i Sources of law
The Russian securities market only started developing at the beginning of the 1990s, inspired by mass privatisation in Russia and by the creation of numerous joint-stock companies. The market started its formation without any legislative base or key institutions (no stock exchanges, regulatory institutions, etc.), which did not allow for its proper functioning. Thus, the creation of the principal structures of the market was rather 'reactive' and reflected particular requirements of the market at that particular time.
This led to a situation in which the Russian legislation regulating the securities market was sometimes fragmentary and ambiguous; however, in recent years, a vast majority of the problems have been successfully eliminated by legislation and market practices.
Securities regulation in Russia is still at a formative stage and may change relatively quickly in response to market practices and state intentions.
Regulations governing the securities market in Russia consist of various legislative acts, governmental and presidential decrees, and ministerial directives, as well as numerous orders of the Central Bank of the Russian Federation (CBR) and other 'sub-legislative' acts.
The key legislation establishing the grounds for the securities market is the Civil Code of the Russian Federation (the Code). The Code establishes the basic principles of the securities market, including the types of securities, transfer of title for securities, etc. The Code also contains detailed regulations in respect of certain securities (warehouse certificates, warrants, etc.).
The Federal Law on the Securities Market No. 39-FZ of 22 April 1996 (the Law) contains detailed regulations on the securities market. The Law establishes that the CBR is the main regulatory body for the securities market (previously it was the Federal Commission for the Securities Market). The Law, inter alia, creates the framework for the securities market, establishing regulatory structure, defining the types of securities, their issuance and trading requirements, defining securities market participants and related requirements.
The Federal Law on Protection of Rights and Interests of Investors in the Securities Market No. 46-FZ of 5 March 1999 (the Protection Law) provides for various limitations on the operation of the securities market and on securities market participants to ensure the proper protection of various groups of investors, and minimising the possibility of market abuse.
The Federal Law on Counteracting Illegal Use of Insider Information and Market Manipulation No. 224-FZ of 27 July 2010 was adopted to establish fair trading and fair market prices for securities, and to counteract market abuse.
Various rules applicable to the securities market are contained in the Law on Joint Stock Companies, the Law on Competition Protection and the Law on the Central Bank of Russia, among others.
ii Regulatory authorities
As noted, the major authority regulating the securities market in Russia is the CBR (also known as the Bank of Russia).
The CBR acts on the basis of the Federal Law on the Central Bank of Russia No. 86-FZ of 10 July 2002.
The CBR, inter alia, is responsible for the following:
- developing and implementing mandatory rules for the securities market and its participants;
- exercising regulatory control over participants in the securities market;
- ensuring effective operation of the securities market; and
- protecting the rights and interests of securities market participants.
The CBR became responsible for the securities market as of 1 September 2013 pursuant to the Decree of the President of the Russian Federation No. 645 of 25 July 2013. Previously this sphere was regulated by the Federal Service for the Securities Market, which was abolished pursuant to the above-mentioned presidential decree, and all functions of the Federal Service for the Securities Market were transferred to the CBR. However, there are numerous regulatory acts issued by the Federal Service for the Securities Market still in force, governing various aspects of securities market operations.
The CBR is the main authority in the sphere of administrative liability for the participants in the securities market.
Responsibility for enforcing securities market regulations in the criminal sphere is vested in the Investigative Committee of the Russian Federation and in the Ministry of Internal Affairs of the Russian Federation, depending on the type of the crime.
Self-regulatory organisations are also an essential part of the regulatory framework, establishing their own rules and enforcing compliance with these rules by their members.
iii Common securities claims
Under Russian law, any party who suffers harm or loss because of a wrongdoing has a right to be compensated in full by the party who committed the wrongdoing. Although most securities abuses are investigated and arraigned by the CBR, the CBR does not compensate private parties for their harm or loss and, in the vast majority of cases, the injured party has to initiate a separate civil claim with an applicable court or intervene in the criminal case (if one has been initiated) and seek damages within that criminal case as a 'civil law defendant'.
Generally, Russian law establishes the following types of liability for wrongdoing in the securities market: administrative liability, criminal liability and civil liability.
