[Federal Register Volume 78, Number 167 (Wednesday, August 28, 2013)]
[Notices]
[Pages 53181-53183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-20956]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70246; File No. SR-NYSE-2013-40]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving Proposed Rule Change Amending 303A.00 of the Exchange's
Listed Company Manual To Provide a One-Year Transition Period To Comply
With the Internal Audit Requirement of Section 303A.07(c) for Companies
Listing in Connection With an Initial Public Offering, or by Means of a
Carve-Out or Spin-Off Transaction
August 22, 2013.
I. Introduction
On June 18, 2013, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Exchange Act''),\2\ and Rule 19b-4
thereunder,\3\ a proposed rule change to amend 303A.00 of the
Exchange's Listed Company Manual (the ``Manual'') to provide a one-year
transition period to comply with the internal audit function
requirement of Section 303A.07(c) for companies listing in connection
with an initial public offering (as new registrants under the Exchange
Act) (``IPO''),\4\ or by means of a carve-out or spin-off transaction.
The proposed rule change was published for comment in the Federal
Register on July 8, 2013.\5\ The Commission received one comment letter
on the proposal.\6\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ For purposes of Section 303A other than Sections 303A.06
(which incorporates Exchange Act Rule 10A-3 by reference) and
303A.12(b), Section 303A.00 currently provides that a company is
considered to be listing in conjunction with an IPO if, immediately
prior to listing, it does not have a class of common stock
registered under the Exchange Act. Consequently, a company whose
common stock has not previously been registered under the Exchange
Act is eligible to avail itself of the IPO transition periods in
Section 303A.00 regardless of whether that company is conducting a
public offering at the time of its initial listing. The Exchange's
proposed amendment would provide a one-year transition period for
compliance with the internal audit function requirement to all
companies currently eligible for the IPO transition periods in
Section 303A.00.
\5\ See Securities Exchange Act Release No. 69914 (July 2,
2013), 78 FR 40816.
\6\ See Letter from Richard F. Chambers, President and Chief
Executive Officer, The Institute of Internal Auditors to Elizabeth
M. Murphy, Secretary, Commission, dated July 29, 2013.
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II. Description of the Proposal
For companies listing on the Exchange in connection with an IPO,\7\
or by means of a carve-out or spin-off transaction, Section 303A.07(c)
of the Manual requires that those companies comply with the internal
audit function requirement at the time of listing. Specifically,
Section 303A.07(c) of the Manual requires that any listed company
subject to Section 303A.07 must have an internal audit function to
provide management and the audit committee with ongoing assessments of
the listed company's risk management processes and system of internal
control. A listed company may choose to outsource this function to a
third party service provider other than its independent auditor.
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\7\ The Commission notes that companies listing on the Exchange
must register under Section 12(b) of the Exchange Act.
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According to the Exchange, consistent with the transition
provisions of Section 303A.00 of the Manual, any company listing upon
transfer from another national securities exchange that does not have
an internal audit function requirement has one year from the date of
listing to comply with the Exchange's internal audit function
requirement in Section 303A.07(c) of the Manual.\8\ Neither the Nasdaq
Stock Market LLC (``Nasdaq'') nor NYSE MKT LLC (``NYSE MKT'') has an
internal audit function requirement for companies listing on their
exchange. Consequently, any company transferring its listing from
Nasdaq or NYSE MKT to the NYSE has one year from the date of listing to
comply with the requirement of Section 303A.07(c) of the Manual. By
contrast, Section 303A.00 currently does not provide any transition
period for compliance with the internal audit function requirement to a
company which is listing in connection with: (i) Its IPO, or (ii) by
means of a carve-out or spin-off transaction.\9\ In its filing, the
Exchange stated that it believes that the lack of a transition period
in relation to the internal audit function requirement for these
categories of newly-listed companies is anomalous in light of the
treatment of companies transferring from other markets. Accordingly,
the Exchange has proposed to amend Section 303A.00 to extend the
application of the one-year transition period to comply with the
internal audit function requirement to such categories of newly-listed
companies. Further, the Exchange proposed to amend Section 303A.07 to
include a sentence explicitly stating that, although Section 303A.00
permits certain categories of newly-listed companies to have a
transition period, that all companies that are subject to Section
303A.07 would be required to have an internal audit function no later
than one year after their listing date.
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\8\ Section 303.00 of the Manual states, among other things,
that a company previously registered pursuant to Section 12(b) of
the Exchange Act must satisfy the requirements of Section 303A,
which includes the internal audit function requirement of Section
303A.07(c), within one year of the listing to the extent that the
national securities exchange on which it was listed did not have the
same requirement, with the exception of Section 303A.06 including,
if applicable, the independence requirements of Section 303A.02,
which must be complied with at the time of listing.
