N. Volovik N. Leonova The law “On the stock market”: key novations and possible impact on the market The necessity to introduce serious changes in the law “On the stock market,” enacted yet in 1996, has been obvious for a long time. However, the amendments, similarly to the law itself in the mid-1990s, were approved as a result of a complicated process. Federal law No. 185 FZ “On amendments to the federal law ‘On the stock market’ and amendments to the federal law “On not-for-profit organizations’” was approved only on December 28, 2002, after long debates in the State Duma and the professional community, the initial approval of the State Duma and the Federation Council vetoed by the RF President, and introduction of new amendments. Below there are analyzed the principal amendments to the law “On the stock market” (hereinafter referred to as the law) and possible practical consequences.
1) The amendments removed certain contradictions between the law and other regulatory and legal acts of the RF. For instance, the federal law “On joint stock companies” sets forth that shares in joint stock companies shall be registered stocks, the previous version of the law stipulated that shares may be both registered and bearer securities. The amendments eliminate this contradiction and therefore bring the law in conformity with the federal law “On joint stock companies.” At the same time, certain amendments affect the competence of the Civil Code and special laws regulating operations of joint stock and other companies, what is unacceptable from the viewpoint of the legislative technology. For instance, Article 17 of the law stipulates the procedure governing the corporate decision making process as concerns the issuance of securities. Article 2 (the definition of bonds, definition of shares as bearer securities) also overlaps the respective provisions of the Civil Code and the RF law “On joint stock companies.” The law also fails to remove more fundamental contradictions, for instance, to the provisions of the RF Civil Code (as concerns documentary securities, the definition of “public placement of securities,” borrowing and pledge of securities, etc)8.
2) The law introduces the concept of financial adviser on the securities market. The financial adviser is defined as a “legal entity licensed to carry out broker and / or dealer activities on the securities market and rendering the issuer services relating to the elaboration of the prospectus of securities” (Article 2). While previously the employment of a financial adviser for the issuance of securities had been a voluntary action, according to the amended law the prospectus of securities issue should be certified (signed) also by a financial adviser in the case of public floatation and / or public circulation of issued securities (Article 22).
Apparently, this novation can not provide additional guarantees for investors. However, the consequences of this novation are ambiguous. First, the introduction of the requirement of the mandatory certification of the prospectus by a financial adviser will result in a sharp rise in the costs of services provided by financial advisers and the process of securities issuance per se (although RF government officials repeatedly stated the necessity to reduce the costs of this process). Second, due to the creation of a new market of professional services, which the authorities are to regulate somehow, there arise possibility of different abuses.
It is also necessary to note that the law sets forth a provision according to which persons signing the issuance prospectus are jointly responsible and subsidiary responsible with the issuer for the damage to owners of securities caused due to unreliable, not complete and / or misleading information contained in the prospectus (item 3, Article 22.1). Indeed, the introduction of responsibility for the aforesaid actions shall positively affect the market of securities on the whole and improve the protection of investors rights and lawful interests in particular. However, there may arise difficulties as concerns the practical enforcement of this stipulation, since it is difficult to establish and prove the guilt of each person who signed the prospectus.
It does not seem quite fair to establish the joint responsibility of all signatories for the damage caused because of the aforesaid actions. It seems feasible to introduce the requirement of mandatory insurance of professional responsibility of financial advisors on the securities markets in relation to the introduction of the institute of financial advisor and responsibility for the damage caused by unreliable, not complete and / or misleading information contained in the prospectus.
3) The requirements relating to the disclosure of information were somewhat changed:
- the right to access the information contained in the prospectus of securities issue is granted not only to “potential owners” but to all interested persons notwithstanding the purposes of obtaining of such information (item 1, Article 23);
- there was introduced the differentiation of the procedure governing the publication of information relating to the state registration of the issue (additional issue) of securities depending on the nature of subscription (closed or public) what is a positive development both for issuers and investors;
- the stipulation according to which the registration of the prospectus was necessary in the case the amount of issuance exceeded 50000 minimal wages was removed (the prospectus shall be registered in two cases:
floatation of issued securities by open subscription and floatation by closed subscription among more than 500 persons). It is a significant amendment, since the registration of the issue determines the responsibility of the issuer to disclose information about substantial facts (developments, actions) affecting the financial and economic operations of the issuer, while the disclosure of information in the form of quarterly report is more actual for companies with larger numbers of shareholders than for companies where the amount of an issue exceeds 50000 minimal wages. However, it remains unclear if the issuers who float issued securities amounting to more than 50000 minimal wages among less than 500 persons must disclose aforesaid information in the future This question remains actual for many companies and it is necessary that the RF FCS clarified the problem9.
See, for instance, Makeyev A., Gudkov F. O porokakh zakona, vnosyaschego izmeneniya v zakon “O rynke tsennykh bumag (On flaws of the law amending the law “On the security market”). – Rynok tsennykh bumag, 2003, No. 2, pp. – 50.
At the same time, a shorter list of requirements necessary for the registration of the prospectus of securities, may bring about negative consequences. Shareholders may encounter additional risks in the case a company where the number of shareholders is below 500 hostile to its shareholders places additional issue of shares. In this situation, state registration - there were changed the requirements pertaining to the contents of the issuer’s quarterly report: according to Article 30, the quarterly report of the issuer shall contain information the composition and amount of which conform with the requirements set forth by the law “On the securities market” applicable to the prospectus of the issue of securities, excluding information pertaining to the procedure and conditions of the issuance of securities.
