------------------------------------------------------------------------

    \47\ See Amendment No. 1 to the Board Diversity Proposal at 20.
---------------------------------------------------------------------------

2. Proposed Rule 5606
    The Exchange proposes to adopt new Rule 5606, which would require 
each Nasdaq-listed company (other than Exempt Companies \48\) 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 of the company's board of 
directors.\49\
---------------------------------------------------------------------------

    \48\ See proposed Rule 5606(c).
    \49\ The Exchange states that its proposal would not prevent 
companies from disclosing information related to other diverse 
attributes of board members beyond those highlighted in the rule if 
they felt such disclosure would benefit investors. See Amendment No. 
1 to the Board Diversity Proposal at 64.
---------------------------------------------------------------------------

    Specifically, pursuant to proposed Rule 5606(a), each Nasdaq-listed 
company would be required to annually disclose its board-level 
diversity data a substantially similar format \50\ as the ``Board 
Diversity Matrix'' provided in proposed Rule 5606(a).\51\ As proposed, 
companies would be required to provide the Board Diversity Matrix 
information at least once per year.\52\ If, within the same year, a 
company changes its board composition after it publishes the matrix, 
the company may, but is not required to, publish its updated 
information.\53\ In addition, any publication of the information in the 
Board Diversity Matrix must be included in a searchable format and, if 
a company uses a graphic or image format (i.e., tif, jpg, gif, or png), 
the company must also include the same information as searchable text 
or in a searchable table.\54\
---------------------------------------------------------------------------

    \50\ As proposed, a company may not substantially alter the 
Board Diversity Matrix. However, a company may supplement its 
disclosure by providing additional information related to its 
directors (e.g., a company may choose to provide the information on 
a director-by-director basis or may choose to include any skills, 
experience, and attributes of each of its directors that are 
relevant to the company). Supplemental information may be included 
below the information required by the Board Diversity Matrix or in a 
separate table. See id. at 326-27.
    \51\ Following the first year of disclosure of the Board 
Diversity Matrix, all companies would be required to include the 
current year and immediately prior year diversity statistics in the 
disclosure. See proposed Rule 5606(a). If a company publishes the 
Board Diversity Matrix on its website, the disclosure must remain 
accessible on the company's website. See Amendment No. 1 to the 
Board Diversity Proposal at 326.
    \52\ See Amendment No. 1 to the Board Diversity Proposal at 326.
    \53\ See id. In addition, the Board Diversity Matrix must 
include the date the information was collected as the ``as of 
date.'' See id.
    \54\ The searchable information could be included, for example, 
together with the related graphic or in an appendix. See id.
---------------------------------------------------------------------------

    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 include the following information 
in accordance with the instructions accompanying the Board Diversity 
Matrix: (1) The number of directors based on gender identity (female, 
male, or non-binary \55\) 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 \56\), 
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.\57\ In the proposed Board Diversity Matrix, any director 
who chooses not to disclose a gender would be included in the ``Did Not 
Disclose Gender'' category and any director who chooses not to identify 
as any race or ethnicity or not to identify as LGBTQ+ would be included 
in the

[[Page 14489]]

``Did Not Disclose Demographic Background'' category.
---------------------------------------------------------------------------

    \55\ ``Non-binary'' refers to genders that are not solely man or 
woman; someone who is non-binary may have more than one gender, have 
no gender, or their gender may not be in relation to the gender 
binary. See id. at 327.
    \56\ 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.
    \57\ The Exchange states that defined terms for the race and 
ethnicity categories in the instructions to the Board Diversity 
Matrix are substantially similar to the terms and definitions used 
in the EEO-1 report, as described above. See supra note 17. Also, in 
the instructions to the Board Diversity Matrix, LGTBQ+ is defined 
similarly to proposed Rule 5605(f)(1) as a person who identifies as 
any of the following: lesbian, gay, bisexual, transgender, or a 
member of the queer community.
---------------------------------------------------------------------------

    A company that qualifies as a Foreign Issuer under proposed Rule 
5605(f)(1) may elect to use an alternative Board Diversity Matrix 
format.\58\ Similar to other companies, a Foreign Issuer would be 
required to provide the total number of directors on its board. The 
Foreign Issuer would also be required to provide the following in its 
Board Diversity Matrix: (1) Its country of principal executive offices; 
(2) whether it is a Foreign Private Issuer; (3) whether disclosure is 
prohibited under 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 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.\59\ In the proposed Board 
Diversity Matrix, any director who chooses not to disclose a gender 
would be included in the ``Did Not Disclose Gender'' category and any 
director who chooses not to identify as an Underrepresented Individual 
or not to identify as LGBTQ+ would be included in the ``Did Not 
Disclose Demographic Background'' category.
---------------------------------------------------------------------------

