NYSE Proposes New Global Market Capitalization Test for Listing Companies

On September 30, 2014, the SEC published an NYSE amendment, effective as of such publication, to adopt a new initial listing standard, and to eliminate all but one of the current NYSE initial listing standards, for US operating companies.

The amendment provides for a global market capitalization test to serve as a new initial listing standard for US operating companies. The global market capitalization test requires that a listing operating company have a minimum total global market capitalization of $200 million at the time of initial listing. A company that is already publicly traded at the time it applies to list on the NYSE must meet the $200 million global market capitalization requirement for at least 90 consecutive trading days immediately preceding the date on which it receives clearance to submit an application to list on the NYSE.

The amendment also eliminates four of the NYSE’s five current initial listing standards for US operating companies: (1) the valuation/revenue with cash flow test, (2) the pure valuation/revenue test, (3) the affiliated company test, and (4) the assets and equity test.

Despite the proposed global market capitalization test, companies listing must also meet both the existing distribution requirements of Section 102.01A, and the stock price and market value of publicly-held shares requirements of Section 102.01B, of the Listed Company Manual. In addition, companies listing under the proposed global market capitalization test must comply with all other applicable NYSE listing rules.

The notes relating to the amendment highlight that Nasdaq and Nasdaq Global Market have a competitive advantage over the NYSE under existing listing standards, particularly with respect to pre-revenue research and development companies. The amendment, and the implementation of the global market capitalization test, is the NYSE’s attempt to level the playing field.

Companies Listing on the NYSE Can Appoint an Internal Auditor Within a Year after an IPO

On August 22, 2013, the SEC approved the NYSE’s proposal that permits a company listing in conjunction with an IPO to comply with the internal audit function requirement of Section 303A.07(c) of the NYSE Listed Company Manual within one year of the listing date.  NYSE rules now require such company to have an internal audit function in place no later than the first anniversary of its listing date[1].  Previously, NYSE rules only required each listed company to have an internal audit function but did not provide any transition period for companies listing in connection with an IPO.  

The new one-year transition period for compliance with an internal audit function requirement expanded NYSE corporate governance provisions, to which a transition period applies in connection with an IPO.  Such provisions relate to the composition of the board of directors as well as the composition of the nominating, compensation and audit committees (see Section 303A.00). 

The NYSE believes that a transition period for establishing an internal audit function will make the company’s process of implementation of such function more effective and will reduce the costs it faces in its first year as a public company.  The NYSE also expects that this transition period would enable the company’s audit committee to play a significant role in the design and implementation of the company’s internal audit function. 

In case of a company availing itself of a one-year transition period with respect to its internal audit function, the audit committee must:

  • assist board oversight of the design and implementation of the internal audit function; and
  • meet periodically with the company personnel primarily responsible for the design and implementation of the internal audit function.

Once the company establishes its internal audit function, the audit committee must (i) assist board oversight of the performance of the company’s internal audit function, and (ii) meet periodically with internal auditors or other personnel responsible for the internal audit function.

In addition, if the listed company does not yet have an internal audit function because it is using the internal audit function transition period, the audit committee’s review with the independent auditor of any audit problems should include a 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.  Once the transition period is over, the audit committee’s review with the auditors should include a discussion of the responsibilities, budget and staffing of the company’s internal audit function.

The audit committee should also discuss with the board management’s activities with respect to the design and implementation of the internal audit function during the transition period, and after the transition period, the audit committee should review with the full board any issues that arise with respect to the performance of the internal audit function.

 Generally, a listed company must maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control, and the company can outsource an internal audit function to a third party service provider (other than the company’s independent auditor).   

 

 

 


[1] It is interesting to note that The NASDAQ Stock Market LLC (NASDAQ) does not have an internal audit function requirement.  Earlier this year, NASDAQ proposed, and later withdrew, an amendment to its listing requirements that each listed company establish and maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control.  The SEC received 42 comment letters on the proposal, and NASDAQ stated in its withdrawal that it was withdrawing the proposal to fully consider such comments and that it intends to file a revised proposal (see SEC Release No. 34-69792).