DEI in Flux During Annual Reporting and Proxy Filing Season

(1) President Trump Takes Aim at Affirmative Action and DEI Via Executive Order

When preparing forthcoming annual report and proxy statement filing disclosures — including human capital disclosures and Item 1A risk factors — companies should consider the substance of President Donald Trump’s recent Executive Order titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (the “Executive Order”) (discussed in our recent insight). The Executive Order directs federal agencies to proactively identify non-compliant entities, underscoring the need to ensure that DEI language in disclosures is accurate and reflects company compliance with applicable law. Moreover, as the DEI landscape continues to evolve, companies should assess whether there is any need to disclose that DEI matters present risk to the company, such as potential litigation costs associated with challenges to DEI initiatives, as well as reputational risks with regard to stakeholders who have differing views regarding the company’s DEI activities.

(2) Nasdaq Moves to Rescind Board Diversity Rules Following Court Defeat

On January 27, 2025, the Securities and Exchange Commission (SEC) approved Nasdaq’s proposal to pull its former “board diversity rules” (the “Rules”) from the exchange’s Listing Rules. This action effectuates a December 2024 decision by the U.S. Court of Appeals for the Fifth Circuit — discussed in our prior insight — vacating the rules.

The SEC solicited public comments for its action via notice, but nonetheless issued an order allowing Nasdaq to pull down the Rules without its usual delay period, and by February 4, 2025.

The Rules struck down by the Fifth Circuit required companies listed on Nasdaq (subject to certain exceptions and phase-in periods) to (1) publicly disclose board-level diversity (race, gender, sexual characteristics) data in a matrix format on an annual basis and (2) have, or explain why they do not have, a certain number of diverse directors on their boards. The New York Stock Exchange never adopted a similar diversity rule.

Companies should review their forthcoming annual report and proxy statement filing disclosures to consider whether, and to what extent, to include DEI-related information. The withdrawal of the Rules does not prevent companies from voluntarily disclosing information, although there may be other risks in doing so.