    \58\ See proposed Rule 5606(a).
    \59\ See id.
---------------------------------------------------------------------------

    Proposed Rule 5606(b) would require each company to provide the 
disclosure required under proposed Rule 5606 in the same manner as, and 
concurrently with, the disclosure required by proposed Rule 
5605(f)(3).\60\
---------------------------------------------------------------------------

    \60\ See supra notes 30-31 and accompanying text.
---------------------------------------------------------------------------

    Proposed Rule 5606(d) would permit a company newly listing on the 
Exchange that was not previously subject to a substantially similar 
requirement of another national securities exchange (including 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) to satisfy the 
requirement of proposed Rule 5606 within one year of listing on the 
Exchange.
    Pursuant to Rule 5606(e), proposed Rule 5606 would become operative 
one year after a Commission approval of the proposal. 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.
    The Exchange proposes to amend Rule 5810(c)(2)(A)(iv) to include a 
deficiency from the standards of proposed Rule 5606 as a deficiency for 
which a company may submit a plan of compliance for Exchange staff 
review. Accordingly, 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.\61\ 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 pursuant to Rule 5815.\62\
---------------------------------------------------------------------------

    \61\ See Rule 5810(c)(2).
    \62\ See id.
---------------------------------------------------------------------------

B. The Board Recruiting Service Proposal

    In order to help advance diversity on company boards and to help 
companies prepare for and, if approved, comply with proposed Rules 
5605(f) and 5606, the Exchange proposes to provide certain Nasdaq-
listed companies with one-year of complimentary access for two users to 
a board recruiting solution, which would provide access to a network of 
board-ready Diverse candidates, allowing companies to identify and 
evaluate Diverse board candidates.\63\ According to the Exchange, this 
service has an approximate retail value of $10,000 per year.\64\
---------------------------------------------------------------------------

    \63\ See proposed IM-5900-9; Amendment No. 1 to the Board 
Recruiting Service Proposal at 10-11.
    \64\ See proposed IM-5900-9.
---------------------------------------------------------------------------

    The Exchange proposes to offer this service to any ``Eligible 
Company,'' which would be defined to mean a listed company (except as 
described below) 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: 
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, or who self-identifies as lesbian, gay, bisexual, 
transgender, or as a member of the queer community.\65\ A company that 
is (i) a Foreign Private Issuer (as defined in Rule 5005(a)(19)), or 
(ii) considered a foreign issuer under Rule 3b-4(b) under the Act and 
has its principal executive offices located outside of the United 
States, would be an Eligible Company if the company 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 based on national, racial, ethnic, indigenous, cultural, 
religious, or linguistic identity in the country of the company's 
principal executive offices, or lesbian, gay, bisexual, transgender, or 
as a member of the queer community.\66\ A company that is a Smaller 
Reporting Company (as defined in Rule 12b-2 under the Act) would be an 
Eligible Company if the company 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, 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, or who self-identifies 
as lesbian, gay, bisexual, transgender, or as a member of the queer 
community.\67\
---------------------------------------------------------------------------

    \65\ See proposed IM-5900-9(a). The Exchange states that, 
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 Amendment No. 1 to the Board Recruiting Service Proposal 
at 11 n.20.
    \66\ See proposed IM-5900-9(b).
    \67\ See proposed IM-5900-9(c). The Exchange states that a 
company that is not an Eligible Company would be able to receive 
complimentary 90-day access to the board recruiting solution, which 
is being offered by Nasdaq's partner to all clients of Nasdaq, Inc., 
including non-listed companies. See Amendment No. 1 to the Board 
Recruiting Service Proposal at 12 n.21.
---------------------------------------------------------------------------

    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.\68\ The Exchange states that it intends to evaluate the 
service and the progress made in enhancing diversity and may extend the 
program prior to its expiration through another proposed rule change 
filed with the

[[Page 14490]]

Commission.\69\ The Exchange states that no other company would be 
required to pay higher fees as a result of its Board Recruiting Service 
Proposal and represents that providing the proposed complimentary 
service would have no impact on the resources available for its 
regulatory programs.\70\
---------------------------------------------------------------------------