Administrative liability is established by the CBR for various market violations pursuant to the provisions of the Law and various regulatory acts, and also on the basis of the provisions of the Code on Administrative Offences of the Russian Federation (the Administrative Code). Under the Administrative Code, Russian law distinguishes the following major types of administrative offences in the securities market:
- administrative offences in respect of dealing with the securities, which includes liability for wrongdoing related to the issuance of securities, illegal operations with the securities, interfering with performance of the rights granted by securities, violation of the rules regarding purchase of 30 per cent or more of the share capital of an enterprise, etc.;
- administrative liability for 'information disclosure' in the securities market, which includes liability for failure to comply with the regulatory requirements for securities market participants to provide timely and accurate reports; for providing false or misleading information in those reports; for intentionally omitting certain information, etc.;
- administrative liability for abuses relating to insider information and market manipulation;
- administrative liability for violation of the rules in respect of depositaries and register holders;
- administrative liability for violation of the rules in respect of shareholders' meetings in public joint-stock companies; and
- administrative liability for violation of the rules of the securities market applicable to various professional participants in the securities market.
All the above administrative offences are investigated and enforced by the CBR. Criminal liability is also contemplated for most of the above offences in the event of substantial damage or loss, in which case the offences are investigated and enforced by the investigating authorities in charge.
Cases in respect of illegal insider trading and market manipulation are not very common in Russia. According to the CBR statistics,2 there were 89 such cases initiated in the period 2010–2018, most of which were for market manipulation (with only three cases for insider trading in 2014 and 2018).
The most common civil law claims in Russia in respect of the securities market may be divided into the following categories:
- contractual claims: claims arising out of sale-purchase contracts, claims against depositaries and register holders, claims to utilise the rights related to the securities, etc.;
- claims invalidating certain transactions;
- claims for compensation of damage or loss (claims in respect of insider trading, market manipulation and information disclosure may be included in this category); and
- other claims.
It should be pointed out that the level of insider trading claims and market manipulation cases is attributable to the non-effective legislation regulating such claims.
II PRIVATE ENFORCEMENT
i Forms of action
The form of actions for private enforcement of securities claims may be either an individual action or a joint action. Joint actions, although contemplated by Russian legislation, are used extremely rarely in Russian court practice for securities disputes because of the limited legislative guidance and controversial court practice in this field.
Normally an individual claim in a securities dispute is filed with the arbitration court3 at the location of the defendant. The claim is filed pursuant to general provisions of the Russian Arbitration Procedure Code (APC). Burden of proof and defences available generally depend on the provisions of the law involved, but, following the principles of the APC, normally each party bears its burden of proof and shall fully support its case with evidence.
Alternatively the claim may be initiated within a criminal case trial, where the injured party acts as a civil law defendant, seeking the award of damages.
Since 1 February 2017, most corporate disputes have been considered as unconditionally or conditionally arbitrable. Unconditionally arbitrable disputes may be settled by commercial arbitration bodies authorised as a permanent arbitration institution under Russian law (i.e., not ad hoc arbitration) provided that all parties have entered into arbitration agreement after 1 February 2017. This category of disputes includes cases connected with disputes related to ownership of shares, sale-purchase of shares and others. In addition to above the provisions, conditionally arbitrable disputes (e.g., disputes connected with issuance of securities) shall be settled in the territory of the Russian Federation under special rules of corporate disputes approved by an arbitration institution, deposited in the Ministry of Justice and published on the arbitration intuition's website. At present, however, there are only three arbitration institutions entitled to consider corporate disputes in Russia.
As noted, the filing of the claim and general procedure is the same as for other claims filed under the terms of the APC with arbitration courts. The claimant should file a written and signed statement of claim, which should contain a mixture of alleged fact and law, coupled with details of the evidence that the claimant proposes to adduce at trial. Mandatory pretrial dispute settlement does not apply to corporate disputes, including disputes relating to securities. The judge is responsible for preparing a case for trial, and will question the parties in an attempt to clarify the issues in dispute between them.
There is no pretrial disclosure per se in Russian legislation. Russian procedural legislation does not provide any special regulation similar to the discovery or disclosure procedure in the United Kingdom or the United States; because of fundamental differences in procedure law, a Russian court has a much more significant role in the court hearing and the examination of evidence. Each party has to prove its case based on the documents available to it. If any evidence is in the possession of other parties (including participants in the case), a party may petition the court to obtain the evidence from the party, and such petitions are normally granted.
