NYSE Proposes to Move to Only Web site Disclosure of Listing Application Materials & to Otherwise Streamline its Listing Application Process; Your Auditors Will Probe Deeper into Related Party Transactions; Status of Challenge to Conflict Minerals Rule; Digging DeeperSEC Issues FAQs Regarding the Conflict Minerals Rule

NYSE Proposes to Move to Only Web site Disclosure of Listing Application Materials & to Otherwise Streamline its Listing Application Process

It has been a long-standing practice of the New York Stock Exchange (NYSE) to post on its Web site the forms of the documents required to be submitted in connection with the NYSE listing applications. On April 30, the NYSE filed proposed rule changes to its Listed Company Manual (Manual), which, if adopted, will result in the Manual sections containing the listing application materials being deleted, and updated listing application materials will be posted only on the NYSE’s Web site.

Although the NYSE amends its Manual from time to time, forms of listing agreements contained in the Manual have not always been amended to reflect changes made to the NYSE listing documents. Some provisions in the listing agreements contained in the Manual are obsolete. The NYSE proposes to remove from the Manual (i) each of the agreements set forth in Sections 901.01 through 901.05; (ii) the form of original listing application contained in §903.01; and (iii) the form of supplemental listing application contained in § 903.02.

In the event that in the future the NYSE makes any substantive changes to those documents that are being removed from the Manual, it will submit a rule filing to the U.S. Securities and Exchange Commission (SEC) to obtain approval of such changes, except for typographical or stylistic changes. The NYSE also plans to maintain all historical versions of those documents on its Web site after changes have been made, so that it will be possible to review how each document has changed over time.

In addition, the NYSE proposes to state certain requirements, which it has been imposing as a matter of practice, in the Manual to add transparency to the listing process. For example, the NYSE proposes to include in the Manual a new § 107.00, Financial Disclosure and Other Information Requirements, which will contain the following requirements, among others:

  • Section 107.03 (SEC Compliance): No security shall be approved for listing if the issuer has not for the 12 months immediately preceding the date of listing filed on a timely basis all periodic reports required to be filed with the SEC or Other Regulatory Authority or the security is suspended from trading by the SEC pursuant to § 12(k) of the Exchange Act.
  • Section 107.04 (Exchange Information Requests): The NYSE may request any information or documentation, public or nonpublic, deemed necessary to make a determination regarding a security’s initial listing, including, but not limited to, any material provided to or received from the SEC or Other Regulatory Authority. A company’s security may be denied listing if the company fails to provide such information within a reasonable period of time or if any communication to the NYSE contains a material misrepresentation or omits material information necessary to make the communication to the NYSE not misleading.

The NYSE also proposes to no longer require the following supporting documents in connection with an original listing application (see Section 702.04):

  • Stock Distribution Schedule (the stock distribution schedule requirement is obsolete because the NYSE obtains the distribution information it needs from the applicant’s public filings and from its transfer agent).
  • Certificate of Transfer Agent/Certificate of Registrar (the information that the NYSE needs about the applicant’s outstanding shares is available in its prospectus or periodic SEC reports, as well as the report of the applicant’s outstanding shares that will be required to be delivered to the Exchange once a quarter after listing).
  • Notice of Availability of Stock Certificates (all transactions in listed securities in the national market system are conducted electronically through the Depository Trust & Clearing Corp. [DTCC]).
  • Prospectus (final prospectuses are publicly available on the SEC’s Web site).
  • Financial Statements (financial statements are included in the applicant’s SEC filings which are publicly available on the SEC’s Web site).

Your Auditors Will Probe Deeper into Related Party Transactions

On May 7, the Public Company Accounting Oversight Board (PCAOB) reproposed an auditing standard, Related Parties, as well as amendments to certain PCAOB auditing standards regarding significant unusual transactions and other related amendments to PCAOB auditing standards. If adopted, the reproposed auditing standard would supersede the PCAOB’s auditing standard AU sec. 334, Related Parties, which was issued in 1983. The reproposed standard and amendments would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after December 15, 2013.

