NASDAQ Withdraws Proposed Internal Audit Rule Citing Breadth of Comments; Plans to Resubmit

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On May 7, in light of the breadth and nature of comments received, NASDAQ withdrew its proposed new rule that would require listed companies to establish and maintain an internal audit function. The proposed rule was intended to provide management and the audit committee with ongoing assessments of risk management processes and internal controls. The function could be outsourced to a third party service provider, other than a company’s independent auditor. The rule proposed by NASDAQ was similar to a requirement adopted by the NYSE in 2003, but offered no exemptions, and followed a request from the SEC for NASDAQ to consider adopting a similar rule.

On May 7, in light of the breadth and nature of comments received, NASDAQ withdrew its proposed new rule that would require listed companies to establish and maintain an internal audit function. The proposed rule was intended to provide management and the audit committee with ongoing assessments of risk management processes and internal controls. The function could be outsourced to a third party service provider, other than a company’s independent auditor. The rule proposed by NASDAQ was similar to a requirement adopted by the NYSE in 2003, but offered no exemptions, and followed a request from the SEC for NASDAQ to consider adopting a similar rule.

NASDAQ filed the proposal on February 20 and opened a comment period to conclude on March 29, encouraging companies to express their views, specifically pertaining to anticipated costs and benefits, responsibilities assigned to the internal audit function, and categories of companies that may be appropriate to exempt from the requirement.

Of the 40 comments posted on the SEC’s website as of May 13, most opposed the rule, citing objections such as redundancies to current internal control processes, excessive costs and burdens for smaller companies that are less complex therefore rendering the function unnecessary, and many called for a market capitalization limit similar to the SOX 404(b) exemption. One letter went so far as to describe the process of developing new regulations as severely flawed, suggesting participation upfront by a cross-section of companies.

Of the 40 comments posted on the SEC’s website as of May 13, most opposed the rule, citing objections such as redundancies to current internal control processes, excessive costs and burdens for smaller companies that are less complex therefore rendering the function unnecessary, and many called for a market capitalization limit similar to the SOX 404(b) exemption. One letter went so far as to describe the process of developing new regulations as severely flawed, suggesting participation upfront by a cross-section of companies.

Others supported the rule but recommended modifications including defining the internal audit function more clearly, establishing a set of standards or principles to serve as a framework, requiring the internal audit function to report directly to the audit committee, and extending the time period for compliance beyond the December 31, 2013 deadline originally proposed.

NASDAQ intends to revise the proposed rule, taking the comments into account, and resubmit it to the SEC.


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