SEC’s ESG Task Force Strikes Again

Activision Blizzard Workplace Misconduct Allegations Transformed into Securities Violations

In another victory for the Securities and Exchange Commission’s (SEC) Climate and ESG Task Force, videogame developer Activision Blizzard Inc. (Activision) agreed on February 3, 2023 to a $35 million no-admit, no-deny settlement with the SEC for alleged governance deficiencies between 2016 and 2021. File No. 3-21294. The SEC alleged that Activision failed to maintain disclosure controls and procedures to ensure complaints of workplace misconduct were communicated timely to the Company’s disclosure personnel, and also that the Company violated SEC whistleblower protection rules in its separation agreements with former employees.

The SEC first charged Activision with violating Exchange Act Rule 13a-15(a), which requires certain issuers of securities to maintain controls and procedures to ensure that disclosures are adequate. 17 C.F.R. § 240.13a-15(a). In addition to extensive financial disclosures, business risk factors also must be disclosed by issuers. According to the SEC, Activision’s periodic financial reports from 2018 to 2021 identified its ability to “attract, retain, and motivate skilled employees” as a material risk to its business. The SEC alleged that the Company had not established controls and procedures to collect or analyze employee complaints of workplace misconduct for disclosure purposes. Therefore, the lack of controls and procedures prevented Activision from assessing whether misconduct allegations were sufficiently material to warrant specific disclosure to investors.

The SEC also charged Activision with violating Section 21F-17 of the Dodd Frank Act, which was designed to encourage whistleblowers to report possible securities law violations. The Section mandates that “[n]o 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.” 17 C.F.R. § 240.21F-17. According to the SEC, in 2016, Activision began to use separation agreements that required employees to notify the Company one business day prior to speaking with an administrative agency regarding a report or complaint. The separation agreement clarified that this notification requirement did not prohibit truthful disclosures to an administrative agency. Despite that clarification, the SEC alleged that the requirement to notify the Company prior to any communication with an administrative agency undermined the purpose of Rule 21F-17, impeding former employees from communicating with the SEC about potential securities law violations.

According to the SEC’s order announcing the settlement, the Company has since remediated these alleged deficiencies by implementing structural changes and policies to facilitate greater compliance with disclosure requirements and removing the notification clause from its separation agreements.

The SEC originally opened its investigation into the Company in September 2021 following a summer of accusations of sexual misconduct, harassment, and workplace discrimination that culminated in a walkout and protest by Activision employees. Although the SEC is traditionally tasked with enforcing the nation’s securities laws, this recent settlement demonstrates the Commission’s exceptionally broad interpretation of “securities laws” and increasing willingness to investigate and charge alleged violations of all “ESG” elements, not just the environmental disclosures that have attracted the most public scrutiny.