Generally, under the reproposed standard, the auditor should engage in a detailed analysis of transactions with related parties and inquire of management regarding:

  • The names of the company’s related parties during the period under audit, including changes from the prior period;
  • Background information concerning the related parties (for example, physical location, industry, size, and extent of operations);
  • The nature of any relationships, including ownership structure, between the company and its related parties;
  • The transactions entered into, or terminated, with its related parties during the period under audit and the terms and business purposes (or the lack thereof) of such transactions;
  • The business purpose for entering into a transaction with a related party versus an unrelated party;
  • Any related party transactions that have not been authorized and approved in accordance with the company’s established policies or procedures regarding the authorization and approval of transactions with related parties; and
  • Any related party transactions for which exceptions to the company’s established policies or procedures were granted and the reasons for granting those exceptions.

In addition to obtaining information regarding related party transactions from management, the auditor should inquire of others within the company regarding their knowledge of the foregoing matters. The auditor is expected to identify others within the company to whom inquiries should be directed, and determine the extent of such inquires, by considering whether such individuals are likely to have knowledge regarding such matters as:

  • The company’s related parties or relationships or transactions with related parties;
  • The company’s controls over relationships or transactions with related parties; and
  • The existence of related parties or relationships or transactions with related parties previously undisclosed to the auditor.

The audit committee will also be questioned by the auditor regarding:

  • The audit committee’s understanding of the company’s relationships and transactions with related parties that are significant to the company; and
  • Whether any member of the audit committee has concerns regarding relationships or transactions with related parties and, if so, the substance of those concerns.

In connection with the audit, the auditor should communicate to the audit committee the results of the auditor’s evaluation of the company’s identification of, accounting for, and disclosure of its relationships and transactions with related parties, as well as other significant matters arising from the audit regarding the company’s relationships and transactions with related parties including, but not limited to:

  • The identification of related parties or relationships or transactions with related parties that were previously undisclosed to the auditor;
  • The identification of significant related party transactions that have not been authorized or approved in accordance with the company’s established policies or procedures;
  • The identification of significant related party transactions for which exceptions to the company’s established policies or procedures were granted;
  • The inclusion of a statement in the financial statements that a transaction with a related party was conducted on terms equivalent to those prevailing in an arm’s length transaction and the evidence obtained by the auditor to support or contradict such an assertion; and
  • The identification of significant related party transactions that appear to the auditor to lack a business purpose.

Status of Challenge to Conflict Minerals Rule

In October 2012, a group of business organizations filed suit in the U.S. Court of Appeals for the District of Columbia challenging the SEC’s conflict minerals rule and § 1502 of the Dodd-Frank Act. The petitioners requested that the conflict minerals rule be modified or set aside in whole or in part. The litigation challenges the conflict minerals rule, which had been finalized by the SEC in August 2012, on several grounds, including the following:

  • The SEC failed to properly evaluate the economic effects of the rule;
  • The SEC’s failure to adopt a de minimus exception to the conflict minerals rule was erroneous, arbitrary and capricious or an abuse of discretion;
  • The SEC’s interpretation of § 1502 as including nonmanufacturers who “contract to manufacture” products was erroneous, arbitrary and capricious or an abuse of discretion;
  • The SEC’s interpretation of § 1502 as covering companies that have “reason to believe” their conflict minerals “may have originated” in the covered countries was erroneous, arbitrary and capricious or an abuse of discretion; and
  • Section 1502 compels speech in violation of the First Amendment to the U.S. Constitution.

On April 30, 2013, the petitioners requested that the Court of Appeals transfer the conflict minerals litigation to the U.S. District Court for the District of Columbia. On May 2, the U.S. Court of Appeals granted petitioners’ motion to transfer. This motion to transfer followed the transfer by the U.S. Court of Appeals of a similar case (related to a challenge to the resource extraction rule) in which the U.S. Court of Appeals determined that it lacked jurisdiction to hear such case. The petitioners requested the transfer in hopes that such a transfer would help to avoid delay in resolving the case. Nevertheless, this transfer may cause a delay in a final decision in the case. The parties are scheduled to appear on July 1, 2013, for a motions hearing on motions for summary judgment. Meanwhile, public companies should continue in their efforts to comply with the conflict mineral rules.

