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Mutual Recognition; NYSE Shareholder Approval; More

Melissa Klein Aguilar | April 8, 2008

Just days after it announced its intention to explore initial agreements on mutual recognition with some of its foreign regulatory counterparts, the Securities and Exchange Commission made good on that promise by beginning talks on the topic with Australian authorities.

SEC Chairman Christopher Cox met with Australian Prime Minister Kevin Rudd on March 29 to begin formal discussions with the Australian Securities and Investment Commission and the Australian Treasury Department to develop a pilot mutual recognition arrangement.


The SEC said the discussions represent the first step toward a possible bilateral arrangement and will cover potential recognition to allow securities exchanges and market participants to operate in each other’s markets.

The SEC and ASIC agreed to undertake a formal assessment of each other’s regulatory systems. The results will be published for public comment. Once complete, that comparability assessment would provide the basis for further discussions between the SEC and ASIC regarding a formal mutual recognition arrangement, including specific discussion of the extent to which, and under what circumstances, U.S. and Australian securities exchanges and market participants could operate in each other’s markets.

The two regulators have operated under Memorandum of Understanding on securities law enforcement since 1993. In recent years, the staffs of both agencies have worked together on cross-border investigations of violations of U.S. and Australian securities laws.

As part of a plan unveiled last month on mutual recognition, the SEC said it would also develop a framework to allow mutual recognition in jurisdictions where multiple regulators operate under a common legal umbrella and would propose reforms to loosen its rules governing U.S. investor contacts with foreign broker-dealers.


However, Democratic lawmakers have raised concerns about the SEC’s mutual recognition efforts. Last week, Senator Jack Reed, D-RI, chairman of the Senate Banking Committee’s securities subcommittee, said he plans to hold hearings on mutual recognition and will send a letter to the SEC on the issue.

“I am particularly concerned by the timing of the SEC’s mutual recognition announcement, which comes in the midst of a major market crisis that has raised questions in the minds of many about the adequacy of U.S. regulatory oversight,” Reed said in a speech at the North American Securities Administrators Association public policy conference on April 1.

Separately, Reed confirmed that he and Senate Banking Committee Chairman Christopher Dodd, D-CT, have asked the Government Accountability Office to review whether the SEC’s Division of Enforcement has “sufficient staff and funds to perform its mission and whether there have been fundamental changes in operation to the way they handle cases.”

The inquiry follows a 50 percent drop in SEC disgorgements in 2007, which Reed said, “raises questions about whether changes have taken place in enforcement philosophy or scope of activity.” He also cited concern that the SEC requested a less than one percent increase in its operating budget for 2009 at a time when he said increased demands are being placed on staff and the agency.

Cos. Rely on NYSE Shareholder Approval Exception

The need to quickly raise capital is breathing new life into a rarely used exception to the New York Stock Exchange’s shareholder approval policy.

Although infrequently utilized prior to the recent credit crunch, the financial viability exception, which allows companies to obtain needed equity capital without the delay associated with a shareholder vote, has become part of the deal arsenal in recent weeks, Wachtell Lipton Rosen & Katz attorneys note.

“In the five years leading up to the credit crunch from 2003 to 2007, it was used about four times,” partner David Silk tells Compliance Week. “Then it was used four times in one month.”

In the first week of March, MoneyGram, Bear Stearns, Thornburg Mortgage, and AbitibiBowater all announced or closed investments in reliance on the provision, Silk noted in a March 27 memo.

“In this period of financial dislocation, we’d expect to see a continued increase in reliance on the exception in connection with rescue investments,” said Silk. “The key thing is for companies to think about the impact on its customers, shareholders, and other constituents.”

NYSE rules generally require a listed company to obtain shareholder approval prior to the issuance of shares that represent more than 20 percent of a company’s currently outstanding common shares or that result in a change in control of the issuer. However, the shareholder approval policy contains an exception to the requirement when “the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise,” the alert states.

NASDAQ has a similar exception to its shareholder approval policy. In each case, the issuer’s audit committee must approve the reliance on the exception and the issuer must notify shareholders that it is relying on the exception.

SEC Democratic Nominees Sent to Senate

The White House has moved a step closer to filling the two vacant commissioner posts at the SEC.

That could potentially put the SEC a step closer to reconsidering the issue of shareholder access to the proxy in director elections, which chairman Christopher Cox has said he would do when the SEC has a full complement of commissioners.


The commission has been operating with a slate of three Republicans since Democratic Commissioner Annette Nazareth left the agency in January. The SEC’s other Democrat, Roel Campos, left the Commission in September.

The nominations come as a Treasury Department blueprint for overhauling U.S. financial regulation has revived calls for a merger of the SEC with the Commodity Futures Trading Commission, raising questions about the agency’s future.


President George W. Bush on March 31 sent nominations to the Senate for two Democrats to serve as SEC commissioners, officially confirming rumors that have been swirling since November.


Luis Aguilar, a partner at the law firm McKenna, Long & Aldridge, would serve for the remainder of a term expiring June 2010. Elisse Walter, senior executive vice president for regulatory policy and programs at the Financial Industry Regulatory Authority and a former deputy director of the SEC’s Division of Corporation Finance, would serve the remainder of a five-year term expiring June 2012.

The full Senate must confirm both nominees.