TheCorporateCounsel.net

On Friday, the SEC announced a $35 million settlement with Activision Blizzard for findings that it failed to maintain disclosure controls related to complaints of workplace misconduct – and separately, that it violated the whistleblower protection rule. The SEC’s 7-page order rests on two main allegations by the SEC. The press release summarizes:

According to the SEC’s order, between 2018 and 2021, Activision Blizzard was aware that its ability to attract, retain, and motivate employees was a particularly important risk in its business, but it lacked controls and procedures among its separate business units to collect and analyze employee complaints of workplace misconduct. As a result, the company’s management 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.

Separately, the SEC’s order finds that, between 2016 and 2021, Activision Blizzard executed separation agreements in the ordinary course of its business that violated a Commission whistleblower protection rule by requiring former employees to provide notice to the company if they received a request for information from the Commission’s staff.

For the disclosure controls aspect of this settlement, the SEC focused on the company’s risk factors and cautionary language in Forms 10-K & 10-Q. The SEC didn’t allege that any particular statement was materially inaccurate or misleading – the problem in the SEC’s view was that shortcomings in how workplace-related information was collected and communicated to the company’s disclosure committee prevented the disclosure decision-makers from evaluating whether disclosure on this topic was needed. SEC Commissioner Hester Peirce dissented from both aspects of the order. Here’s her objection to the alleged “disclosure controls” violation:

In other words, the required disclosure controls and procedures must capture not only information that a company is required to disclose, but also an additional, vaguely defined category—information “relevant” to a company’s determination about whether a risk or other issue reaches the threshold where it is “required to be disclosed.”

She continues:

The requirement cannot be that a company’s disclosure controls and procedures must capture potentially relevant, but ultimately—for purposes of disclosure—unimportant information. As I read it, in this Order, the SEC once again has sat down at the gaming console to play its new favorite game “Corporate Manager.” Using disclosure controls and procedures as its tool, it seeks to nudge companies to manage themselves according to the metrics the SEC finds interesting at the moment. For Activision Blizzard, today, that metric is workplace misconduct statistics, but other issues will follow. In this level of the enforcement game, the SEC has added $35,000,000 to its point total despite the Order not identifying any investor harm.

The settlement comes at a time when the SEC has signaled that it may propose more prescriptive human capital disclosure rules in response to investors wanting more comparable info on that topic. Those rules are not yet in place, but the Enforcement Division already appears to be interested in the principles-based aspects of that topic.

Regardless of whether you find yourself nodding along with Commissioner Peirce, this settlement is another reminder that “workplace misconduct” continues to be a topic that requires board attention, appropriate oversight & information collection, and careful disclosures. The whistleblower component of the action also suggests you should take a fresh look at your separation terms. As this Cooley blog notes, this stuff is no longer just “employment lawyer” territory – you should have a cross-functional team.

Recall that last month, the SEC brought an enforcement action against McDonald’s to allege that the company mischaracterized the nature of the former CEO’s separation from service by not acknowledging that purported workplace misconduct was “cause.” (Commissioners Peirce & Uyeda dissented and said they believed the SEC was rewriting Item 402 disclosure requirements through an enforcement proceeding.) Two weeks later, the Delaware Court of Chancery allowed a fiduciary duty claim to proceed against McDonald’s HR head, finding at the motion to dismiss stage that if all the facts alleged by the plaintiff were true, the officer consciously ignored red flags and didn’t put in place reasonable information systems to report to the CEO & board. And while Activision settled an EEOC claim last year for a lower amount than this SEC matter, that company continues to face litigation in state court.

– Liz Dunshee