Who does this affect?

Australian and US exchanges, brokers and dealers.

What do you need to do?

Be aware that further developments in this area are likely.

Authors
Jim Boynton  
Partner

David Friedlander  
Partner

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Jim Boynton  
Partner
T +61 2 9296 2086

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David Friedlander  
Partner
T +61 2 9296 2444

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This week the Australian Securities and Investments Commission, the US Securities and Exchange Commission and the Australian Minister for Superannuation and Corporate Law, entered into a mutual recognition arrangement. Initially it will be limited to certain national exchanges and broker dealers who deal with institutional clients.

The arrangement provides ASIC and the SEC with the power to exempt entities which provide capital markets-related services. These exemptions will allow:

• US brokers and dealers to offer their services to Australian investors without being subject to the Corporations Act or the ASIC Act (and regulations made under those acts), and
• ASIC regulated exchanges and brokers to offer their services to US investors without being subject to US securities laws and regulations (such as the US Securities Act of 1933 and the Sarbanes-Oxley Act).

Both regulators will retain jurisdiction over violations of antifraud laws and regulations.

Practical implications of the mutual recognition arrangement

• The potential exemptions will apply only to Australian financial service licensees who are also participants of a financial market licensed by ASIC. Initially the only financial market will be the ASX. Other licensees may need to find another SEC exemption to rely on if they want to deal in Australian listed securities with US clients
• Initially, exemptions will be limited to listed "equity or debt securities" and may not extend to ASX listed managed investment schemes, listed warrants or other listed derivative instruments
• Unlike Australia's mutual recognition arrangements with New Zealand and Hong Kong, and proposed arrangements with Singapore, this arrangement does not apply to unlisted managed investment schemes
• As the mutual recognition arrangement is currently limited to US brokers and dealers seeking to do business with Australian wholesale clients, it is unclear what advantages, if any, exist for a US broker or dealer in applying to be exempted under the new mutual recognition arrangements rather than applying for the existing passport relief, which has been available to US broker-dealers (and others eg securities advisers) since 2003
• The arrangement will not cover initial public offerings. Nor will it increase the access of Australian companies to a dual listing on a US exchange, and
• Brokers and dealers and exchanges will need to receive permission from the regulator in the country they want to operate in. The first exemptions are expected to be granted in early 2009.