\9\ Section 102.01B of the Manual defines a carve-out as the
initial offering of an equity security to the public by a publicly
traded company for an underlying interest in its existing business
(which may be subsidiary, division, or business unit). For all
practical purposes, a carve-out is the same as an IPO, as it
involves the listing of a newly-public company in connection with
the initial public offering of its common stock. A spin-off involves
the distribution by a listed company of all of the outstanding
common stock of a subsidiary to the listed company's shareholders
and the listing of the new company, generally without any concurrent
offering.
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Several provisions in Section 303A.07 set forth duties of the audit
committee with respect to the internal audit function requirement. In
its filing, the Exchange has proposed to amend those provisions to
clarify the duties of the audit committee with respect to the internal
audit function during any transition period applicable to IPOs,
transfers from another national securities exchange, carve-outs and
spin-offs. The Exchange has proposed to amend the following sections of
the Manual as described below:
Section 303A.07(b)(i)(A) currently requires that the audit
committee's charter must provide that the committee will assist board
oversight of: (1) The integrity of the listed company's financial
statements, (2) the listed company's compliance with legal and
regulatory requirements, (3) the independent auditor's qualifications
and independence, and (4) the
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performance of the listed company's internal audit function and
independent auditors. The proposed amendment would provide that if the
listed company does not yet have an internal audit function because it
is availing itself of a transition period pursuant to Section 303A.00,
the company's charter must provide that the committee will assist board
oversight of the design and implementation of the internal audit
function.
Section 303A.07(b)(i)(E) currently states that the audit
committee's charter must provide that the committee will meet
separately, periodically, with management, internal auditors (or other
personnel responsible for the internal audit function) and independent
auditors. The proposed amendment would provide that if the listed
company does not yet have an internal audit function because it is
availing itself of a transition period pursuant to Section 303A.00, the
audit committee must meet periodically with the company personnel
primarily responsible for the design and implementation of the internal
audit function.
Section 303A.07(b)(i)(F) currently requires the audit
committee's charter to provide that the committee will review with the
independent auditor any audit problems or difficulties and management's
response. This review is required to include, among other things, a
discussion of the responsibilities, budget and staffing of the listed
company's internal audit function. The proposed amendment would provide
that if the listed company does not yet have an internal audit function
because it is availing itself of a transition period pursuant to
Section 303A.00, this review should include a discussion of
management's plans with respect to the responsibilities, budget and
staffing of the internal audit function and the company's plans for the
implementation of the internal audit function.
Section 303A.07(b)(i)(H) currently states that the audit
committee's charter must provide that the committee will report
regularly to the board of directors to review, among other things, the
performance of the company's internal audit function. The proposed
amendment would provide that if the listed company does not yet have an
internal audit function because it is availing itself of a transition
period pursuant to Section 303A.00, the audit committee should review
with the board management's activities with respect to the design and
implementation of the internal audit function.
In its filing, the Exchange stated its belief that providing a
transition period to comply with the internal audit function
requirement to companies listing in connection with their IPO or by
means of a carve-out or spin-off transaction does not, in its view,
give rise to any novel regulatory issues that do not arise in
connection with the existing transition provision for companies
transferring from another national securities exchange. The Exchange
stated that it believes that providing a transitional period after
listing for a newly public company to establish its internal audit
function would benefit investors by making the company's implementation
of the internal audit function more effective and efficient and
reducing the costs that a company faces in its first year as a public
company. The Exchange further believes that the proposed transition
period would also limit any interference by the Exchange's internal
audit requirement with a company's business decision regarding the
timing and use of resources relating to its initial listing. In that
regard, the Exchange noted in its filing that newly-public companies
are typically in the process of upgrading their accounting systems and
internal controls and hiring additional staff to meet the greater
demands placed on public companies. The Exchange in support of its
proposal also stated its belief that a one-year transition period would
give a newly-appointed audit committee an opportunity to become
familiar with the internal controls and risk management of the company
and determine what kind of internal audit function is suitable for the
company given its specific circumstances.
As noted in its proposal, the Exchange believes that given the
limited scope of the proposed transition provision and the fact that
other national securities exchanges do not have comparable rules, the
extension of the transition provision to IPOs, carve-outs and spin-offs
is consistent with the protection of investors and the public interest
and that investors would be at least as well protected by having these
companies listed on the Exchange, where they would be subject to such a
requirement after the transition period.
