The US Securities and Exchange Commission has announced a settlement with Activision Blizzard Inc., a video game publisher and developer headquartered in California, resolving an investigation into the company’s workforce disclosure controls and whistleblower protections.
As alleged by the SEC, between 2018 and 2021 Activision Blizzard lacked procedures and controls to collect and analyze employee complaints concerning misconduct in the workplace. In its SEC filings for fiscal years 2017 through 2020, the company emphasized the importance of attracting, retaining, and motivating the skilled personnel necessary to conduct its business; the company noted as well that its future results would be dependent on, among other factors, its ability to maintain relationships with key personnel. Despite its stated reliance on the retention of skilled personnel, during the relevant period Activision Blizzard’s various business units lacked the controls and procedures necessary to collect and analyze employee complaints. According to the cease and desist order, after May 2020 the company implemented company-wide structural changes that enhanced the documentation of employee complaints, and the internal communications surrounding those complaints.
The SEC found that, during the years before Activision Blizzard’s structural changes, the company’s conduct violated Rules 13a-15(a) of the Securities Exchange Act of 1934 (Exchange Act). Rule 13a-15(a) requires issuers like Activision Blizzard to maintain disclosure controls and procedures, which are defined in Rule 13a-15(e) as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits… is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.” Without such procedures, a registrant’s management may not have adequate and timely information to assess whether its disclosures to investors are accurate, complete, and not misleading.
The SEC’s investigation examined Activision Blizzard’s compliance with the whistleblower protection provisions of the Dodd-Frank Wall Street Reform And Consumer Protection Act, in addition to its examination of the company’s procedures and controls. The SEC found that, beginning in 2016, and extending to 2021, Activision Blizzard executed separation agreements with multiple employees that contained language requiring departing employees to notify the company of any request or report to an administrative agency. Although the separation agreements also contained a clause stating that the release did not bar former employees from communicating with the SEC or other government administrative or regulatory body, the SEC that, alleged that, despite this additional language, the separation agreements as written violated Exchange Act Rule 21F-17(a), part of the Dodd-Frank Act that protects whistleblower communications. Specifically, Rule 21F-17(a) reads in pertinent part, “No person may take any action to impede an individual from communicating directly with the Commission staff…including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”
As a result of these findings, Activision Blizzard was ordered to pay a civil money penalty of $35 million, and to cease and desist from committing or causing violations of Exchange Act Rules 13a15(a) and 21F-17(a).