Originally published August 27, 2008

Keywords: SEC, mutual recognition agreement, Australian Securities and Investment Commission, ASIC, Superannuation and Corporate Law, securities markets, broker-dealer firms, Australian investors, Memoranda of Understanding, MOU, enhanced enforcement MOU

On August 25, 2008, the US Securities and Exchange Commission (SEC) entered into a mutual recognition arrangement with the Australian Securities and Investment Commission (ASIC) and the Australian Minister for Superannuation and Corporate Law. The bilateral mutual recognition arrangement is a first-of-its kind agreement under which the SEC and its Australian counterpart have agreed upon a protocol governing how certain Australian securities markets and broker-dealer firms may apply for exemptions to permit them to do business with investors in the United States. The protocol also contains a reciprocal mechanism for US exchanges and firms to do business with Australian investors.

This announcement marks the SEC's first concrete step toward mutual recognition, a concept that had been discussed among academics for years. The SEC's willingness to adopt a mutual recognition policy was always in doubt until very recently. That the agency's position might be about to change was presaged by an article written by Ethiopis Tafara, Director, SEC Office of International Affairs, in the Winter 2007 edition of the Harvard International Law Journal entitled "A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework," in which Mr. Tafara discussed what essential elements the SEC might require of a mutual recognition framework. A few months later, the SEC announced that it would seek to enter into cooperative arrangements with willing regulators that would permit mutual recognition of foreign registered broker-dealers and securities markets.

The SEC's March 24 press release contained a good historical overview of the SEC's efforts in the international arena. A few days thereafter, in a March 29 press release, the SEC announced that it had begun exploratory discussions about mutual recognition with Australian regulatory authorities. Proponents of mutual recognition have been curious to see what form any actual, final agreement might take. That wait is now over, but the significance of the new arrangement will depend on how it works in application.

The SEC and Australian authorities actually signed three separate agreements. In addition to the mutual recognition arrangement, the SEC and ASIC entered into two new Memoranda of Understanding (MOUs). One is a supervisory MOU that details the agencies' cooperation in market oversight and supervision of US and Australian financial services firms that are regulated by both the SEC and ASIC (dually regulated). The second is described by the SEC as an enhanced enforcement MOU that governs the agencies' mutual assistance and cooperation in enforcement investigations and actions.

Mutual Recognition Arrangement

The mutual recognition arrangement proposes to provide expanded benefits to US and Australian investors through broader access to both nations' securities markets while preserving the protections afforded to them under their home country's laws and regulations. Under the arrangement, each regulator agrees to permit financial markets, securities exchanges and broker-dealers that are licensed or registered in the reciprocating jurisdiction to do business with investors in their own jurisdiction.

In the case of financial markets and securities exchanges, each regulator has agreed to permit those markets or exchanges that are registered or licensed in the reciprocating jurisdiction to apply for an exemption (e.g., a US securities exchange applying to the ASIC) to permit it to do business with investors in the regulator's jurisdiction (e.g., Australian investors) through broker-dealers registered or licensed in the investors' home jurisdiction (e.g., Australian broker dealers) in equity or debt securities listed on the foreign market or exchange (e.g., a US securities exchange). The SEC, ASIC and Australian Minister for Superannuation and Corporate Law will endeavor to ensure that Australian markets do not unfairly discriminate in granting access to US broker-dealers and that US exchanges do not unfairly discriminate in granting access to Australian broker-dealers. Under the arrangement, any transactions with investors must be accompanied by a risk disclosure statement alerting them to the fact that the laws and remedies that would govern the transaction might be different under the foreign jurisdiction's regulatory scheme than they would be in a purely domestic transaction.

In the case of broker-dealers, each regulator agrees to permit a reciprocating jurisdiction's broker-dealer (e.g., an Australian broker-dealer applying to the SEC) to apply for an exemption to permit it to do business with certain domestic investors1 (e.g., US qualified investors) in equity or debt securities listed on a market or exchange licensed or registered in the reciprocating jurisdiction (e.g., Australian securities listed on an Australian financial market) and subject to the reciprocating jurisdiction's regulatory framework (e.g., Australian laws and regulations and market rules).