III. Comments
The Commission received one comment letter on the proposed change
from The Institute of Internal Auditors (``the IIA'').\10\ Given the
important role of a robust internal audit function, the IIA believes
that all organizations, whether publicly traded or privately held,
should have an internal audit function. In its comment letter, the IIA
stated that it opposes the Exchange's proposed rule change because it
will relax an important governance requirement. Additionally, the IIA
stated that because newly-public companies are typically upgrading
their accounting systems and internal controls and hiring additional
staff to meet the greater demands placed on public companies, an
internal audit function would assist the board and senior management in
assessing these critical systems and internal controls as they are
being developed, implemented, enhanced and/or upgraded. Regarding
NYSE's statement that a one-year transition period would give a newly-
appointed audit committee the opportunity to become familiar with the
internal controls and risk management of the company and determine a
suitable internal audit function for the company, the IIA stated its
belief that there was greater value to the company's board of
directors, management, and investors in having a chief audit executive
on staff as soon as possible to assist in developing the internal audit
function and providing expert advice and counseling on internal control
and risk management during such a formative stage for the company and
the audit committee. Additionally, the IIA acknowledged that other
national securities exchanges do not have rules comparable to NYSE's
rules, but nevertheless stated its belief that NYSE should continue to
set the standard for U.S. company listing requirements and not weaken
its stance as those rules apply to IPOs, new registrants, carve-outs
and spin-offs. The IIA also believes that companies that understand the
important role that internal audits play in overall good corporate
governance will comply with more than just the minimum aspects of any
governance rule.
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\10\ The IIA stated that it is a globally recognized authority
of the internal auditing profession and represents more than 180,000
members, one-third of whom reside in the United States.
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IV. Discussion and Commission Finding
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and rules
and regulations thereunder applicable to a national securities
exchange.\11\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\12\ in that
it is designed to promote just and
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equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\11\ In approving the proposed rule changes, the Commission has
considered their impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\12\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change, which would
provide a one-year transition period to comply with the internal audit
requirement of Section 303A.07(c) for companies listing in connection
with an IPO or by means of a carve-out or spin-off transaction, is
consistent with the Act. The Commission notes that this change will
provide a transition period to comply with the internal audit function
requirement to companies listing in connection with an IPO, or by means
of a carve-out or spin-off transaction, while retaining its general
requirement that all such companies must have an internal audit
function no later than one year from the company's listing date.
Moreover, the Commission notes that with this change, companies listing
in connection with an IPO, or by means of a carve-out or spin-off
transaction will be subject to the same one year deadline to comply
with the internal audit function requirements of Section 303A.07(c)
that applies to any company listing upon transfer from another national
securities exchange that does not have the same internal audit function
requirement.
The Commission has also considered the comment letter of the IIA
and agrees that an internal audit function plays an important role in
overall good corporate governance for all public companies. The
Commission notes, however, that as of the date of this order, no other
national securities exchange has comparable rules requiring listed
companies to maintain an internal audit function.\13\ The Commission
also notes that the transition is limited in duration and that during
any transition period the audit committee will continue to have a role
in overseeing the listed company's financial systems and internal
controls over financial reporting and will also be involved in
overseeing the design and implementation of the company's internal
audit function during that period. In this regard, the Exchange has
specifically amended its rules to make clear, as required to be set
forth in the audit committees' written charter provisions, that a
listed company's audit committee still has responsibilities as to the
oversight of the design and implementation of the company's internal
audit function during any one year transition period, as well as a
requirement, to review and discuss management's plans with respect to
the responsibilities, budget and staffing of the internal audit
function and plans for its implementation. These charter provisions and
responsibilities of the audit committee should help to ensure that the
internal audit function is being developed with oversight from the
audit committee during the transition period, and is on track to be
implemented no later than one year from the company's listing on the
Exchange.
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\13\ The Commission notes that Nasdaq had previously proposed to
require listed companies to have an internal audit function similar
to NYSE's requirement prior to the change being approved in this
order. However, on May 7, 2013 Nasdaq withdrew its proposal. Nasdaq
stated it was withdrawing its proposal so that it may fully consider
the comments submitted on it, but that it ``. . . remains committed
to the underlying goal of the proposal, to help ensure that listed
companies have appropriate processes in place to assess risks and
the system of internal controls, and intends to file a revised
proposal.'' See Securities Exchange Act Release 69792 (June 18,
2013), 78 FR 37867 (June 24, 2013). To date, Nasdaq has not filed a
revised proposal. NYSE MKT had also filed a proposal to adopt an
internal audit function requirement but withdrew its proposal on May
14, 2013. (SR-NYSEMKT-2013-41) The Commission continues to believe,
as noted above, that an internal audit function is important for
listed companies.
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The Commission further notes that, although this proposed rule
change will allow certain companies a one-year transition period, these
same companies will continue to be subject to the requirements of
Section 13(b)(2)(B) of the Exchange Act, and the rules thereunder, that
require registered companies to devise and maintain a system of
internal accounting controls. The Commission believes that an internal
audit function can, among other things, assist newly listed companies
on the NYSE in meeting their obligations under Section 13(b)(2)(B). As
a result, companies eligible to avail themselves of the proposed
transition period are encouraged to implement an internal audit
function as quickly as possible.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\14\ that the proposed rule change (SR-NYSE-2013-40) is approved.
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\14\ 15 U.S.C. 78f(b)(2).
\15\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20956 Filed 8-27-13; 8:45 am]
BILLING CODE 8011-01-P