Digging DeeperSEC Issues FAQs Regarding the Conflict Minerals Rule

On May 30, the staff of the SEC issued longawaited FAQs related to the conflict mineral rules. The FAQs provide guidance on various aspects of the conflict mineral rules including the following:

  • The conflict mineral rules apply to all issuers that file reports with the SEC under Exchange Act Sections 13(a) or 15 (d), whether or not the issuer is required to file such reports. Accordingly, the rules apply to voluntary filers. Registered investment companies that are required to file reports pursuant to Rule 30d-1 under the Investment Company Act are not subject to the conflict mineral rules.
  • An issuer that only engages in activities customarily associated with mining is not considered to be manufacturing those minerals.
  • An issuer must determine the origin of conflict minerals, and make any required disclosures regarding conflict minerals, for itself and all of its consolidated subsidiaries.
  • Etching or otherwise marking a generic product that is manufactured by a third party, with a logo, serial number, or other identifier is not considered to be “contracting to manufacture.”
  • An issuer would be required to conduct a reasonable country of origin inquiry with respect to conflict minerals included in generic components included in products it manufactures or contracts to manufacture. Moreover, the staff stated that there is no distinction between the components of a product that an issuer directly manufactures or contracts to manufacture and the generic ones it purchases to include in a product.
  • Only a conflict mineral that is contained in a product would be considered “necessary to the functionality or production” of the product. The packaging or container sold with a product is not considered to be part of the product. This conclusion is true even if a product’s package or container is necessary to preserve the usability of that product up to and following the product’s purchase. If, however, an issuer manufactures and sells packaging or containers independent of the product, the packaging or containers, in that circumstance, would be considered a product.
  • Issuers that manufacture or contract for the manufacturing of equipment they use in providing a service they sell are not required to report on the conflict minerals in that equipment. (i.e. cruise ship operators that manufacture or contract to manufacture cruise ships) The staff would not object if issuers did not file reports on Form SD regarding the conflict minerals in the equipment that they manufacture or contract to have manufactured if that equipment is used for the service provided by the issuer and the equipment is retained by the service provider, is required to be returned to the service provider, or is intended to be abandoned by the customer following the terms of the service. Item 1.01(a) of Form SD requires issuers only to report on conflict minerals that are necessary to the functionality or production of “products” hey manufacture or contract to have manufactured, and the staff does not interpret equipment used to provide services to be “products” under the rule.
  • If (i) an issuer manufactures or contracts to have manufactured tools, machines, or other equipment (which contain conflict minerals) which are used by the issuer in the manufacture of products; and (ii) after using such tools, machines, or other equipment the issuer subsequently sells such equipment, the issuer will not be required to file a report on Form SD regarding the conflict minerals in such equipment. The tools, machines, or other equipment are not products of that issuer, and the staff will not view their later entry into the stream of commerce as transforming them into products of that issuer.
  • Item 1.01(c)(2) of Form SD requires an issuer that manufactures products or contracts for products to be manufactured that have not been found to be “DRC conflict free” or that are “DRC conflict undeterminable” to provide a description of those products. The rule permits an issuer to describe its products based on its own facts and circumstances because the issuer is in the best position to know its products and to describe them in terms commonly understood within its industry. An issuer is not required to describe its products using model numbers. Regardless of the manner by which an issuer describes its products, however, the description in the Conflict Minerals Report filed with Form SD must state clearly that the products “have not been found to be ‘DRC conflict free’” or are “DRC conflict undeterminable,” as applicable.
  • An issuer that determines that the products it manufactures or contracts to manufacture contain conflict minerals from the Democratic Republic of the Congo or an adjoining country, but the products are “DRC conflict free,” is required to file a Form SD with a Conflict Minerals Report and obtain an independent private sector audit of the Conflict Minerals Report. The issuer, however, is not required to disclose the products containing those conflict minerals in its Conflict Minerals Report or provide certain other disclosures specified in Item 1.01(c) (2) of Form SD because those products are “DRC conflict free.”
  • The staff will not object if an issuer that conducts an initial public offering starts reporting under the conflict mineral rules for the first reporting calendar year that begins no sooner than eight months after the effective date of its initial public offering registration statement.
  • The failure to timely file a Form SD regarding conflict minerals will not cause an issuer to lose eligibility to use Form S-3. In determining eligibility for use of Form S-3, the requirement that the registrant has filed in a timely manner all reports and materials required to be filed during the prior 12 calendar months refers only to Exchange Act § 13(a) or 15(d) reports and Exchange Act Section 14(a) and 14(c) materials. Form SD regarding conflict minerals is required to be filed under Exchange Act Section 13(p). Therefore, the filing of Form SD regarding conflict minerals does not impact an issuer’s eligibility to use Form S-3.

©Reprinted from the Wall Street Lawyer. Copyright © 2013 Thomson Reuters/West. For more information about this publication, please visit www.west.thomson.com.