[Federal Register Volume 78, Number 130 (Monday, July 8, 2013)]
[Notices]
[Pages 40816-40819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16289]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69914; File No. SR-NYSE-2013-40]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of 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, as New Registrants or by Means of a Carve-Out or Spin-Off 
Transaction

July 2, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on June 18, 2013, New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange

[[Page 40817]]

Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
self-regulatory organization. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes 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 requirement of Section 303A.07(c) for 
companies listing in connection with an initial public offering 
(``IPO''), as new registrants or by means of a carve-out or spin-off 
transaction. The text of the proposed rule change is available on the 
Exchange's Web site at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Section 303A.07(c) of the Listed Company Manual requires that any 
listed company which is 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.
    Consistent with the transition provisions of Section 303A.00, any 
company listing upon transfer from another national securities exchange 
that does not have an internal audit requirement has one year from the 
date of listing to comply with the internal audit function requirement 
of Section 303A.07(c). Neither the Nasdaq Stock Market LLC (``Nasdaq'') 
nor NYSE MKT LLC (``NYSE MKT'') has an internal audit requirement. 
Consequently, any company transferring from Nasdaq or NYSE MKT to the 
NYSE has one year from the date of listing to comply with the 
requirement specifically set forth in its rules. By contrast, Section 
303A.00 does not provide any transition period for compliance with the 
internal audit requirement to a company which is listing in connection 
with: (i) Its IPO \4\ or whose common stock has not previously been 
registered under the Exchange Act or (ii) by means of a carve-out or 
spin-off transaction.\5\ The Exchange believes that the lack of a 
transition period in relation to the internal audit requirement for 
these categories of newly-listed companies is anomalous in light of the 
treatment of companies transferring from other markets. Accordingly, 
the Exchange proposes 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 companies.
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    \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. Conseqently [sic], 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\ 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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    The Exchange believes that providing a transition period to comply 
with the internal audit function requirement to companies listing in 
connection with their IPO, as new registrants or by mean of a carve-out 
or spin-off transaction does not 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 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 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 notes 
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. In 
addition, many such companies appoint a number of new directors at the 
time of listing to comply with NYSE independence requirements. 
Frequently, a newly-listed company will appoint a completely new audit 
committee on the date of listing. As the audit committee has an 
oversight role with respect to internal audit and risk management, it 
is appropriate for that newly-constituted committee to have a 
significant role in the design and implementation of the company's 
internal audit function. 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.
    Given the limited scope of the proposed transition provision and 
the fact that other national securities exchanges do not have 
comparable rules, the Exchange believes that the extension of the 
transition provision to IPOs, new registrants, carve-outs and spin-offs 
is consistent with the protection of investors and the public interest. 
Moreover, given that any company which would be able to avail itself of 
the proposed transition could list on Nasdaq without ever having to 
comply with an internal audit requirement, the Exchange believes 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. After adoption of the proposed 
amendment, all companies that are subject to Section 303A.07 would 
continue to be required to have an internal audit function no later 
than one year after their listing

[[Page 40818]]

date. The Exchange proposes to amend Section 303A.07 to include a 
sentence explicitly stating this fact.
    The Exchange notes that there are several provisions in Section 
303A.07 that set forth duties of the audit committee with respect to 
the internal audit function. The Exchange proposes 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, new registrants, transfers from another national securities 
exchange, carve-outs and spin-offs. The proposed amendments are as 
follows:
     Section 303A.07(b)(i)(A) provides 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 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 charter must provide that the 
committee will assist board oversight of the design and implementation 
of the internal audit function) [sic].
     Section 303A.07(b)(i)(E) provides that the audit 
committee's charter must provide that the committee will meet 
separately, periodically, with management, with internal auditors (or 
other personnel responsible for the internal audit function) and with 
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 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) provides that the audit 
committee's charter must 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 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, the review should include discussion of management's plans 
with respect to the responsibilities, budget and staffing of the 
internal audit function and its plans for the implementation of the 
internal audit function.
     Section 303A.07(b)(i)(H) provides 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 committee should review with 
the board management's activities with respect to the design and 
implementation of the internal audit function.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \6\ of the Securities Exchange Act of 1934 (the 
``Act''), in general, and furthers the objectives of Section 6(b)(5) of 
the Act,\7\ in particular in that it is designed to promote just and 
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. The Exchange believes that 
the proposed amendment is consistent with the investor protection 
objectives of Section 6(b)(5) of the Act in that the proposed amendment 
would provide an appropriate transition period to comply with the 
internal audit requirement to companies listing in connection with an 
IPO, as a new registrant, 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. The Exchange notes that during any 
transition period the audit committee would continue to have a role in 
overseeing the listed company's financial systems and internal controls 
and would also be involved in overseeing the design and implementation 
of the company's internal audit function during that period.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act, as it simply provides a 
transition period for newly-listed companies to comply with the 
Exchange's internal audit requirement.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSE-2013-40 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2013-40. This file 
number should be included on the subject line if email is used.

[[Page 40819]]

    To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Copies of such filing also will be available for inspection and copying 
at the principal offices of NYSE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSE-2013-40, and should be submitted on or before July 
29, 2013.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-16289 Filed 7-5-13; 8:45 am]
BILLING CODE 8011-01-P