President Trump has issued a series of executive orders targeting the private sector's initiatives related to Diversity, Equity, and Inclusion (DEI) and/or Diversity, Equity, Inclusion, and Accessibility (DEIA).1 These and other recent executive actions and developments concerning DEI come on the heels of the Fifth Circuit's December 2024 decision striking down the Nasdaq's board diversity rule that would have required companies to have, or explain why they do not have, at least one female director and one director who self-identifies as an underrepresented minority or LGBTQ+.2
The U.S. disclosure regime does not require companies to disclose DEI-related programs or policies, per se. But in recent years, many companies disclosed DEI-related information as part of business, risk factors, human capital management, board and executive compensation, or other sections of their periodic SEC filings, proxy statements, and public disclosures. Even before the recent change in the DEI landscape, plaintiff firms and political groups had begun filing claims against companies, officers, and directors concerning their DEI-related disclosures. Companies have usually responded by rolling back or modifying their DEI-related policies.
Now that, more than ever, DEI-related disclosures will come under the microscope, it is critical for companies to evaluate the risks of their DEI programs and proactively mitigate the risk of investor claims that may arise from their pursuit of'or withdrawal from'DEI initiatives and their associated public statements. The rest of this alert describes risks facing companies relating to DEI-related disclosure and shareholder litigation and our key takeaways and recommendations.
SEC Enforcement. Under the Biden administration and during the tenure of then-SEC chair Gary Gensler, the SEC developed a DEIA Strategic Plan,3 performed biennial collections of "Diversity Self-Assessment Submissions from Regulated Entities,"4 which it used "to assess and report on progress and trends in regulated entity diversity-related activities,"5 and identified DEI as a priority with respect to the SEC's regulation of capital markets.6 While Paul Atkins has just been confirmed as chair of the SEC, it is hard to imagine the agency will continue on the same path. Instead, it is more likely that the agency will scrutinize companies' DEI- (and ESG-) related disclosures and, particularly following negative market events, examine whether they accurately conveyed to investors the companies' DEI practices and associated risks.
Shareholder Direct Actions. In the last few years, there have been several direct investor cases (typically putative class actions) alleging false DEI-related disclosures in companies' proxy statements and other public statements and filings, giving rise to claims under Sections 14(a) and 10(b) of the Securities Exchange Act of 1934 and related SEC Rules. Some have alleged that companies paid only lip service to DEI, while allowing discrimination against people from...
