Quite a lot has already been said, some it valid.
First, let us put the "blame" for this where it belongs. Valar and the BoEF most likely were the catalyst for this change, but the blame still must rest solely on the heads of those who performed the action, in this case WoTC. Valar did not force a response, certainly not this particular response. WoTC could have chosen any of a number of responses.
While WoTC has the right (legally) to change the d20 license in any way they choose, at any time they choose, what they have done here is bad. As has been pointed out, this will have the efect of stifling creativity within the d20 license. While some of that creativity may simply be chased to the OGL, it is also possible that it will go to other game systems entirely, leaving what has been my favorite game for 26 years that much poorer as a direct result.
A point that has not yet been made, the policy as written is discriminatory. It is saying that females, by their very nature, are purile in a way that males are not. Am I the only one that has a problem with this?
As another flaw in WoTC's reasoning, consider this image:
A woman, sitting. It is obvious that she is completely topless.
(So far, this might be a no-no...)
A nipple is visible.
(Okay, now it is definately a no-no...)
The other nipple is not visible because something is in the way.
(Doesn't change anything yet.)
She is holding a baby to the obscured breast to suckle.
(Now, by all that is right and holy, this should make it legit all by itself, but America has some pretty sick and twisted attitudes about breast feeding...)
She is seated on a throne (not an euphemism, we won't go there)
(Still doen't change things as far as the d20 license goes...)
She is Isis, and the baby is Pharoh.
This is a real world depiction of a real world Goddess(*), and WoTC wants to say it is not allowed? Now we have religious descrimination to go with the sex discrimination.
(*) Yes I am aware that there are not nearly as many Isis worshipers now as there was 20 or 30 centuries ago, but that is irrelevant.
WoTC needs to withdraw this change immediately.