Securities Regulations

David Scott and Mikhail Turetsky, Baker & McKenzie, Moscow

The securities market and securities transactions within the Russian Federation are primarily regulated by Federal Law No. 39-FZ "On the Securities Market" (the Securities Law), dated April 22, 1996 (as amended). The offering of corporate securities is regulated by Federal Law No. 208-FZ "On Joint-Stock Companies" (the JSC Law), dated Dec. 26, 1995 (as amended), and (with regard to credit institutions) by Law No. 395-1 "On Banks and Banking Activity," dated Dec. 2, 1990 (as amended). While recent years have seen considerable discussion on changes to the applicable legislation and the structure of the securities markets in general, to date such changes have been limited to the adoption of Federal Law No. 152-FZ "On Mortgage-Backed Securities" (the MBS Law), dated Nov. 18, 2003. The issuance of securities in the Russian Federation is also subject to a number of regulations issued by the Federal Service for the Financial Markets of the Russian Federation (the FSFM), (previously the Federal Commission for the Securities Market (the FCSM)), and other regulatory agencies, as well as the general provisions of the Civil Code.

The securities market and securities transactions within the Russian Federation are primarily regulated by Federal Law No. 39-FZ "On the Securities Market"
Particular instruments will not be considered securities unless they are specifically recognized as such under Article 143 of the Civil Code or other relevant securities laws. Such securities include bonds, shares, negotiable promissory notes, checks, deposit and saving certificates, bills of lading, securities issued in the process of privatization and options on shares.

The Securities Law outlines the procedure for the registration of securities issuances and stipulates when a prospectus is required, as follows:

• When securities are to be distributed to an unlimited number of holders
• When the number of holders is known and exceeds 500, or
• When securities are intended to be listed or otherwise publicly traded

The Securities Law generally requires quarterly reporting of financial and other information, and the publication of information describing material events which will affect the finances or the business activities of the issuer, within five days of the occurrence of such events. Issuers are obliged to publish such information if they have ever registered a prospectus or if they are issuers of "publicly offered securities."

Equity Securities. Russian joint-stock companies (JSCs) may issue shares, options on shares, corporate bonds and other securities. Open joint-stock companies may raise capital either by issuing shares to the public or by private placement. Shares of closed joint-stock companies may not be offered to the general public. Shares in a limited liability company are not deemed to be securities and cannot be used for capital raising from the general public.

Debt Securities. The issuance of corporate bonds is regulated by the Civil Code, the JSC Law, and, in respect to limited liability companies, by Federal Law No. 14-FZ "On Limited Liability Companies," dated Feb. 8, 1998 (as amended), (the LLC Law). The public issuance and trading of bonds is governed by the Securities Law. This legislation introduced the concept of secured and unsecured bonds. Secured bonds must be fully secured with a third-party guarantee or suretyship, or with a pledge (or a mortgage) over the issuer‘s and/or third party‘s securities or immovable property. Only companies (including credit institutions) which have existed for a minimum of two years may issue unsecured bonds. The above legislation provides that the par value of all unsecured bonds issued by a company must not exceed the charter capital of the company, and that no bonds may be issued until the charter capital is paid-up in full. Russian JSCs may also issue bonds convertible into shares. Two specific types of securities were introduced in 2003 to facilitate mortgage securitizations. Pursuant to the MBS Law, Russian banks and certain other entities may issue mortgage-backed bonds and mortgage-participation certificates. Such securities must be backed by loan receivables secured by mortgages over real estate.

Besides bonds, Russian companies commonly use promissory notes and bills of exchange for debt raising. Under Russian law, promissory notes and bills of exchange are treated as securities. The legal regime for promissory notes and bills of exchange is prescribed in Federal Law No. 48-FZ "On Promissory Notes and Bills of Exchange," dated March 11, 1997. In addition, the Russian Federation is a party to the Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes (Geneva, June 7, 1930).


The Securities Law regulates the status of professional participants of the securities market and provides legal requirements for their operations. The activities of professional participants of the securities market are subject to licensing by the FSFM and the procedures for obtaining a license and requirements for professional participants of the securities market are prescribed in various regulations adopted by the FSFM. Set forth below is a summary of the types of professional participants of the securities market that are subject to FSFM licensing and regulation.

