Implications of the SEC’s Recent Enforcement Action Against Activision Blizzard

The SEC’s Enforcement Action

The SEC’s order describes Activision as one of the world’s largest video game development and publishing companies, employing over 9,500 individuals worldwide. In its Form 10-K and 10-Q filings submitted between 2018 and 2021, Activision disclosed in its risk factors that “attracting, retaining, and motivating a workforce of employees with specialized skills” could affect its business.

Rule 13a-15(a) requires issuers to have “disclosure controls and procedures.” Rule 13a-15(e) defines disclosure “controls and procedures” to include “controls and procedures designed to ensure that information required to be disclosed by an issuer in [SEC filings] is accumulated and communicated to the issuer’s management ... as appropriate to allow timely decisions regarding required disclosure.” 

According to the SEC’s findings, which the company neither admitted nor denied, Activision violated Rule 13a-15(e) because it lacked controls and procedures designed to ensure that it collected and assessed employee complaints or incidents of workplace misconduct. The order posits that information about employee complaints and workplace misconduct is “relevant” to the company’s ability to attract and retain a skilled workforce. Therefore, without information about employee complaints and workplace misconduct, Activision’s management and disclosure personnel were unable to assess the accuracy of its statements about employee retention.

Specifically, the order alleges that Activision “lacked controls and procedures designed to ensure that information related to employee complaints of workplace misconduct would be communicated to Activision Blizzard’s disclosure personnel to allow for timely assessment on its disclosures.” The order also notes that Activision’s identified categories of “potentially material information” required to be reported to the Disclosure Committee did not include information relevant to Activision’s “ability to retain employees, such as employee complaints or incidents of workplace misconduct.” As a result, the order finds that management was unable to assess whether such information warranted disclosure or whether its disclosures were “fulsome and accurate.” Notably, the SEC did not find that Activision’s disclosures were materially misleading.

The SEC also found that Activision’s separation agreements violated Rule 21F-17(a) of the Exchange Act, which prohibits any person from taking action to impede communications with the SEC about possible securities law violations. From 2016 and 2021, Activision, in the ordinary course of its business, had a “significant number” of its departing employees sign template separation agreements that included a clause requiring those former employees to notify Activision of any requests from administrative agencies in connection with a report or complaint. Most of the separation agreements also contained a clause clarifying that nothing in the agreement prevented the former employee from communicating with the SEC. The SEC made no finding of any instance in which a departing employee was prevented from communicating with the Commission. Nonetheless, the SEC found that the separation agreements “undermine[d] the purpose” of whistleblower protections and thus violated Rule 21F-17(a).

Takeaways

The SEC’s order demonstrates the SEC’s broad interpretation of the disclosure controls and procedures requirement under Rule 13a-15(a). The order suggests that an issuer’s disclosures need not be materially misleading for the SEC to find a violation of Rule 13a-15(a) and that the SEC may find a violation of Rule 13a-15(a) where an issuer failed to capture information merely  “relevant” to the determination about what to disclose. As Commissioner Hester M. Peirce posits in her dissenting statement, it is “difficult to see where the logic of this Order stops.”² Given the uncertainty as to the boundaries of the SEC’s interpretation of Rule 13a-15(a), companies should consider reviewing their disclosure controls and procedures to assess potential adjustments or enhancements to internal data tracking that bear on their current disclosures.

The order also indicates that the SEC may find notice requirements in separation agreements sufficient impediments to communication for purposes of Rule 21F-17(a). The SEC has historically brought enforcement actions under Rule 21F-17(a) for more apparent instances of whistleblower impediment, such as where employment agreements expressly restrict communications with governmental agencies or include prohibitive disincentives such as waivers on the ability to obtain whistleblower awards. Here, there was no prohibition, but an after-the-fact requirement that the employee notify the company of a disclosure obligation or request from an administrative agency. The SEC’s position, however, is not unprecedented. The closest precedent is a matter currently being litigated, in which the SEC also brought a claim for a violation of Rule 21F-17(a) against a company where, among other things, the company executed a separation agreement with a senior employee requiring the employee to notify the company if the employee was contacted by any regulatory agency or authority.³ In light of the foregoing, companies should evaluate their employment policies, procedures, and agreements with an eye toward anything that could be viewed as interfering with whistleblower protections, including any notice requirements. Companies should consider whether clarifications, emphasis, or further notice to employees on the availability of whistleblower protections may be warranted. 

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¹ In the Matter of Activision Blizzard, Inc., Securities Exchange Act Release No. 96796, Administrative Proceeding File No. 3-21294 (Feb. 3, 2023), available at https://www.sec.gov/litigation/admin/2023/34-96796.pdf.

² Statement of SEC Commissioner Hester M. Peirce, The SEC Levels Up: Statement on In re Activision Blizzard (Feb. 3, 2023), available at https://www.sec.gov/news/statement/peirce-statement-activision-blizzard-020323.

³ See SEC v. GPB Capital Holdings, LLC, et al., No. 1:21-cv-00583 (E.D.N.Y. Feb. 4, 2021).