In granting exemptive relief, the authorities agree that their respective staffs will need to assess and take into account one another's regulatory regimes in deciding whether to grant exemptions to one another's markets, exchanges and broker-dealers. While recognizing that different regulatory philosophies may justify differences in regulation, the authorities agree to consider and analyze core securities regulatory principles in each system and grant exemptions subject to such terms and conditions that each authority may find appropriate. What this will mean in practice will need to be clarified as entities apply for exemptions and the regulators grapple with specific conditions to impose.

Supervisory MOU

The new supervisory MOU between the SEC and ASIC is similar to, and builds on the framework of, earlier MOUs that the SEC has entered into with foreign regulators facilitating regulatory cooperation and information sharing in connection with the oversight of dually regulated entities, that is, financial services firms registered both with the SEC in the United States and with the foreign regulator in its home jurisdiction. Although most provisions are similar or identical to the earlier MOUs, the new supervisory MOU with ASIC provides for certain additional information sharing, including information about trading activities of exempted entities and on-site visits for dually regulated entities. It also envisions, but tables for future consideration, the establishment of a framework for the joint oversight of any eventual affiliation of US and Australian securities markets through a common ownership structure.

Enhanced Enforcement MOU

The new enhanced enforcement MOU supersedes the previous October 20, 1993, enforcement MOU between the SEC and ASIC. The new MOU notes that, although both the SEC and ASIC are signatories to the International Organization of Securities Commissions Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (IOSCO MMOU), the new bilateral MOU is necessary because there is a "growing ability to provide, and increased need for, assistance in enforcement matters beyond the international benchmark established by the [IOSCO MMOU]." Accordingly, the SEC/ASIC enforcement MOU tracks the format and provisions of the IOSCO MMOU. However, it contains a number of noteworthy differences:

  • It explicitly permits each authority to communicate with and obtain documents from anyone on a voluntary basis in the jurisdiction of the other authority;

  • It permits the requesting authority to "onward share" information obtained under the MOU with criminal authorities in its jurisdiction for use in criminal investigations or criminal proceedings and omits the clause in the IOSCO MMOU that allows an authority to deny permission to obtain documents and information if there has already been a criminal proceeding initiated by that authority based on the same facts and against the same persons as are being investigated by the requesting authority;

  • It specifically states that authorities will, upon request, obtain and provide the following information:
    • Accounting information (including audit work papers);

    • Telephone, mobile phone and internet service provider records;

    • Credit card records;

    • Travel records;

    • Employment information;

    • Corporate records (including chronologies and lists of persons with access to relevant information); and

    • Records of electronic and telephonic communications (including email);

  • It confirms each authority's commitment to seek the legal authority to assist the other authority in freezing assets in its jurisdiction that constitute proceeds of potential violations of laws or regulations and facilitate restitution to investors;

  • It represents that there are no restrictions, including domestic secrecy, blocking or data protection laws in either authority's jurisdiction that would prevent the collection or provision of information pursuant to the MOU; and

  • It states that, upon request, an authority "will" obtain testimony under oath, responses to questions or a statement from any person involved with the subject matter of the request for assistance, that the authority "will" make a transcript of any such evidence and provide it to the requesting authority and that a representative of the requesting authority "will" be allowed to participate in the taking of such evidence.

Conclusion

The practical effect of these interlocking agreements will become apparent as they come into use. While the mutual recognition agreement will require financial markets, securities exchanges and broker-dealers to apply for exemptions and the staffs of the SEC and ASIC to assess each application and work through the implications of granting each exemption upon their respective regulatory objectives, the effects of the new MOUs should be observable more quickly in ongoing enforcement investigations and the oversight of dually registered entities.

We will continue to monitor and report on the SEC's progress toward mutual recognition.

Endnotes

1 In the US, only with a "qualified investor" as defined in the Securities Exchange Act of 1934, Section 3(a)(54)(A) with certain exceptions and, in Australia, only with a "wholesale client" as defined in Section 761G of the Corporations Act of 2001.

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