Subject to the procedural legislation, evidence is considered as being legally obtained information about the facts constituting the claims and objections of the parties, as well as other circumstances that are important for the correct examination and resolution of the case.
This information may be obtained by the court by means of:
- explanations by the parties or third persons;
- testimony of witnesses;
- written or material evidence;
- audio and video materials; and
- expert examination.
No evidence may have its force established in advance. The court will assess the relevance, admissibility and authenticity of all evidence, as well as its sufficiency and interconnection.
Each party must prove the circumstances it refers to within the claim or objection. However, it is the court that determines which circumstances are relevant to the case and which party successfully proves it. The court may also propose that the parties bring additional evidence.
Explanations by the parties or third persons concerning the circumstances necessary to resolve the case are checked and evaluated like any other evidence. Thus, these explanations do not take precedence over other evidence such as witness or material evidence. In addition, if the party acknowledges any facts constituting the claim of the counterparty, the latter does not have to prove this later on.
Russian arbitration courts rarely rely on witness statements and written witness testimonies, relying mostly on documents and written evidence.
Judgment will be given orally and in writing, normally within a week of the oral decision being announced.
Decisions of the first instance arbitration court become enforceable after one month, and during this time a party has a right of appeal, on fact or law, to the appeals instance. The decision of the court of the appeal instance is further appealable to the court of cassation. The final court of appeal is the Russian Supreme Court, which has a supervisory appellate function (empowering it to revise the decision of any state arbitration court that is illegal or lacking in legal substance).
The costs of litigation include a court fee plus the costs related to the trial of the case. Losing parties are usually ordered to pay the winner's costs. Legal costs of the winning party may also be collected, but at a 'reasonable' level at the discretion of the judge.
Settlement may be reached at any stage of arbitration proceedings, including at the enforcement stage. The court considering the case is usually trying to force the parties to reach a settlement.
A settlement is usually formalised through a court-approved settlement agreement, which has the force of a court decision. The settlement shall also contain the provisions on allocation of court expenses and fees of each party, and in the absence of these provisions the court shall allocate the expenses by itself and reflect this in its ruling approving the settlement.
The settlement agreement may not affect the rights and obligations of third parties (including other participants in the securities market), otherwise it will not be approved by the court. For the settlement, the parties may use mediation proceedings, but such proceedings are very rarely utilised as mediation results do not have mandatory and binding effect pursuant to Russian legislation.
iv Damages and remedies
Compensation of damage or loss caused by the violation of a right is a general tool of protection under Russian law. A person whose rights were violated may demand full compensation of damage or loss incurred. Both material and 'non-material' damages may be collected (i.e., compensation for pain and suffering for individuals, or 'loss of business reputation' for legal entities). Normally the full amount of direct damages shall be collected, although 'non-material' damages are usually awarded at the discretion of the courts and are of nominal value. The claimant shall prove the amount of claimed damages by means of relevant documents.
Damages to recover loss of profit can be claimed, but are difficult to prove in court. The courts are reluctant to award large amounts of damages in relation to loss of profits.
Other remedies are also available (performance in kind, orders to perform certain acts or refrain from certain steps, etc.).
III PUBLIC ENFORCEMENT
i Forms of action
The CBR has quite broad authority to supervise the securities market and to investigate any activities of its participants. It is necessary to mention that the CBR's authority to supervise the securities market is provided by the administrative legislation (the Administrative Code), as well as by the general legislation on the securities market and its regulation (the Law, the Protection Law, other legislative acts), so the CBR has wide variety of tools to regulate the market and prevent market abuses.
An investigation may be initiated by the CBR either on its own initiative on the basis of market supervision or received reports, or in response to any complaint from a market participant or any other person.
If, following an initiated investigation, the CBR finds any wrongdoing, it has the authority to initiate administrative proceedings and issue corresponding orders (or, depending on the amount of the loss or damage, pass the case for consideration to the investigating authorities in charge for initiation of a criminal case). Orders of the CBR may be appealed to relevant courts pursuant to the terms of the Administrative Code.