    \68\ See proposed IM-5900-9.
    \69\ See Amendment No. 1 to the Board Recruiting Service 
Proposal at 12.
    \70\ See id.
---------------------------------------------------------------------------

III. The Exchange's Arguments in the Proposals and the Comment and 
Response Letters Received on the Proposals

A. Summary of the Exchange's Arguments in the Proposals

1. The Board Diversity Proposal
    In support of 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.\71\ While the Exchange acknowledges that some 
studies have mixed results on this issue--for example, some studies 
have found that board gender and ethnic diversity has a non-significant 
relationship or no relationship with a company's performance \72\--the 
Exchange believes that, at a minimum, the academic and empirical 
studies support the conclusion that board diversity does not have 
adverse effects on company performance.\73\
---------------------------------------------------------------------------

    \71\ 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.
    \72\ See id. at 25-27.
    \73\ See id. at 28. The Exchange also states that this is not 
the first time it has considered whether, on balance, various 
studies finding mixed results related to board composition and 
company performance are a sufficient rationale to propose a listing 
rule. See id. The Exchange states that, for example, in 2003, 
notwithstanding the various findings of studies at the time 
regarding the relationship between company performance and board 
independence, it adopted listing rules requiring a majority 
independent board. See id.
---------------------------------------------------------------------------

    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.\74\ The Exchange states 
that more than a dozen studies have found a positive association 
between gender diversity and important investor protections,\75\ and 
some academics assert that such findings may extend to other forms of 
diversity, including racial and ethnic diversity.\76\ 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.\77\
---------------------------------------------------------------------------

    \74\ See id. at 29.
    \75\ 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.
    \76\ See id. at 29, Section 3.a.III.B.
    \77\ See id. at Section 3.a.III.C.
---------------------------------------------------------------------------

    The Exchange states that, while some companies have made progress 
in diversifying their boardrooms,\78\ 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.\79\ The Exchange 
states that its discussions with organizational leaders representing a 
broad spectrum of market participants and stakeholders (including 
business, investor, governance, legal, and civil rights communities) 
revealed strong support for disclosure requirements that would 
standardize the reporting of board diversity statistics.\80\ The 
Exchange further states that such discussions reinforced the notion 
that if companies recruit by skill set and experience rather than 
title, they would find that there is more than enough diverse talent to 
satisfy demand.\81\
---------------------------------------------------------------------------

    \78\ The Exchange believes that a supermajority of listed 
companies have at least one woman on the board and that listed 
companies are diligently working to add directors with other diverse 
attributes. See id. at 12, 41. The Exchange states that, while 
gender diversity has improved among U.S. company boards in recent 
years, the pace of change has been gradual and the U.S. still lags 
behind jurisdictions that have focused on board diversity. See id. 
at 12, Section 3.a.IV. The Exchange also states that progress toward 
bringing underrepresented racial and ethnic groups into the 
boardroom has been slower. See id. at 12, Section 3.a.IV.
    \79\ See id. at 8-9.
    \80\ See id. at Section 3.a.V. The Exchange also states that the 
majority of the organizations were in agreement that companies would 
benefit from a disclosure-based, business-driven framework to drive 
meaningful and systemic change in board diversity, and that a 
disclosure-based approach would be more palatable to the U.S. 
business community than a mandate. See id. at 46. According to the 
Exchange, some in the group pointed out that smaller companies and 
companies in certain industries may face challenges finding diverse 
board members. See id. In addition, the Exchange states that leaders 
from the legal community emphasized that any proposed rule change 
that imposed additional burdens beyond, or is inconsistent with, 
existing securities laws would present an additional burden and 
potentially more legal liability for listed companies. See id. at 
46-47.
    \81\ 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 (e.g., directors looking within their own social 
networks for candidates with previous C-suite experience). See id. 
at 41-44, Section 3.b.II.A.
---------------------------------------------------------------------------

    Moreover, the Exchange 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.\82\ 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 statistics being significantly unreliable and unusable to 
investors.\83\ The Exchange states that the lack of transparency 
creates barriers to investment analysis, due diligence, and academic 
study, and is impacting investors who are increasingly basing public 
advocacy, proxy voting, and direct shareholder-company engagement 
decisions on board diversity considerations.\84\
---------------------------------------------------------------------------

    \82\ 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 (stating that the current lack of 
transparency and consistency makes it difficult for the Exchange and 
investors to determine the state of diversity among listed companies 
and each board's philosophy regarding diversity; to the extent 
investors must obtain this information on their own through an 
imperfect process, this increases information asymmetries between 
larger and smaller stakeholders; and a broader definition of 
diversity may result in certain diverse candidates being overlooked 
and may hinder meaningful progress on improving diversity related to 
race, ethnicity, sexual orientation, and gender identity).
    \83\ See id. at Sections 3.a.VI.A-B.
    \84\ See id. at 51-52.

