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Allens Arthur Robinson

Focus: Capital Markets – September 2008

Mutual recognition of Australian and US securities markets

In brief: Australia and the United States have announced a mutual recognition arrangement to reduce red tape and compliance costs for Australian and US securities exchanges, brokers and dealers operating in each other's markets. Partner Steve Clifford (view CV) and Articled Clerk Brendan Ferguson examine the proposed regime and consider the likely benefits for US and Australian investors.

How does it affect you?

  • Australian brokers and dealers will be able to deal directly with US qualified investors without being subject to the US regulatory system, which is likely to increase direct US investment in Australian listed companies.
  • US brokers and dealers will be able to deal directly with Australian wholesale investors and financial firms without being subject to the Australian regulatory system, which will reduce the obstacles to direct Australian investment into US markets.
  • The exemptions necessary for the new arrangements to take effect are expected to be granted by the SEC and the Australian authorities in early 2009.
  • ASIC and the SEC have agreed to increase cooperation in enforcement and market supervisory activities for the added protection of investors in both jurisdictions.

Overview

Australia and the United States have announced an arrangement of mutual recognition with respect to securities regulation. The US Securities and Exchange Commission (SEC) and the Australian Securities and Investments Commission (ASIC), together with the Australian Minister for Superannuation and Corporate Law, have entered into the arrangement, which establishes a framework for regulatory exemptions permitting US and Australian securities exchanges, brokers and dealers to operate in both jurisdictions without being subject to each country's regulatory regime. The new framework recognises that while the regulatory and investor protection regimes in Australia and the US are not identical, they do provide equivalent safeguards.

It is anticipated that the arrangement will reduce the barriers that US and Australian investors face presently when investing in each other's markets. The arrangement is complemented by two memoranda of understanding (together, the MOUs) concerning consultation, cooperation and the exchange of information on market oversight and the supervision of financial services firms (the Supervisory MOU) and the enforcement of securities laws (the Enforcement MOU).

Australia has previously entered into mutual recognition arrangements with New Zealand – regarding securities offerings – and Hong Kong – on the public offering of collective investment schemes to retail investors. However, Australia is the first jurisdiction with which the US has entered into any such arrangement. The Director of the SEC's Office of International Affairs, Ethiopis Tafara, described the arrangement as 'a pilot exercise in building a cross-border regulatory infrastructure to address the increasing globalisation of our securities markets'.

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Mutual recognition arrangement

Item two of the mutual recognition arrangement defines the arrangement's purpose as being 'to continue expanding the benefits to investors of broader access to US and Australian securities markets in a manner that ensures the significant protections afforded to investors under each nation's system are maintained and enhanced'.

The arrangement provides for the SEC, ASIC and the Australian Government to consider exemption applications by certain market participants, which would, if granted:

  • allow an eligible US securities exchange, broker or dealer (regulated by the SEC) to do business with certain Australian investors in US equity or debt securities, without being subject to the Australian regulatory system (eg the Corporations Act 2001, ASIC Act 2001 and respective regulations under that legislation); or
  • allow an eligible Australian market, broker or dealer (regulated by ASIC) to do business with certain US investors in Australian equity or debt securities, without being subject to the US regulatory system.

Brokers and dealers from either country operating under such an exemption will be required to provide risk disclosure statements to foreign investors explaining that they are conducting transactions with a foreign entity which is not subject to direct oversight by that investor's domestic regulator.

The arrangement is designed to reduce red tape and compliance costs as brokers and markets in each country will only be subject to a single regulatory system with which they are already familiar. However, it is important to note that both the SEC and ASIC will retain jurisdiction to pursue violations of their respective anti-fraud and market misconduct laws.

The arrangement provides for periodic consultation between the SEC and ASIC regarding developments and issues related to the operation of the arrangement, and remains subject to periodic review and renewal every five years.

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Memoranda of understanding

The MOUs entered into by the SEC and ASIC refer to the importance of enhancing SEC and ASIC cooperation in enforcement and supervisory efforts, having regard to escalating cross-border, financial services operations and the globalisation of world markets. 

While providing assurances regarding the use and confidential treatment of non-public information, the Supervisory MOU and the Enforcement MOU respectively express the intent of the two authorities to:

  • consult, cooperate and exchange information in connection with the supervision of financial services firms and the oversight of markets in each jurisdiction, including with respect to entities exempted under the mutual recognition arrangement; and
  • exchange information in relation to, and mutually assist with, securing and enforcing compliance with each regulatory regime.

So, while the MOUs serve to complement the mutual recognition arrangement, they are intended to achieve a different objective. The mutual recognition arrangement seeks to reduce barriers that US and Australian investors now face when investing in each other's markets, whereas the MOUs serve to bolster the protections afforded to investors. It follows that the enhanced cooperation between the SEC and ASIC, as envisaged by the MOUs, will apply broadly to all US and Australian market activity and not just with respect to those entities seeking relief under the mutual recognition arrangement.

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The mutual recognition arrangement in practice

No details have been provided at this stage on the implementation of the new arrangement. For example, there is little in the way of guidance as to how an entity should apply for an exemption, and while the arrangement states that the SEC and ASIC will apply appropriate terms and conditions to any relief granted, aside from the requirement for a risk disclosure statement, the likely nature of any such conditions remains uncertain. Furthermore, there has been no indication as to how the arrangement will interact with the existing class order licensing relief granted to SEC-regulated entities providing financial services to wholesale clients in Australia (CO 03/1100). 

What we do know is that the scope for mutual recognition under the arrangement is currently limited. At present:

  • the only eligible Australian market is the Australian Stock Exchange;
  • eligible Australian brokers and dealers are confined to those who hold an Australian financial services licence and participate in an Australian financial market;
  • the exemptions do not apply to registered investment advisers, unlike ASIC Class Order (CO 03/1100);
  • exemptions will only apply in relation to listed 'equity or debt securities'; and
  • the arrangement does not extend to collective investment schemes (except, possibly, those that are listed).

However, the potential for expanding the scope of the mutual recognition in future is expressly provided for within the arrangement and has been encouraged by the Investment and Financial Services Association in Australia.

Entities wishing to take advantage of the new arrangements will be required to apply to the relevant regulator for an exemption. The SEC and the Australian authorities are now considering exemption applications and it is expected that the process of considering initial applications will be completed by early 2009.

For further information, please contact:

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