Brokers, Dealers, Trust Managers of Securities. Under the Securities Law, brokers are professional participants of the securities market who perform transactions with securities on behalf of and at the expense of their clients (investors or issuers) or on their own behalf and at the expense of a client.

Dealers are defined as professional participants of the securities market who perform transactions with securities on their own behalf and for their own account by declaring in public the bid/ask prices with the obligation to buy and/or sell securities at such prices.

Trust managers of securities are professional participants of the securities market who manage securities of their clients under a trust management agreement. Trust management may be exercised over securities, money for investment in securities, and also assets and securities derived from such management activities.

Registrars, Depositories. Under the Securities Law, registrars are professional participants of the securities market who are charged with maintaining the register of securities owners. If a joint-stock company has over 50 shareholders, it must appoint a professionally licensed registrar to maintain its shareholders' register. (A joint-stock company with 50 or less shareholders may maintain its own shareholders' register.)

Under the Securities Law, depositories are professional participants of the securities market who hold certificates of securities and/or record transfer of rights to the securities. The conclusion of a depositary contract does not involve the transfer to the depositary of the right of ownership of the depositor's securities. The depositary has no right to dispose of the depositor's securities, to manage them, or to perform any actions with securities on behalf of the depositor, except for those performed on the depositor's order in cases provided for by the depository contract.

Organizers of Trade, Stock Exchange, Clearing Organizations. Under the Securities Law, "organizers of trades" are professional participants of the securities market who render services which directly facilitate the conclusion of transactions with securities among the participants of the securities market. The Securities Law requires organizers of trades to disclose information on rules of trade, rules of circulation of securities, rules of conclusion and registration of transactions with securities and other information related to trade to any interested party.

The Russian Federation has several well-established stock exchanges in Moscow and throughout the country, including MICEX (Moscow Interbank Currency Exchange), RTS (Russian Trading System Stock Exchange) and certain others. A legal entity may exercise the activity of a stock exchange, if it is a nonprofit partnership or a joint-stock company.

Under the Securities Law, clearing organizations are professional participants of the securities market that clear settlements under transactions with securities. Typically, a clearing organization would be closely working with a stock exchange (e.g. Clearing House of MICEX, Clearing Center of RTS, etc.).


The Federal Service for the Financial Markets. Pursuant to Presidential Decree No. 314 dated March 9, 2004, the FSFM has replaced the FCSM as the primary regulator of the Russian securities market. The main functions of the FSFM, which it carries out either directly or through its authorized territorial agencies, include: the licensing and supervision of professional securities-market participants; the authorization of self-regulatory organizations; the registration of securities issuances and prospectuses and the approval of standards thereof; and the classification and definition of different types of securities. The FSFM has the authority to take certain actions against professional participants of the securities market in breach of securities market regulations. Such measures include the suspension and revocation of licenses, enforcement actions and petitions for criminal prosecution. In addition, the FSFM has the power to fine legal entities or individual entrepreneurs for various securities law violations. Any action pursued against issuers, such as the invalidation of an issuance, must be effected through the courts. Consequently, the ultimate jurisdiction over breaches of the securities laws remains with the courts.

In respect of banks, certain regulatory functions (including registration of securities, etc.) have been transferred from the FSFM to the Central Bank of the Russian Federation. Issuance of securities by state and municipal authorities also falls outside the ambit of FSFM regulation and is regulated by the Ministry of Finance.

The Securities Law requires that notification be provided to the FSFM of transactions whereby foreign parties acquire shares in Russian companies, foreign ownership of which is restricted by law (e.g. the gas and electricity monopolies and insurance entities). Notably, Russian issuers must receive an approval of the FSFM for issuing of securities outside of the Russian Federation.

Self-regulating Organizations ("SROs"). Under the Securities Law, an SRO is a voluntary association of professional participants of the securities market functioning on the principles of a non-profit organization established for the provision of their professional activity, the observance of standards of professional ethics, the protection of the interests of owners of securities and the implementation of regulations and standards to ensure the effective functioning of the securities market. Obligatory membership in an SRO is no longer necessary for professional participation in the securities market, following the repeal of this requirement by a presidential decree on Oct. 16, 2000.