August 29, 2013

NYSE: IPO Companies Gain Transition Period to Meet Internal Audit Requirements

Here’s a blog from Davis Polk’s Ning Chiu:

Companies listing on the NYSE in connection with an IPO, carve-out or spinoff transaction will have a one-year transition period to comply with the NYSE internal audit requirements. The SEC approved the proposed NYSE rule change on August 22, 2013.

Section 303A.07(c) of the NYSE requires a listed company to 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. In July, NYSE proposed a one-year transition period for IPO, carve-out and spinoff companies to be consistent with the one-year transition period currently available to any company transferring from another national securities exchange.

Other national securities exchanges do not have a similar internal audit requirement, although Nasdaq had previously proposed adopting one. Nasdaq withdrew its proposal after comment letters to the SEC indicated a high degree of concern, as we previously discussed, primarily related to potential costs. According to one report, 40% of Nasdaq-listed companies with market capitalization between $75 million and $250 million do not have an internal audit function. Nasdaq is planning to resubmit the proposal.

Since the NYSE rules have specific requirements making the audit committee responsible for oversight of the internal audit function, several corresponding changes are being made to the audit committee standards, and the committee charter, for any company that wants to avail itself of this transition period, including:

– The audit committee will assist board oversight of the design and implementation of the internal audit function.
– The audit committee must meet periodically with the company personnel primarily responsible for the design and implementation of the internal audit function.
– The audit committee must review with the independent auditor 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.
– The audit committee should review with the board management’s activities with respect to the design and implementation of the internal audit function.

SEC Takes Oddly Aggressive Stance on Payment of Monetary Sanctions

Check out David Smyth’s blog for news on this front:

When Mary Jo White was installed as the SEC’s chair in April, I had little doubt she would be well-suited for her new role. She is extremely well regarded in the securities bar, and doubts about “ties to Wall Street” compromising her effectiveness seemed overblown to me. I wondered, though, whether her tenure would change the Commission dramatically from that of her predecessor, Mary Schapiro. But four months in, the record has tangible evidence of real changes. Since she’s arrived:

– She has announced, and implemented in the form of a case against Philip Falcone and Harbinger Capital Partners, a policy change that will in some settled cases compel defendants to admit wrongdoing;
– The SEC has re-committed itself to pursuing accounting fraud matters against public companies, and created a task force to root them out;
– She has pushed the staff to write rules mandated by the JOBS Act and actually lifted the general solicitation ban for offerings under new Rule 506(c).

Last week brought another example. On Friday, the SEC filed an action in the Eastern District of New York to enforce an administrative order requiring payment of monetary sanctions that was all of six days old.

The underlying case arose from an alleged fraud at a small hedge fund. According to the SEC, Anthony Vicidomine misappropriated $189,000 from the North East Capital Fund in the form of unearned “incentive fees” and used the money to pay his own personal expenses. Vicidomine also allegedly made misrepresentations about his own investment in the fund, his use of procedures to mitigate investors’ risk of loss, and an independent audit of the fund. Vicidimone and North East Capital settled their case with the SEC on August 16th with an order to pay $346,000 in monetary sanctions within three days.

As it turns out, the SEC wasn’t kidding. But Vicidimone didn’t pay the judgment in three days. He didn’t pay the judgment in four or even five days. On the sixth day, Mary Jo White’s SEC had had enough, and sued in Brooklyn federal court to put an end to that nonsense. As the Commission’s application said on Friday, “The deadline for payment has passed, yet Respondents have not paid a cent.”

I have to say, this seems odd to me for several reasons. First, the SEC frequently requires payments to be placed in escrow before approving settlements, though it must not have done so here. Second, while the guidelines can shift with different Commissioners, the SEC has sometimes waived financial penalties against defendants who truly cannot pay them. It’s not a popular policy within the SEC, but it can allow cases to be resolved more quickly when defendants are plainly tapped out and will not be able to cover the losses they’ve caused. Third, when payments have not been escrowed but are still compelled, the Commission typically gives ten days to send a check covering the amount.

I don’t think I’ve seen a case where the SEC gives three days to pay, sees nothing, and files an action in federal court six days later to enforce the judgment. It almost makes me wonder if the Commission is trying to send a signal: ignore our orders and we’ll sue you again and get a federal judge to sort out the mess.

Last week, the plaintiffs in the Delaware Chancery exclusive forum bylaw case – Boilermakers Local 154 Retirement Fund and Key West Police & Fire Pension Fund – filed a notice of appeal to the Delaware Supreme Court. No word on timing of the appeal process…

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– New Standards for Judicial Approval of Deferred Prosecution Agreements
– FASB Proposes Going Concern Disclosure
– New SEC Case Emphasizes Importance of Internal Controls
– Compliance Training: True Entertainment Rather Than Forced…
– “End-User Exception” for Swaps: Governance Action Items for Companies

– Broc Romanek