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

[[Page 14491]]

    The Exchange states that it is well positioned to establish 
practices that would assist in carrying out its mandate to protect 
investors and remove impediments from the market through the Board 
Diversity Proposal.\85\ The Exchange believes that it is well within 
its delegated authority to propose listing rules designed to enhance 
transparency, provided that they do not conflict with existing federal 
securities laws.\86\ The Exchange also states 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.\87\ 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).\88\ The Exchange also 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.\89\
---------------------------------------------------------------------------

    \85\ See id. at 53. The Exchange also states that the Board 
Diversity Proposal leverages the Exchange's unique ability, as a 
self-regulatory organization (``SRO''), to influence corporate 
governance in furtherance of the goal of Section 342 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010. See 
id. at 18.
    \86\ See id. at 58. 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. See id. at 58-59. The Exchange 
also states that it has designed the proposal to avoid a conflict 
with existing disclosure requirements under Regulation S-K and 
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. See id. at 60.
    \87\ See id. at Section 3.b.II.E.
    \88\ 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.
    \89\ See id. at 156.
---------------------------------------------------------------------------

    The Exchange believes that the disclosure-based framework of 
proposed Rule 5605(f) may influence corporate conduct if a company 
chooses to meet the proposed diversity objectives,\90\ and could help 
increase opportunities for Diverse candidates who otherwise may be 
overlooked due to the impediments of the traditional director 
recruitment process.\91\ The Exchange also believes that boards that 
choose to meet the proposed diversity objectives may experience 
benefits from diversity that perfect the mechanism of a free and open 
market and a national market system, and promote investor protection 
and the public interest.\92\ Moreover, the Exchange believes that, to 
the extent a company chooses not to meet the proposed diversity 
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 and its philosophy regarding diversity.\93\ 
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.\94\ In addition, the Exchange believes 
that the proposed disclosure framework and phase-in and transition 
periods 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.\95\
---------------------------------------------------------------------------

    \90\ See id. at 121.
    \91\ See id. For these reasons, the Exchange believes that 
proposed Rule 5605(f) is designed to remove impediments to a free 
and open market and a national market system. See id. The Exchange 
also states that proposed Rule 5605(f) is not designed to create 
additional impediments to a free and open market and a national 
market system because it would empower companies to maintain 
decision-making authority over the composition of their boards. See 
id. at 122.
    \92\ See id. at Sections 3.b.II.B-C. The Exchange also believes 
that including diverse directors with a broader range of skills, 
perspectives, and experiences may help detect and prevent fraudulent 
and manipulative acts and practices by mitigating ``groupthink'' and 
enhancing the functioning of boards, and may reduce the likelihood 
of insider trading and other fraudulent and manipulative acts and 
practices. See id. at 123-29. In addition, the Exchange states that 
it 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.
    \93\ See id. at 122. The Exchange also believes that the 
proposal could help lower information asymmetry and reduce the risk 
of insider trading or opportunistic insider behavior, which would 
help to make stock prices more informative and enhance stock 
liquidity, and is therefore designed to protect investors and 
promote capital formation and efficiency. See id. at 135.
    \94\ The Exchange believes that, therefore, the proposal is 
designed to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and to promote 
capital formation and efficiency. See id. at 122-23.
    \95\ See id. at Section 3.b.II.D. See also id. at 161-63 
(stating that the proposal would not impose any burden on 
competition among issuers that is not necessary or appropriate in 
furtherance of the purposes of the Act and would not impose any 
burden on competition among listing exchanges).
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    The Exchange believes that the disclosures required by proposed 
Rule 5606 and the accompanying format requirements would protect 
investors by eliminating data collection inaccuracies, decreasing 
investors' costs, and enhancing investors' ability to utilize the 
information disclosed.\96\ The Exchange also believes 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.\97\ Moreover, the Exchange believes that the 
proposed annual disclosures would provide consistent information to the 
public and would enable investors to continually review the board 
composition of a company to track trends,\98\ as well as simplify or 
eliminate the need for a company to respond to multiple investor 
requests for board diversity information.\99\ The Exchange also 
believes that the proposed timing for the board composition disclosures 
would align with other governance-related disclosures (e.g., those 
provided in the proxy) and would make it easier for investors to know 
where a company has provided the disclosures and give shareholders 
access to the information