It shall be noted that after the enactment of the aforesaid amendments the composition of information disclosed by issuers in the form of the quarterly report was expanded. For instance, earlier quarterly reports disclosed only information relating to transactions concluded in the reporting quarter and the amounts of which (or respective value of property) made 10 per cent or more of the issuer’s assets as on the date of the transaction. According to the amended law, quarterly reports shall disclose: first, information on significant transactions where the amount of respective obligations is at or above 10 per cent of the balance sheet value of the issuer’s assets over the last 5 completed financial years, or over the each completed financial year if the issuer carries out operations for less than 5 years, and, second, information about the transactions concluded by the issuer if the interest in these transactions existed for the same period. Since the quarterly report is a substantial source of information about the company’s operations for shareholders, more stringent requirements will increase the degree of knowledge about the issuer’s activities both on the part of shareholders and professional securities market operators, what is, obviously, a positive development.
4) The law stipulates broader powers of the “federal executive authority” (i.e. FSC). Thus, according to the amended law, the regulations pertaining to the listing (de-listing) of securities shall correspond to the requirements set forth in regulatory and legal acts of the “federal executive authority responsible for the securities market.” At the same time, the quotation lists may include only the securities meeting the requirements set by the legislation, regulatory and legal acts of the federal executive authority responsible for the security market10. According to available assessments, enforcement of this stipulation will result in inclusion in quotation lists only of securities meeting the requirements set forth by the FSC. At present, it is difficult to evaluate the consequences of the introduction of this provision. It will become clear if the rights of issuers and professional securities market operators are really infringed upon only after the federal executive authority responsible for the security market sets forth the requirements pertaining to the listing (de-listing) of securities.
Russian issuers have the right to float securities outside the RF territory, including floatation in accordance with foreign law of securities issued by foreign issuers certifying the rights of Russian issuers in relation to issued securities of Russian issuers, only as approved by the federal executive authority responsible for the securities market (Article 16). The law sets forth a number of terms the issuer should comply with in order to be granted such permission; however, this procedure is not detailed. The exhaustive list of documents necessary to obtain the permission to float the aforesaid securities outside the RF territory shall be determined by the same “federal executive authority responsible for the securities market.” It is obvious that vesting the FSC with the right to determine such a list of documents at its discretion may result in the constant and uncontrolled expansion of the list and, therefore, substantially limit the right of Russian issuers to float securities outside the RF territory.
The stipulation of the law (Articles 20 and 25) vesting with the “federal executive authority responsible for the securities market” the right to determine the exhaustive list of documents necessary for the state registration of the issue (additional issue) of securities and set forth the exhaustive list of documents, which shall be submitted to the registration authority in order to register the report about the results of the issuance (additional issuance) of securities may also result in infringements on the rights of operators of the security market.
is an important stage for owners of shares in terms of information and control. However, the law fails to remove the risk that shareholders may be informed about additional issuance only after its results are registered and not at the stage where it is still possible to stop it (assessment of E. Krasnitskaya, Troyka Dialog).
At the same time, the expert findings “On amendments to the law ‘On the securities market’” (approved by the RF President on October 10, 2002), which clarified the reasons behind the President’s decision to veto the initial version of the law, pointed out, as a reason for the veto, that the “federal law contains provisions stipulating that a federal executive authority shall determine the requirements applicable to securities subject to mandatory access to the listing on the stock exchange, inclusion of securities in a respective list of securities, and exclusion from such a list. In practice, it means that a federal executive authority is vested with the function to select issuers whose securities may be floated on the organized market, what infringes on the rights of both issuers and professional stock market operators.” See also the web site of the “Bureau of Legal Information” (http://www.bpi.ru).
The expansion of powers relating to the regulation of marginal transactions also gives rise to doubts.
Thus, the original version of the law stipulated that the list of securities being the subject of marginal transactions should be determined in accordance with regulations and legal acts approved by the “federal executive authority responsible for the securities market.” The expert findings concerning this law (approved by the RF President) states that this provision in fact creates opportunities to limit the rights of the parties of the agreement basing on a regulation issued by an executive authority, what contradicts to the RF Constitution and the principles of the civil law fixed by the RF Civil Code. However, the law sets forth that only liquid securities included in the quotation list of the organizers of trade may be accepted as backing of loans granted by brokers11. At the same time, the regulatory and legislative acts of the federal executive authority responsible for the securities market shall determine the criteria of liquidity of the aforesaid securities, the minimal discount, the procedure of determining the market value of securities accepted by brokers as backing, the procedure and terms of their reevaluation, as well as requirements pertaining to terms, procedures, and conditions of realization of securities serving as the backing of clients’ obligations relating to loans granted by brokers. Apparently, the amended wording does not change the nature of the acquired powers. Similarly to the listing regulations, at present it is difficult to evaluate the consequences of this measure. It may be monitored only after FSC approves the respective regulations setting forth the procedure governing the determination of liquidity of securities backing clients’ obligations, etc.