December 2012

Title I of the JOBS Act mandated that a study be conducted on the impact of decimalization.  This study was delivered earlier in the year, and the SEC announced that it would call for a roundtable to discuss the impact of decimalization and consider alternatives.  The roundtable will be held at the SEC on February 5, and will consist of three panels.  The first panel will consider the impact of tick sizes on small and mid-sized companies, the economic consequences of increasing or decreasing minimum tick sizes, and whether other policy alternatives might better address concerns raised by the JOBS Act.  The second panel will address the impact of tick sizes on the securities market generally.  The third panel will address potential methods for analysis of the issues, including a pilot study.  Electronic or paper submissions may be submitted to the SEC.

On December 17, 2012, the SEC issued an order granting approval of the Public Company Accounting Oversight Board’s Auditing Standard No. 16, “Communications with Audit Committees,” and related and transitional amendments to PCAOB.  Auditing Standard No. 16 will replace the temporary auditing standard regarding auditor communications with the audit committee that the PCAOB adopted shortly after it was formed. The new auditing standard will be effective for audits of financial statements with fiscal years beginning on or after December 15, 2012.

The approval of Auditing Standard No. 16 represents the first time that the SEC has used its authority under the JOBS Act to determine if a new auditing standard will apply to audits of emerging growth companies (“EGCs”). Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as amended by Section 104 of the JOBS Act, provides that any additional rules adopted by the PCAOB subsequent to April 5, 2012 do not apply to the audits of EGCs, unless the Commission determines that the application of such additional requirements is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.

After considering all of those factors, the SEC found that applying Auditing Standard No. 16 to audits of EGCs is necessary or appropriate in the public interest.  In making this determination, the SEC considered the PCAOB’s EGC analysis, which included discussions of: (1) the background of and reasons for the new standard; (2) the PCAOB’s approach to developing the new standard, including consideration of alternatives; (3) key changes and improvements from existing audit committee communication requirements; and (4) characteristics of EGCs and economic considerations.  Only one commenter, the U.S. Chamber of Commerce, commented on the EGC analysis, and the SEC specifically responded to the points made in that comment letter.  The Chamber raised concerns about the PCAOB’s EGC analysis, focusing in particular on the substance and form of the PCAOB’s EGC analysis and whether it was sufficient to form a basis for the SEC’s EGC determination

In determining that Auditing Standard No. 16 should apply to EGCs, the SEC noted that the EGC determination does not require the Commission to overcome a “presumption” that a PCAOB proposed rule should not apply to audits of EGCs. Rather, the statute sets forth a predicate finding that the SEC must make, after considering specified factors, in order for the rule to be approved.

In a recent update regarding the last meeting of the FINRA Board of Governors (see http://www.finra.org/Industry/Regulation/Guidance/CommunicationstoFirms/P197425), FINRA noted that the Board had authorized FINRA to  issue an interim form to seek essential information from prospective funding portals intending to apply for membership with FINRA pursuant to the JOBS Act.  Funding portals would file the interim form with FINRA voluntarily until final SEC and FINRA rules governing funding portals are in place.

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Earlier this week, FINRA Rule 5123 relating to private placements became effective, and FINRA released a set of FAQs (see http://www.finra.org/Industry/Compliance/RegulatoryFilings/PrivatePlacements/FAQ/index.htm) to provide market participants with additional guidance.  The FAQs clarify that only private placements that are made to institutional accredited investors are exempt from the filing requirements, while those made to accredited investors that are natural persons are not exempt.  FINRA notes that member firms will not be required to file pursuant to Rule 5123 if they participate in crowdfunding offerings.

Recently, Congressmen Scott Garrett, Kevin McCarthy and Patrick McHenry wrote to urge Chairman Schapiro to consider, in connection with the SEC’s Rule 506 rulemaking, the regulatory burden that may be imposed by a complex investor verification process and noted that lawmakers did not contemplate a burdensome verification process when the JOBS Act was being considered.  The Congressmen, of course, noted the need to balance investor protection concerns with the mandate to promote capital formation.  The letter can be accessed from this link http://www.knowledgemosaic.com/ResourceCenter/20121120-Garrett-McCarthy-McHenry-Letter-to-Schapiro.pdf.

The SEC announced that its staff will host a roundtable early next year to discuss the impact of decimal-based stock trading on small and mid-sized companies, market professionals, investors, and U.S. securities markets.  The roundtable will be held on Feb. 5 at the SEC’s Washington, D.C., headquarters, and will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued shortly.  See the release at http://www.sec.gov/news/press/2012/2012-250.htm.