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Washington Watch: SEC’s Activision Blizzard investigation sparks debate on regulatory overreach

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Activision Blizzard Inc. has been dogged by allegations that it discriminated against its female employees by paying them less and fostering an environment conducive to sexual harassment in recent months, inviting private lawsuits and sanctions from California regulators.

The Wall Street Journal reported Tuesday that the Securities and Exchange Commission is now investigating the company, in a move that some critics say is an example of the securities regulator’s increasing willingness to police corporate behavior outside the bounds of securities laws.

“If there are plausible allegations that senior Activision
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management engaged in discriminatory practices, an investigation into whether employment civil rights laws were violated is clearly appropriate,” wrote Stephen Bainbridge, a professor of law at UCLA, in a Tuesday blog post. “But that’s not the SEC’s job.”

Bainbridge argued that it’s “critical” that Activision management has not been convicted of a criminal violation or found to be in violation of a civil statute. In such a case “it would be arguable that failing to disclose those convictions would be a material omission” that would violate a public company’s duty to disclose important facts to its investors or potential investors.

He pointed to a 1979 ruling by a federal district court which held that management of the textile manufacturer J.P. Stevens & Co. did not have to disclose to its investors that it had been accused of violating labor laws.

Last year, the SEC updated its rules related to disclosure of “human capital management,” that encouraged companies to relay more information to investors about how they manage their workforces, though the agency declined to require companies to disclose information like the comparabiliity of pay between men and women.

Under the leadership of Gary Gensler, the SEC is revisiting this question. In August, he announced that he has directed the agency’s staff to come up with recommendations for stricter disclosure rules around workforce management.

Ken Joseph, a former SEC enforcement and examinations official and a regulatory consultant at Kroll, told MarketWatch that the investigation into Activision shouldn’t necessarily be viewed as part of a newfound interest in workplace issues.

“The real focus here is around whether material information was promptly disclosed to investors or prospective investors,” he said in an interview. “To the extent that there are litigation risks, that in and of itself would be material information.”

According to the Journal report, the SEC has specifically requested documents related to separation agreements with six former employees. Joseph said those may be of particular interest because federal securities laws bar companies from impeding a former employee’s attempt to communicate with the SEC about potentially illegal behavior.

Last year, the SEC’s enforcement division received 16,000 tips and conducted several thousand investigations into public companies, the agency has indicated in its annual report. Joseph said that the simple act of investigating a potential disclosure violation should not necessarily be interpreted as shift in the agency’s focus.

“Disclosure investigations against public issuers are commonplace,” he said. “It’s a significant proportion of the agency’s agenda.”

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