[[Page 14492]]

prior to a company's annual shareholders meeting.\100\ Finally, the 
Exchange believes that proposed Rule 5606 would provide appropriate 
flexibility for Foreign Issuers \101\ and appropriate exceptions for 
certain types of Nasdaq-listed companies,\102\ and would provide 
reasonable compliance periods because it would impose only a de minimis 
burden on companies.\103\
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    \96\ See id. at 110. The Exchange also believes that it would be 
in the public interest to utilize the Board Diversity Matrix format 
because it would remove impediments in aggregating and analyzing 
data across all companies. See id. at 113. The Exchange additionally 
believes that it would be reasonable and in the public interest to 
allow companies the flexibility of supplementing their disclosure by 
providing additional information related to their directors (beyond 
what is required by proposed Rule 5606) in the Board Diversity 
Matrix. See id. The Exchange also states that its proposed 
definition of ``Diverse'' would be familiar to most companies and 
that the proposed Board Diversity Matrix would provide for 
standardized disclosures. See id. at 114. Moreover, the Exchange 
believes that prohibiting companies from providing the information 
through graphics and images would allow investors to easily 
disaggregate the data and track directors with multiple diversity 
characteristics. See id. at 113.
    \97\ See id. at 110-11. In addition, the Exchange states that 
the proposed disclosure format would provide a company with a 
uniform template with the flexibility to include any additional 
details about its board that the company believes would be useful to 
investors. See id. at 111.
    \98\ 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), which would protect investors and the public interest. See 
id. at 116.
    \99\ See id. at 112. The Exchange also believes that the 
proposed disclosures would make information available to investors 
who otherwise would not be able to obtain individualized 
disclosures. See id.
    \100\ See id. at 115. See also id. at 135 (stating a similar 
belief with respect to the disclosures under proposed Rule 5605(f)). 
The Exchange also states that proposed Rule 5606(b) would closely 
align the timing for companies that choose to disclose the Board 
Diversity Matrix data on their websites and companies that choose to 
provide the data through a Commission filing. See id. at 115.
    \101\ See id. at 115-16.
    \102\ See id. at 117-18.
    \103\ See id. at 118. See also id. at 159-60 (stating that the 
Exchange faces competition in the market for listing services, and 
the Exchange's belief that there would be a de minimis time and 
economic burden on listed companies to collect and disclose the 
diversity statistical data under proposed Rule 5606, and that any 
burden placed on companies to gather and disclose this information 
would be counterbalanced by the benefits that the information would 
provide to a company's investors). In the Board Diversity Proposal, 
the Exchange also describes the alternatives that it considered, 
including: (1) Mandate-based and disclosure-based approaches; (ii) 
higher and lower diversity objectives; (iii) longer and shorter 
compliance timeframes; and (iv) broader and narrower definitions of 
``Diverse.'' See id. at Section 3.a.VII.D.
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2. The Board Recruiting Service Proposal
    In support of the Board Recruiting Service Proposal, the Exchange 
argues that offering a board recruiting solution would assist and 
encourage listed companies to increase diverse representation on their 
boards, which the Exchange believes could result in improved corporate 
governance, strengthening of market integrity, and improved investor 
confidence.\104\ The Exchange further states that offering this service 
would help companies to achieve compliance with the Board Diversity 
Proposal, if it were approved.\105\ The Exchange also states that 
utilization of the complimentary board recruiting solution would be 
optional, and no company would be required to use the service.\106\
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    \104\ See Amendment No. 1 to the Board Recruiting Service 
Proposal at 10. The Exchange reiterates that, in researching the 
Board Diversity Proposal, it has reviewed dozens of empirical 
studies and found that an extensive body of academic and empirical 
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 encourage 
or mandate corporations to diversify their boards and improve 
diversity disclosures. See id. at 9-10.
    \105\ See id. at 10.
    \106\ See id. at 13.
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    The Exchange further argues that it is reasonable and not unfairly 
discriminatory to offer the board recruiting solution 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.\107\ 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.\108\ The Exchange also believes that offering this 
complimentary service would help it compete to attract and retain 
listings, particularly in light of the additional requirements in the 
Board Diversity Proposal that would apply to Exchange-listed companies, 
if it were approved.\109\ The Exchange further represents that 
individual listed companies would not be given specially negotiated 
packages of products or services to list, or remain listed.\110\
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    \107\ See id.
    \108\ See id. at 13-14. As described above, 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.
    \109\ See id. at 14.
    \110\ See id. at 15.
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B. The Comment and Response Letters Received on the Proposals

