The SEC has been pushing the envelope on enforcement initiatives.  At the same time, the SEC is pushing new disclosure obligations like cybersecurity and climate change.  The SEC is following up on the importance of disclosure obligations and the surrounding controls.  This is a new enforcement priority because the SEC is focusing beyond financial disclosures and reporting to new areas of significant risk.  The Activision case represents a significant new foray in this area.

Activision is one of the world’s largest video game and publishing companies.  Activision has three major video game franchises: World of Warcraft, Call of Duty and Candy Crush.

Microsoft has proposed to acquire Activision Blizzard for $69 billion.  The FTC, EU and UK regulators have opposed the transaction. 

The SEC’s enforcement actions focuses on two specific issues – Activision’s inadequate disclosure controls and failure to implement appropriate whistleblower protection rules.

The SEC cited Activision’s acknowledgment, in its quarterly and annual SEC filings, of the importance of attracting, retaining and motivating employees with specialized skills.  Activision suffered from a “frat boy” culture that was linked to the conduct of its CEO and senior management. 

Given its risk statements, the SEC focused on Activision disclosure controls to ensure that its risk statements were accurate.  As noted by the SEC, Activision lacked controls and procedures to ensure that information related to employee complaints of workplace misconduct would be communicated to Activision’s disclosure personnel to allow for timely assessment.

Activision required that individual business unit leaders report certain categories of potentially material information to Activision’s Disclosure Committee.  These categories, however, did not include any information relevant to Activision’s ability to retain and attract employees, including employee complaints or incidents of workplace misconduct.

In view of the absence of any control to collect relevant information on employee culture, Activision’s management and disclosure personnel were unable to assess the volume and substance of employee complaints relating to workplace misconduct for public disclosure purposes.

To address this issue, Activision implemented structural changes and policies to enhance the documentation and communication of employee misconduct to management and disclosure personnel.

On the whistleblower issue, between 2016 to 2021, Activision entered into a significant number of separation agreements using templates that required former employees to notify the company if they received a request from a government agency in connection with a report or a complaint.

Section 21F-17 of the Dodd-Frank Act prohibits a person from taking “any action to impede an individual from communicating directly with the [SEC staff] about a possible securities law violation, including enforcing . . . a confidentiality agreement . . . with respect to such communications.”

Activision adopted a separation agreement template that it used when employees departed from the company.  The template included a clause requiring former employees to notify Activision of any requests from an agency concerning a report or complaint.  Over a five-year period, 2016 to 2021, a significant number of departing employees signed separation agreements with this clause.  In 2022, Activision modified its template and removed the notification requirement from the template.