Document ID: SEC-2013-1528-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange, LLC
Posted Date: 2013-08-28T04:00Z

[Federal Register Volume 78, Number 167 (Wednesday, August 28, 2013)]
[Notices]
[Pages 53181-53183]
From the Federal Register Online via the Government Printing 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

[[Page 53182]]

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

[[Page 53183]]

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