    The Commission has received comment letters that support the 
proposals, comment letters that suggest changes to the proposals, and 
comment letters that oppose the proposals.\111\ The Commission has also 
received two response letters from the Exchange.\112\
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    \111\ 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. 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.
    \112\ 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), available at: 
https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-8343758-228925.pdf; 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, available at: https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-8425992-229601.pdf.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2020-081 and SR-NASDAQ-2020-082, as Modified by Amendments No. 
1, and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \113\ to determine whether the proposed rule 
changes, as modified by Amendments No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the issues raised by the proposed rule changes. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described below, the Commission seeks and encourages 
interested persons to provide additional comment on the proposed rule 
changes, as modified by Amendments No. 1, to inform the Commission's 
analysis of whether to approve or disapprove the proposed rule changes, 
as modified by Amendments No. 1.
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    \113\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\114\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
described above, the Exchange proposes in the Board Diversity Proposal 
to require each of its listed companies, subject to certain exceptions, 
to: (i) Provide statistical information regarding the diversity 
characteristics among the members of the company's board of directors; 
and (ii) if the company does not meet the applicable board diversity 
objectives, to disclose an explanation as to why. Also as described 
above, the Exchange proposes in the Board Recruiting Service Proposal 
to provide certain Nasdaq-listed companies with one-year of 
complimentary access to a diverse board candidate recruiting solution. 
In addition, as stated above, the Commission has received comment 
letters that support the proposals, comment letters that suggest 
changes to the proposals, and comment letters that oppose the 
proposals, as well as two response letters from the Exchange. Moreover, 
on February 26, 2021, the Exchange submitted an amendment to each of 
the proposals.
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    \114\ Id.
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    The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposals, as modified by Amendments

[[Page 14493]]

No. 1, with Section 6(b)(5) of the Act,\115\ 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, and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, 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 Section 6(b)(8) 
of the Act,\116\ 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 
is instituting proceedings to also allow for additional analysis of, 
and input from commenters with respect to, the consistency of the Board 
Recruiting Service Proposal, as modified by Amendment No. 1, with 
Section 6(b)(4) of the Act,\117\ which requires that the rules of a 
national securities exchange provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities.
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    \115\ 15 U.S.C. 78f(b)(5).
    \116\ 15 U.S.C. 78f(b)(8).
    \117\ 15 U.S.C. 78f(b)(4).
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V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposals. In particular, the Commission invites the written 
views of interested persons concerning whether the proposals, as 
modified by Amendments No. 1, are consistent with Sections 
6(b)(4),\118\ 6(b)(5) \119\ and 6(b)(8) \120\ of the Act or any other 
provision of the Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4 under the Act,\121\ any request for an opportunity to make an 
oral presentation.\122\
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    \118\ Id.
    \119\ 15 U.S.C. 78f(b)(5).
    \120\ 15 U.S.C. 78f(b)(8).
    \121\ 17 CFR 240.19b-4.
    \122\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposals, as modified by Amendments 
No. 1, should be approved or disapproved by April 6, 2021. Any person 
who wishes to file a rebuttal to any other person's submission must 
file that rebuttal by April 20, 2021. Comments may be submitted by any 
of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2020-081 or SR-NASDAQ-2020-082 on the subject 
line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2020-081 or SR-
NASDAQ-2020-082. This file number should be included on the subject 
line if email is used. To help the Commission process and review your 
comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
changes that are filed with the Commission, and all written 
communications relating to the proposed rule changes between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2020-081 or SR-NASDAQ-2020-082 and should be submitted by April 
6, 2021. Rebuttal comments should be submitted by April 20, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\123\
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    \123\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-05343 Filed 3-15-21; 8:45 am]
BILLING CODE 8011-01-P