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Australia and US agree to mutual recognition (1)

LAST WEEK the Australian Government and Australian Securities and Investment Commission (ASIC) entered into an agreement wit

user iconLawyers Weekly • 04 December 2008 • NewLaw
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h the US Securities and Exchange Commission (SEC) to establish a mutual recognition of securities regime between Australia and the US.

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Under the pact, the parties have agreed to consider providing exemptions to exchanges and securities brokers in one another’s countries. In practice, such exemptions would allow Australian stock exchanges and broker-dealers to offer their services to US wholesale investors and financial firms without being subject to most SEC regulation. Likewise, US stock exchanges and brokers-dealers could operate in Australia without being subject to ASIC regulation.

Announcing the agreement, ASIC chairman Tony D’Aloisio said that the arrangement reflected “the importance of the freer flow of capital in providing wider investment opportunities for Americans and Australians where sound market integrity and investor protection regulatory regimes are in place”.

Andrew Lumsden, a partner in the corporate advisory practice of Corrs Chambers Westgarth, said that the SEC has made clear that mutual recognition won’t be automatic. “Rather, it’s based on brokers obtaining exemptions from their respective regulator – that is, SEC and ASIC,” he said. An SEC release also suggests that the exemptions will operate only at the wholesale level.

Lumsden explained that under the current system, Australians wanting to invest in the US are subject, at various points, to both Australian and US regulation, which at times overlap. “And it’s kind of a moot point where they overlap. That’s one of the reasons for these sorts of rules, because as things become increasingly globalised you get these odd overlaps in an attempt to get a little bit more regulatory certainty,” he said.

The agreement, he said, would help reduce transaction costs associated with this overlap and enhance capital flows between the markets.

Another problem arising from this regulatory overlap is the potential for international fraud – a risk that the agreement should also help alleviate, Lumsden said. “Securities frauds are not necessarily perpetrated in one jurisdiction, and the danger is that somebody will get the smarts on and find a way to slip through both [SEC and ASIC regulation],” he said.

On this point, SEC Chairman Christopher Cox said that the agreement would strengthen the ability of the SEC and ASIC to “co-operate with each other in our enforcement and supervisory efforts, thereby enhancing the integrity of both our markets”.

According to Lumsden, the agreement is a positive development which sends a strong message about strength and integrity of the Australian market.

“The Americans are notoriously protective of their patch. The SEC lives in a difficult constitutional environment where [it has] state regulators, so [it has] to be whiter than white in terms of how they approach foreign offerings in particular. So, for Australia, this kind of support emphasises that there is pretty high quality regulation and a high level of compliance in the Australian market,” he said.

He also said that it would help Australia to boost its reputation internationally in the area of funds management.

“The ultimate plan is for Australians to be able to leverage their funds management expertise into the US market,” he said. “That would be the ideal thing for us to do, to continue with that work that’s been done in relation to making Australia a financial hub. Our funds management expertise is just without parallel.”

This is the third mutual recognition agreement Australia has entered into. The first was with New Zealand, covering securities offer documents, and the second was with Hong Kong, covering the sale of retail funds to investors.

Applications for exemptions under this latest agreement can now be submitted to the SEC and ASIC for consideration, and according to the SEC, the first exemptions could be granted by early next year.

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