Mutual recognition is the concept that the Securities and Exchange Commission recognize foreign securities regimes to permit brokers and exchanges in those countries to offer securities publicly traded in those countries to U.S. investors. John White, Director of the SEC Division of Corporation Finance, addressed the concept in a January 14 speech before PLI’s Seventh Annual Institute on Securities Regulation in Europe, and in a January 28 speech before the 35th Annual Securities Regulation Institute. He stated that establishing and evaluating standards for the securities involved in mutual recognition is essential. Initially, it would seem appropriate to limit trading to plain vanilla securities, such as ordinary or common equity shares of companies with a broad market following, e.g., $700 million public global float and with a track record of public trading and public disclosure, e.g., 6-12 months.
Next would be focusing on the country’s issuer disclosure standards. These could include International Financial Reporting Standards as issued by the International Accounting Standards Board and the International Disclosure Standards of the International Organization of Securities Commissions. Third would be corporate governance. This would include audit committees responsible for auditor oversight, strong internal controls over financial reporting and management reports to shareholders on internal controls. He would also look to see if the home country had in place an independent entity with oversight over audit firm activities and minimizing auditor conflict of interest.
He expressed the view that mutual recognition does not apply to capital raising and offerings On February 1, SEC Chairman Christopher Cox and Charlie McCreevy, European Commissioner for Internal Markets and Services, issued a joint press release. In it they stated they have jointly mandated their staff to work on a possible framework for EU-US mutual recognition in 2008.