State Attorneys General Take Aim at DEI Policies at Six Major Financial Institutions

On January 23, 2025, a coalition of Attorneys General from ten states, led by AG Ken Paxton of Texas, penned a letter to six major U.S. financial institutions, warning that their embrace of “race-and-sex-based quotas” and investment decisions made “in the furtherance of political agendas” might violate federal and state laws.  AG Paxton invited these firms to answer a series of questions regarding their policies, but nevertheless reserved the right to take “enforcement actions to vindicate federal or State laws.”  This letter comes on the heels of President Trump’s recent executive orders including one entitled, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity”, which we wrote about previously here.  What does the letter say, and what, if anything, should other companies do in response?  We explore these questions and offer some guidance about them below.

What Does the Letter Say?

With respect to DEI initiatives, the letter focuses on the obligation not to engage in discrimination based on sex, race, or color in conducting business in two key ways.

• First, the letter describes “fiduciary duties” contained in contracts with asset managers that manage public retirement systems that obligate fiduciaries to act “solely in the interest” of stakeholders and beneficiaries and in a manner that prohibits race or sex-based discrimination.  
  
  
• Second, the letter asserts that these companies maintain discriminatory “quotas” in violation of state and federal law (i.e., Title VII of the Civil Rights Act of 1964, Section 1981 of the Civil Rights Act of 1866, and state equivalents) in three specific ways: (1) by maintaining discriminatory employment “quotas”; (2) “pursuing discriminatory board quotas”; and (3) “[u]sing discriminatory supplier quotas”.  For example, the letter references goals announced by these companies to increase the percentages of female and racially diverse candidates and highlights the use of “DEI goals in employee performance reviews” which are allegedly tied to incentive compensation.  According to AG Paxton, these practices do not have “anything to do with meeting fiduciary obligations.”  Likewise, AG Paxton contends that these companies have violated their “fiduciary duties by pursuing race-and sex-based board quotas,” referencing “proxy voting guidelines” which “encourage” companies to have diverse boards.  Finally, the letter highlights “supplier diversity” programs maintained by some of these companies, which AG Paxton contends potentially violate Section 1981 (which prohibits discrimination based on race, color, or ethnicity in making and enforcing contracts). 

The letter poses a series of specific questions to each of the six financial institutions which are aimed at understanding the nature of the various diversity initiatives maintained by each company, and seeks to uncover information that could potentially form the basis of an enforcement action.  For example, AG Paxton requests that these companies provide information with respect to diversity initiatives and commitments, steps they have taken to date to meet these goals, and any complaints received regarding these goals.

This Letter is Far from an Isolated Instance. 

In the wake of the Supreme Court’s 2023 decision in Students for Fair Admissions, Inc. v. Harvard, which effectively struck down race-based affirmative action programs, some of these same attorneys general sent a similar letter to all Fortune 500 CEOs reminding them of their obligation to refrain from discrimination on the basis of race in employment.  This earlier letter highlighted many of the same themes in the January 23, 2025 letter— such as calling out alleged “racial preferences and quotas” as violating state and federal law and warning that such policies could become the subject of future enforcement actions.  Likewise, just days after sending the January 23, 2025 letter, nineteen attorneys general (many of whom signed onto the January 23, 2025 letter), sent a letter to Costco Wholesale, demanding that the retail giant abandon its DEI policies which they contend violate the law.  The Costco letter comes in the wake of Costco’s shareholders overwhelmingly rejecting a proposal to the Costco board to abandon DEI initiatives, because the board found them important to ensure that the company can “attract and retain employees who will help [its] business succeed.  Beyond these letters, the Department of Justice has also forecasted its enforcement priorities with respect to DEI policies in a memorandum released on February 5, 2025, which expressly states that the DOJ’s Civil Rights Division “will investigate, eliminate, and penalize illegal DEI and DEIA preferences, mandates, policies, programs, and activities in the private sector…”  Needless to say, the January 2025 letter is the latest installment in targeting DEI policies at companies across the United States. 

What, If Anything, Should Companies Do in Response? 

Even in the absence of a targeted letter from an attorney general or other governmental agency, the legal and social environment is rapidly evolving—most recently in light of President Trump’s recent Executive Order—“Ending Illegal Discrimination and Restoring Merit-Based Opportunity.”  While this Executive Order focuses primarily on federal DEI policies, it does direct federal agency heads to propose “strategic enforcement plan[s]”  “containing recommendations for enforcing Federal civil-rights laws and taking other appropriate measures to encourage the private sector to end illegal discrimination and preferences, including DEI.”  This activity at the federal level, coupled with states eager to engage in similar enforcement actions, compels businesses that maintain policies calculated to improve diversity in its workforce to understand the reason for and contents of those DEI initiatives. 

While there are many actions companies can take with respect to DEI policies (many of which we wrote about here), what, if anything, should companies do to prepare for the distinct possibility that they too might receive a letter like this one—either from a state attorney general, a federal government agency, or even a private actor?

First and foremost, companies should pay attention to public statements made about diversity efforts—both in hiring as well as with respect to suppliers or contractors (to the extent applicable).  While companies may rightfully make public statements that align with their values and mission, thought should be given to how such statements are worded, how they could be misconstrued, or how they could be scrutinized. Companies should carefully review public statements—whether made in public filings or in more informal settings, such as interviews—to ensure that they align with company values and do not run violate the law.

Second, companies should assess any existing programs aimed at increasing diversity in their workforce and evaluate for continued compliance with the law.  This assessment should include a comprehensive review of DEI programs, including their history, projected impact, and impact on a going-forward basis.  This review should be done with the assistance of counsel to ensure that any such review is protected by the attorney-client privilege. 

Third, ensure that hiring managers and any individual involved in the hiring process continue to make employment decisions based solely on lawful criteria.  While this letter targets what it purports are discriminatory “quotas” and hiring practices, the success of any enforcement action hinges on actual violations.  Companies that engage in recruitment or hiring efforts aimed at increasing workforce diversity should review these policies—both as written and as applied—to ensure that they are ultimately making hiring decisions based on lawful criteria.  On this point, it is important to note that, even absent these latest actions targeting DEI efforts, federal and state anti-discrimination laws continue to apply and prohibit – universally – employment decisions based on a person’s membership in a protected class. 

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DEI programs will face significant scrutiny in the coming years.  With that understood, it is incumbent upon businesses and employers to ensure that they deliberate with all relevant stakeholders to ensure that their DEI policies and programs are legally compliant and aligned with company goals and objectives.  The Mintz Employment team is continuing to monitor further developments on this front and is ready to assist employers in addressing and working through these issues in the coming months and years.  

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