Nasdaq Proposes Listing Requirements
In early December 2020, Nasdaq filed a proposal with the Securities and Exchange Commission (SEC) to adopt new listing rules related to board diversity and related disclosures. If approved by the SEC, the new listing rules would require all companies listed on Nasdaq’s U.S. exchange (with some limited exceptions, mostly for smaller companies) to publicly disclose consistent, transparent diversity statistics regarding their board of directors. The rules also would require most Nasdaq-listed companies to have, or explain why they don’t have, at least two diverse directors (including one who self-identifies as female and one who self-identifies as either an underrepresented minority—Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander—or as LGBTQ+). In announcing the proposed rules, Nasdaq stated that the goal was to “provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective.” And, “[a]s part of rationale for the new requirements, Nasdaq’s proposal presents an analysis of over two dozen studies that found an association between diverse boards and better financial performance and corporate governance.” Id.
Relatedly, California Governor Gavin Newsom recently signed a bill requiring companies headquartered in the state to have on their boards at least one minority (defined as an individual who self‑identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self‑identifies as gay, lesbian, bisexual, or transgender), and Goldman Sachs & Co. has stated it won’t take a company public unless at least one “diverse” member—with an emphasis on women—sits on its board.
DOL Amended Rule Curbs Socially Conscious ERISA Proxy Voting Untethered to Economic Interests
Effective January 15, 2021, the DOL amended the investment duties regulation (29 C.F.R. § 2550.404a-1) to address the application of the prudence and exclusive purpose duties under the Employee Retirement Income Security Act of 1974 (ERISA) to the exercise of shareholder rights, including proxy voting, the use of written proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms. The new rule provides that
when exercising shareholder rights, plan fiduciaries must: (A) Act solely in accordance with the economic interest of the plan and its participants and beneficiaries; (B) Consider any costs involved; (C) Not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any nonpecuniary objective, or promote nonpecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries; (D) Evaluate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights; (E) Maintain records on proxy voting activities and other exercises of shareholder rights; and (F) Exercise prudence and diligence in the selection and monitoring of persons, if any, selected to advise or otherwise assist with exercises of shareholder rights, such as providing research and analysis, recommendations regarding proxy votes, administrative services with voting proxies, and recordkeeping and reporting services.
In short, the rule makes it more difficult for ERISA fiduciaries to vote proxies in support of ESG and diversity proposals without documenting how those votes first advance pecuniary interests. Given that ESG and diversity are hot topics for some investors, it is not surprising that this rule was fairly controversial as proposed (and remains so as adopted). Commentators have noted that the rule will likely be challenged in court, in Congress, or by the Biden administration (or in all or some of these).
Conclusion
With an incoming Biden administration generally focused on diversity and ESG considerations, it remains to be seen whether the SEC and DOL priorities will continue where the Trump administration left off or whether they will be modified to encourage consideration of these factors in investment decisions. Investors, practitioners, and ERISA fiduciaries should watch for developments on these issues throughout the year.