Foreign Private Issuer NYSE Audit Committee Requirements
The New York Stock Exchange (NYSE) corporate governance standards are contained in Section 303A of the NYSE Listed Company Manual. The NYSE corporate governance standards apply to all US companies that are listing or have listed equity securities on the NYSE (see NYSE Listed Company Manual). Foreign Private Issuers must comply with the audit committee standards in Rule 10A-3 of the Securities Exchange Act of 1934 (the “Exchange Act”).
Compliance with SEC Rules
Foreign Private Issuers must have an audit committee that complies with the requirements of Rule 10A-3 under the Exchange Act. Additionally, a Foreign private issuer must disclose how its corporate governance standards in its home country differ from the NYSE corporate governance requirements. Foreign private issuers that are subject to SEC Reporting Requirements and required to file a Form 20-F must disclose this corporate governance information in their Form 20-F report. All other foreign private issuers can provide this information on their websites or in annual reports filed with the SEC.
Foreign Private Issuer Audit Committee Members
The NYSE requires that a Foreign Private Issuer have an audit committee of at least three members (NYSE Section 303A.07). Each member of the audit committee of a Foreign Private Issuer is required to be “financially literate” or the member must become financially literate within a reasonable time after his or her appointment. The NYSE rules do not define “financially literate” and financial literacy is determined by the Company’s board of directors. NYSE rules require that at least one member of the audit committee have “accounting or related financial management expertise.”
Independence – Foreign Private Issuer Audit Committee
Under NYSE rules all members of the audit committee of a Foreign Private Issuer must meet the SEC’s independence requirements as well as the NYSE’s independence standards for all directors.
Audit Committee Charter
The NYSE requires that the audit committee of a Foreign Private Issuer have a written charter. The Foreign Private Issuer must its audit committee charter publicly available on its website, and must disclose this in its proxy statement.
The Audit Committee charter must include the following:
I. The purposes of the Audit Committee, which must at a minimum include:
(a) assisting the Foreign private Issuer’s board of director oversight of the company’s financial statements, legal and regulatory compliance, the auditors’ qualifications and independence and performance of the company’s internal audit department and auditors; and
(b) preparing the audit committee report required by Item 407(d)(3)(i) of Regulation S-K.
II. An annual self-evaluation of the audit committee’s performance
III. The Foreign Private Issuer’s audit committee’s responsibilities, which must at a minimum include:
(a) the requirements of Rule 10A-3 (see SEC Rules and Requirements);
(b) obtaining and reviewing an annual report by the company’s auditors on the auditors’ internal quality control procedures, any issues arising from their most recent internal quality control review or any other investigation of audits completed by the auditors and any relationships between the auditors and the company (this report assists the audit committee to evaluate the auditors’ qualifications and independence);
(c) reviewing and discussing the company’s financial statements and management’s discussion and analysis of financial condition and results of operations (MD&A) disclosure with management and the auditors;
(d) reviewing and discussing the company’s earnings releases and any financial information or earnings guidance given to financial analysts and credit rating agencies;
(e) reviewing and discussing the company’s risk assessment and risk management policies. This does not mean that the audit committee is responsible for overall risk assessment and management, but that the committee is involved in determining the processes by which this is done. However, the audit committee should discuss the company’s major financial risks and review the steps management has taken to monitor and control such exposures;
(f) holding separate meetings with management, the company’s auditors and the company’s internal audit department or third party provider (this ensures that the committee can effectively exercise its oversight duties);
(g) reviewing any audit problems or other issues and management’s responses with the auditors (this should include any disagreements between the auditors and management and any restrictions imposed by management on the auditors’ activities or access to company information);
(h) reviewing any major issues regarding accounting principles, presentation of financial statements, the company’s internal control over financial reporting or the effect of alternative GAAP methods on the financial statements and the impact of any regulatory or accounting initiatives or off-balance-sheet arrangements on the financial statements;
(i) setting specific policies for hiring employees or former employees of the company’s auditors; and
(j) reporting regularly to the board of directors any issues that arise regarding the company’s financial statements, legal and regulatory compliance, the auditors’ qualifications and independence and performance of the company’s internal audit department (or third party providers) and auditors.
Foreign Private issuers listing on the NYSE in connection with their IPOs are allowed phase in their compliance with the NYSE audit committee requirements. Foreign Private issuers are not required to have an audit committee with at least three independent directors at the time it applies for listing or upon completion of the IPO but the issuer must meet the following requirements:
• The Foreign Private Issuer must have at least one director on its audit committee, and at least one independent member of its audit committee, by the date its shares are listed on the NYSE.
• The Foreign Private Issuer must post its audit committee charter on its website by the earlier of the IPO closing date or five business days after the NYSE listing date.
• The Foreign Private Issuer must have at least two directors on the audit committee by 90 days after the NYSE listing date, and at least a majority of independent members on the committee by 90 days after the effective date of its registration statement.
• The Foreign Private Issuer must have at least three directors on its audit committee within one year of the NYSE listing and a fully independent audit committee within one year of the effective date of its registration statement.
If the company was not subject to SEC reporting requirements before the NYSE lising, it can have non-independent directors on its audit committee during the phase-in periods above.
The Foreign Private Issuers listing on the NYSE should attempt to comply with the NYSE requirements, despite the grace period, by completion of their IPOs. If a Foreign Private Issuer does not intend to satisfy the NYSE’s audit committee requirements before completion of its IPO then this information should be disclosed in the Issuer’s Form F-1 registration statement.
Companies applying for listing in connection with a carve-out or spin-off transaction, after emerging from bankruptcy, after failing to qualify as a foreign private issuer or that had earlier been registered under Section 12(b) or 12(g) of the Exchange Act also can phase in their compliance with the audit committee standards as described in more detail in Section 303A.00 of the NYSE Listed Company Manual.
The CEO of a listed company must certify to the NYSE annually that he is not aware of any company violations of the NYSE’s corporate governance standards. In addition, the CEO must notify the NYSE upon the discovery of any noncompliance with the NYSE’s corporate governance standards (Section 303A.12).
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