December 2, 2020

Board Diversity: Nasdaq’s Proposed Listing Standard

Yesterday, Nasdaq filed a rule proposal with the SEC that would require all listed companies to disclose board diversity statistics, and would require most of them to either satisfy specified board diversity requirements or disclose why they don’t. This excerpt from Nasdaq’s press release summarizes the requirements of the proposed rule:

Under the proposal, all Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule. The timeframe to meet the minimum board composition expectations set forth in the proposal will be based on a company’s listing tier. Specifically, all companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule.

Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have two diverse directors within four years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Capital Market will be expected to have two diverse directors within five years of the SEC’s approval. For companies that are not in a position to meet the board composition objectives within the required timeframes, they will not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives.

Nasdaq has posted FAQs and a summary of what listed companies need to know about the rule proposal on its website. One of the things about the proposal that surprises me is how few listed companies currently satisfy the proposed diversity standard. According to this NYT DealBook report, Nasdaq says that more than 75% of listed companies do not meet the proposed standard.

That means that a lot of companies are going to have a lot of work to do if the rule is adopted. In order to assist those companies, Nasdaq also announced a partnership with Equilar to assist listed companies in addressing board composition issues.

Big 3 Asset Managers: Paging Ida Tarbell. . . 

If you’ve studied American economic history, you’ve likely heard of journalist Ida Tarbell, whose landmark series of articles in McClure’s magazine on The Standard Oil Company was credited with accelerating the government’s 1911 breakup of the company. According to this provocative new report from The American Economic Liberties Project, the growing dominance of the Big Three asset managers poses the same kind of threats that trusts like Standard Oil posed at the turn of the last century. Here’s an excerpt:

Today, scholars of finance are increasingly raising concerns that the rise of mutual fund ownership of U.S. corporations is “reminiscent of the early 20th century system of finance capital when business was under the control of tycoons such as J.P. Morgan and J.D. Rockefeller.” Antitrust experts argue that the “historic trusts that motivated the creation of antitrust law were horizontal shareholders[,]” where a common set of investors own significant shares in corporations that are competitors in a market. In this sense, asset management firms have become a part of a new “money trust”—a system of financial architecture dominated by a few large banks, private equity firms, and hedge funds.

Modern financial markets are distinct from the robber baron era by the fact that ultimate ownership of corporate shares is dispersed across many investors and asset owners, albeit controlled by a small concentrated group of institutions. In this sense, it is a modern version of an old problem.

For a sense of the scale of the problem, the “Big Three” asset management firms—BlackRock, Vanguard and State Street—manage over $15 trillion in combined global assets under management, an amount equivalent to more than three-quarters of U.S. gross domestic product.

The report details how the outsized footprint of the Big Three & a handful of other institutions raises concerns about corporate governance, American economic competitiveness, the concentration of political power, and the stability of financial markets. It also offers some dramatic solutions – including limits on asset managers’ ownership of individual companies & companies within similar industries, concentration restrictions limiting the “economic exposure” of individual asset managers, and legislation mandating a “structural separation” of asset managers’ systemically important infrastructure activities from their other lines of business.

These are the kind of sweeping changes that would require sustained, bipartisan Congressional action to implement, and right now, that looks like a pipe dream – absent a lot of public outcry.  But in 1900, the idea of breaking up Standard Oil seemed pretty far-fetched too. . .

OTC: An Overview of Rule 15c2-11

Before brokerage firms can quote securities of unlisted companies, they have to satisfy the informational & other requirements of Exchange Act Rule 15c2-11. While the rule regulates the activities of brokers, ensuring that sufficient information is available to permit them to quote an issuer’s securities is often quite important to the issuers themselves. Liz blogged about the SEC’s recent amendments to the rule, and this BakerHostetler memo provides a comprehensive summary of the rule & the changes made by the amendments.  Here’s the intro:

The SEC recently adopted amendments to Rule 15c2-11 of the Securities Exchange Act of 1934. Generally, in an effort to prevent fraudulent, deceptive or manipulative acts or practices related to the quote, the Rule imposes restrictions on a broker-dealer’s ability to publish or submit securities quotations for unlisted companies. Specifically, the Rule governs the requirements that broker-dealers must satisfy before they publish or submit securities quotations for unlisted companies in a quotation medium other than a national securities exchange – in other words, the over-the-counter (OTC) market.

The Amendment adds additional investor protections by mandating that investors have access to the current and publicly available information of issuers whose securities trade on the OTC markets, and it further requires broker-dealers to confirm that certain information about the issuer and its security is current and publicly available before quoting that security.

The memo walks through the mechanics of the rule, the alternative methods by which its information requirements may be satisfied, and summarizes the effect of the amendments.

John Jenkins