Australia: Australia/US Mutual Recognition Arrangement

US & Australia Agree Framework For Simplified Cross-Border Securities Activity
Last Updated: 15 September 2008
Article by Catherine Merity

Early last week, the US Securities and Exchange Commission (SEC) and Australian authorities reached an agreement, referred to as the Mutual Recognition Arrangement, to allow certain broker-dealers and exchanges to operate in both jurisdictions, generally without the need for them to be separately regulated in each of the countries. The Mutual Recognition Arrangement is the first of its kind involving the US, and the results of its implementation over the coming months will be eagerly watched by market participants.


In an attempt to enhance Australian and US investors' ability to access each other's markets, under the Mutual Recognition Arrangement, the SEC and Australian authorities have agreed to consider applications from exchanges and certain broker-dealers in each other's country for exemptive relief that will permit them to conduct specified activities in the US or Australia (as applicable) whilst being principally regulated only by their home country regulators. It is expected that, once implemented, such exemptions will permit certain US exchanges and broker-dealers regulated by the SEC to carry on business with certain Australian wholesale investors and firms without being subject to most of the regulation by the Australian Securities and Investments Commission (ASIC). Similarly, the Australian Securities Exchange and broker-dealers regulated by ASIC will be able to offer their services to certain US investors and firms without being subject to most SEC regulation.

Such exemptions will be subject to any conditions imposed by Australian authorities or the SEC, including the requirement that specified notices and risk disclosure statements be given to investors under certain circumstances as well as any other requirements imposed at the time an order is granted. Each country will retain jurisdiction over any violation of their respective anti-fraud and market misconduct regimes notwithstanding the Mutual Recognition Arrangement.

The first applications for exemptions are expected to be processed and implemented by the SEC and Australian authorities in early 2009.


The Mutual Recognition Arrangement is aimed at increasing liquidity in the Australian market by providing easier access for US investors to Australian listed securities. In addition, the Mutual Recognition Arrangement opens up the possibility that for the fi rst time, the Australian Securities Exchange could do business directly with US investors, including retail investors.

Moreover, the Mutual Recognition Arrangement may significantly simplify the requirements for Australian broker-dealers that wish to carry out transactions in Australian-listed Australian debt and equity securities to certain US institutional and sophisticated investors.

Currently, to carry out business in the US, a broker-dealer must register as a broker-dealer with the SEC or satisfy the requirements for the exemptive relief provided by Rule 15a-6, including the requirements that transactions be limited to certain institutional and sophisticated investors and that certain activities be 'chaperoned' by a registered US broker-dealer. Those broker-dealers that apply for and receive exemptive relief under the Mutual Recognition Arrangement will instead simply need to comply with the Australian broker-dealer rules for those activities covered by the exemptive relief.

However, the Mutual Recognition Arrangement does not appear to cover certain broker-dealer activities in the US, including transactions in unlisted securities, sales and marketing in connection with IPOs and other primary offerings, and transactions in non-Australian securities that are listed on an Australian exchange. While it may be possible to request broader exemptive relief than contemplated by the Mutual Recognition Arrangement, it appears that for many activities, Australian broker-dealers may need to continue to rely on Rule 15a-6, to which the SEC has recently proposed signifi cant relaxations.

Similarly, where US broker-dealers obtain an exemption under this arrangement, the requirements for doing business with Australian investors in US debt and equity securities listed on a US exchange will be simplifi ed, reducing red tape and compliance costs, as they will primarily only have to comply with regulations in their home jurisdiction rather than being required to obtain an Australian fi nancial services licence from ASIC. This will, however, initially only extend to US brokers seeking to do business with Australian professional and sophisticated investors and only with respect to US debt or equity securities listed on a US exchange.

The arrangement appears to also be limited to secondary trading in such listed securities and does not extend to recognition by the SEC of prospectuses or product disclosure statements issued by Australian entities or IPOs or other primary offerings.

This is the third mutual recognition agreement entered into by the Australian authorities, following agreements with New Zealand and Hong Kong earlier this year.


As an adjunct to the Mutual Recognition Arrangement, the SEC and the Australian regulator also entered into two Memorandums of Understanding (MOUs) which will broadly apply to the US and Australian markets regardless of whether a particular entity is mutually recognised under the Mutual Recognition Arrangement. The MOUs deal with the exchange of information in the contexts of market oversight and supervision and the enforcement of securities laws and seek to create a closer relationship between the two jurisdictions. It is expected that the MOUs will allow for considerably greater regulatory and enforcement cooperation and coordination between the US and Australia.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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