On 25 August 2008, the Australian Securities & Investments Commission ("ASIC") together with the Australian Minister for Superannuation and Corporate Law, executed a Mutual Recognition Arrangement ("MRA") with ASIC's US counterpart, the United States Securities and Exchange Commission ("SEC"). The MRA is expected to significantly reduce requirements for Australian entities wishing to offer securities to US investors. The agreement follows similar agreements that Australia has signed with New Zealand and Hong Kong authorities that are intended to establish closer links with their respective financial markets.
The purpose of the MRA is to expand the benefits to investors of broader access to US and Australian securities markets whilst maintaining respective domestic protections afforded to investors from those jurisdictions. To this end, ASIC and SEC have agreed to consider applications for exemptions from the rules governing the offering of securities to foreign persons, that are made by market participants based in the other's jurisdiction, such as brokers, asset managers and advisory firms.
The exemptions will initially only be granted to:
- the Australian Securities Exchange ("ASX") where it seeks to do business with US investors, through US brokers, in respect of Australian equity or debt securities listed on the ASX ("Australian Investments");
- Australian brokers seeking to do business with US qualified investors in respect of Australian Investments;
- US stock exchanges seeking to do business with Australian investors, through Australian brokers, in respect of US equity or debt securities listed on a US stock exchange ("US Investments"); and
- US brokers seeking to do business with Australian wholesale clients in respect of US Investments.
Australian brokers that are granted an exemption will be required to provide US investors with a risk disclosure statement to the effect that the Australian broker and any Australian Investment is not subject to direct SEC oversight and different laws apply. Similarly, US brokers will need to advise Australian investors that US Investments are not subject to direct oversight by ASIC.
Exemptions granted by ASIC and SEC may be subject to certain terms and conditions. However, all exemptions will require the relevant applicant to include a notice to investors in the jurisdiction from which exemptive relief is sought, to the effect that the exempted entity generally is not regulated in that jurisdiction, but is subject to the laws and regulations of its home country. Further, no exemption will constitute any waiver of US anti-fraud protections or the Australian market "misconduct" provisions.
The arrangements are intended to continue for a period of five years after which time they will be reviewed by ASIC and SEC.
In connection with the execution of the MRA, ASIC and SEC have also signed Memoranda of Understanding ("MOUs") concerning the consultation, co-operation and the exchange of information related to:
- market oversight;
- supervision of financial services firms; and
- enforcement of securities laws.
Under the MOUs, ASIC and SEC have agreed to:
1. regularly consult with each other regarding the operation of the MRA as well as on general supervisory developments and issues relevant to the operations, activities and regulation of entities that are granted an exemption;
2. inform each other of pending regulatory changes that may have a significant impact on the operations or activities of entities involved in financial services that are authorised or registered with both ASIC and SEC and assist each other in relation to "on-site" visits of such entities; and
3. assist each other in relation to:
(i) securing compliance by financial services entities with applicable Australian and US securities laws and regulations; and
(ii) freezing assets in its jurisdiction that constitute proceeds of a possible violation of applicable laws or regulations in the other's jurisdiction and facilitating restitution to investors.
Whilst the MRA may increase and assist in capital flows between Australia and the US, certain limitations and restrictions remain. For example, relief is not provided in respect of initial public offerings or unlisted managed investments schemes. It is also questionable as to whether relief will be granted for listed managed investment schemes and derivative instruments. Australian applicants that request relief pursuant to the MRA will be required to be an ASX market participant in addition to holding an Australian financial services licence.
However, the MRA may prove to be particularly useful for Australian brokers and underwriters wishing to market Australian Investments to US investors generally or to specific US institutions.
The practical effect of the MRA will not be known until ASIC and SEC formalise the process for relief applications and will also depend upon how the arrangements are implemented and developed over time. The process for relief applications is expected to be provided by ASIC in early 2009.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.