The Proposed Model for the Mutual Recognition Arrangement
A model for the mutual recognition of offers of securities and managed investment scheme interests is currently being developed by the Commonwealth Treasury and the New Zealand Ministry of Economic Development (NZ MED), in consultation with the Australian Securities and Investments Commission (ASIC), the New Zealand Securities Commission (NZSC), the Australian Attorney General's Department and the New Zealand Ministry of Justice.
4.1 An Overview of the Proposed Model
The proposed model aims to allow securities of issuers from the home jurisdiction to be offered to investors in the host jurisdiction on the basis of compliance with the substantive requirements of the home jurisdiction's securities laws. It is envisaged that this will be achieved by providing that an offer made under the mutual recognition regime is subject to a different set of requirements under the law of the host country, including a requirement to comply with the relevant securities laws of the home country, and is not subject to the requirements of the "fundraising laws" of the host jurisdiction that apply to domestic offers.
The fundraising laws of the home jurisdiction will apply to offers made to investors in the host jurisdiction. The law of the host jurisdiction will also apply to such offers, imposing a set of requirements that is specific to offers made under the mutual recognition regime, including, as noted above, an ongoing requirement to comply with the relevant laws of the home jurisdiction.
The basic principle that underpins the proposed regime is that an offer of securities which is a regulated offer in one country and can lawfully be made in that country, can lawfully be made in the other country in the same manner and with the same offer documents, provided that:
- the entry requirements for the regime are satisfied; and
- the offeror complies with the ongoing requirements of the regime.
Under the proposed model, issuers who wish to operate under the mutual recognition regime will have to comply with a number of entry and ongoing requirements prescribed in the host jurisdiction's law. Entry requirements will include, among others, a condition that an offeror opt into the mutual recognition regime in respect of a particular offer, by filing a notice with the host jurisdiction regulator that contains prescribed information in relation to the offeror and the offer. An offer that did not meet the entry requirements would fall outside the recognition regime, and would therefore be treated as an ordinary offer under the host jurisdiction's law and as such would need to meet the standard requirements under the laws of the host jurisdiction.
Ongoing requirements will include, among others, a condition that an offeror must comply with the home jurisdiction's relevant fundraising laws in relation to the making of offers as they apply from time to time. If an issuer breaches the home jurisdiction's fundraising laws, the proposed model will allow investors in the host jurisdiction to pursue statutory remedies in the host jurisdiction's courts as well as in the courts of the home jurisdiction. The consequences of a breach of the ongoing requirements in the host jurisdiction, both civil and criminal, will be prescribed by the law of the host jurisdiction.
The ability to comply with the legal requirements that apply to an activity in one jurisdiction by meeting the requirements of the corresponding laws of another jurisdiction is a standard feature of mutual recognition regimes, both in the trans-Tasman context and in other parts of the world. Under the TTMRA, for example, goods may be sold in one participating jurisdiction if they have been produced in or imported through another participating jurisdiction, and they meet the relevant requirements of the jurisdiction of origin.
Because compliance with the host country's laws can be achieved through complying with the current requirements of the home country, a change in the laws of the home country has the effect of altering the substantive compliance requirements in the host country for goods or services supplied under a mutual recognition regime, even though the laws of the host country do not change. This is an integral feature of all mutual recognition regimes: they cannot operate effectively, and achieve their policy goal of ensuring that the activity is subject to only one set of requirements at any given time, on any other basis.
This approach does create the risk, at least in theory, that the laws of one country will change in a manner that affects the equivalence of the regulatory regimes, giving rise to concerns about the appropriateness of continuing to operate the mutual recognition regime. Under the proposed model, this risk would be managed by including provisions in the intergovernmental agreement (the Agreement)6 governing the mutual recognition regime that:
- require each jurisdiction to give the other jurisdiction advance notice of any proposed legislative changes that have implications for the mutual recognition regime;
- provide for consultation where a proposed change in one jurisdiction gives rise to concerns in the other about the operation of the regime;
- enable either party to terminate the mutual recognition arrangement, in the unlikely event that serious concerns arise and cannot be resolved.
4.2 The Merits of Other Possible Models
The proposed model would be preferable to other possible models, such as those which require the incorporation of foreign law into domestic legislation (model 1) or which involve the disapplication of domestic law, leaving the offer to be regulated solely by the laws of the home jurisdiction (model 2).
Model 1: Incorporation of Foreign Law
Under model 1, the host jurisdiction would incorporate the laws of the home jurisdiction within its domestic regulatory framework (which would apply in relation to conduct within its boundaries by entities from the home jurisdiction). It is likely that the host jurisdiction would incorporate home jurisdiction law either "word for word" or by reference to the home jurisdiction law as at a particular date. The practical difficulty with model 1 is that the host jurisdiction would have to amend its law or regulations to reflect changes in the home jurisdiction's law. Such a process can be resource intensive and can lead to gaps in the mutual recognition regime where there is a lag between changes in the law in one jurisdiction and changes in the law in the other jurisdiction. The proposed mutual recognition model minimises these difficulties and allows for the legal regimes in both jurisdictions to work in a more harmonised manner consistent with a mutual recognition regime.
Model 2: Disapplication of Domestic Law
Model 2 would involve the disapplication of the law of the host jurisdiction in favour of the applicable law of the home jurisdiction. There would be no ongoing requirements under the law of the host jurisdiction - the offer would be regulated solely by the law of the home jurisdiction. The securities regulator of the host jurisdiction would have no involvement in the regulation of the offer, and would have no supervisory or enforcement powers.
The proposed model is preferable to model 2, as model 2 raises a number of concerns in respect of appropriate regulatory outcomes in the host jurisdiction. The host jurisdiction would depend entirely upon regulatory enforcement in the home jurisdiction with regard to the conduct of overseas based issuers in the host jurisdiction. This would be likely to limit the extent to which a host jurisdiction would be willing to exclude or modify its domestic regulatory framework, thereby limiting the usefulness of the arrangement. An additional concern with the model relates to the increased difficulty for investors in the host jurisdiction of accessing remedies available to them under the regulatory framework of the home jurisdiction, as they would need to seek relief before the (more distant and, for them, less convenient) courts of the home jurisdiction in all cases.
Compared with model 2, the proposed model would create more complexity for issuers (as they would have to interact more extensively with overseas regulators) as well as for host jurisdiction regulators and courts (as they would be required to enforce compliance with different substantive requirements within their respective jurisdictions). However the advantage of the proposed model is that it is more likely to ensure the maintenance of appropriate regulatory outcomes in relation to the conduct of overseas based issuers in the host jurisdiction. Under model 2, the conduct of overseas based issuers is essentially unregulated under the law of the host jurisdiction (depending on the degree of disapplication of host jurisdiction law).
The proposed mutual recognition model seeks to provide a "middle-ground" between these two models.
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