On February 3, 2023, the SEC announced a settled enforcement action against Activision Blizzard, Inc. that involved two issues:

• • Provisions in separation agreements that violated whistleblower protection rules, and
  • Ineffective disclosure controls and procedures for human capital resources disclosures.

Activision agreed to pay a $35 million fine and entered into a cease and desist order.

Separation agreement and employment contract provisions that try and limit whistleblowing are not a new enforcement topic.  Over the years the SEC has brought cases against a number of companies, including Brinks, KBR, Blackrock and Homestreet, for provisions in agreements that attempt to limit whistleblowing.

Section 21F of the Dodd-Frank Act, “Whistleblower Incentives and Protection”, includes provisions to protect whistleblowers.  Pursuant to this section of the Act, the SEC adopted Rule 21F-17, which includes this language:

 (a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.

Activision Blizzard routinely included provisions in separation agreements that required departed employees to notify Activision Blizzard if the SEC sent them a request for information, in violation of these rules.

The second issue in this case, inadequate disclosure controls and procedures, relates to Activision Blizzard not having processes and controls to accumulate and communicate information concerning employee complaints about workforce misconduct.  The company was aware that its ability to attract, retain, and motivate employees was a particularly important risk in its business.  It included this language as a risk factor heading in 10-Ks for 2017, 2018, 2019 and 2020:

“If we do not continue to attract, retain, and motivate skilled personnel, we will be unable to effectively conduct our business.”

According to the SEC’s Order, the company:

“lacked controls and procedures designed to ensure that it captured and assessed – from a disclosure perspective – certain information related to these risk factors.”

The SEC specifically focused on information about workplace misconduct.  As a result, according to the SEC’s Press Release, the company

“lacked sufficient information to understand the volume and substance of employee complaints about workplace misconduct and did not assess whether any material issues existed that would have required public disclosure.”

You can read more details in the SEC’s Order.

As always, your thoughts and comments are welcome!