The CBR has the right to issues fines or petition the applicable court for disqualification of individuals responsible for the wrongdoing, or impose both these sanctions. The CBR is also entitled to use other coercive measures as provided by securities legislation:
- request documents for investigations in process;
- issue mandatory orders to participants in the securities market;
- issue orders prohibiting (or limiting) certain operations on the securities market for a period of up to six months; and
- prohibit issuance of certain securities, etc.
As noted, the CBR on its own initiative or upon a complaint initiates first a preliminary investigation and if there are grounds to believe that a wrongdoing was committed, the CBR starts a formal investigation. Once the formal investigation is initiated, the CBR has the power to proceed with certain coercive measures as indicated above to conduct and finalise the investigation, as well as to prevent ongoing wrongdoing, by issuing mandatory orders to the participants in the securities market.
Once it has reached its final conclusion in respect of the wrongdoing, the CBR may either close the case, undertake certain measures to prevent further wrongdoing, issue administrative fines or apply to the court for disqualification of certain individuals responsible for the wrongdoing (or both), or transfer the case for the consideration of the investigating authorities in charge if the amount of damage or loss caused by the alleged wrongdoing is substantial and exceeds certain statutory established thresholds (for each wrongdoing).
The alleged wrongdoer may participate in the CBR investigation, submit its explanations and objections, provide relevant documents in support of its position and further appeal the decision of the CBR to the relevant court.
The proceedings in the court are conducted pursuant to the Administrative Code. Usually the proceedings are fast and efficient.
The decision of the court of the first instance may be appealed to the corresponding appellate division within one month of the decision being issued in full. The decision of the appellate instance may be further appealed to the court of cassation.
If the CBR transfers the case to the investigating authorities in charge because the wrongdoing may be considered a criminal offence, the corresponding authorities conduct its own investigation and, depending on the results of a preliminary case assessment, it may initiate a criminal case.
Settlements in administrative cases are possible as well. The settlement in administrative proceedings may relate only to rights and obligations of the parties to the dispute (settlement may not affect rights and obligations of third parties and other participants in the securities market).
The settlement is fixed by a court-approved agreement, defining the rights and obligations of the parties. Upon approval of the settlement by the court, the administrative case proceedings shall be terminated in full (or in part, if settlement relates to a particular aspect of the dispute).
The court-approved settlement in administrative proceedings has the power of a valid and binding court decision and may be enforced accordingly.
Settlements with the CBR are not very common (nor are settlements with other administrative authorities), as Russian officials are concerned about potential accusations of corruption and thus tend to leave cases for final and ultimate consideration by the courts.
Settlements in criminal cases are also possible pursuant to Article 25 of the Criminal Procedure Code of the Russian Federation. The settlement is possible under the following conditions:
- the settlement is possible only for 'small- and mid-gravity' crimes (deliberate malicious wrongdoing with punishment of no more than five years of imprisonment or reckless acts as contemplated by the Criminal Code of the Russian Federation (the Criminal Code));
- the accused individual has never been criminally accused before;
- the accused individual reconciled with the injured party and fully compensated the damage;
- the injured party filed a special motion asking for termination of criminal proceedings; and
- the accused individual does not object to terminating the criminal proceedings.
Further, Russian legislation specifically provides the possibility of termination of criminal proceedings for certain economic crimes, which includes most criminally punishable wrongdoings in the securities market. Pursuant to Article 76.1 of the Criminal Code, criminal proceedings shall be terminated in respect of the crimes committed in the securities market under the following terms:
- the accused individual has never been criminally accused before;
- the accused individual fully compensated the damage done to the injured party; and
- the accused paid to the state budget double the amount of the damage or loss caused (or paid to the state budget the amount of income received as a result of the wrongdoing plus double the amount of that income).
Again, as in administrative proceedings, criminal investigators are reluctant to 'settle' cases, out of concern about corruption allegations; however, the settlement may be reached in court.
iv Sentencing and liability
Under the Administrative Code, Articles 15.17–15.24.1 and 19.7.3 are devoted to administrative wrongdoing in the sphere of securities. The following liability is provided:
- illegal securities operations (transactions preformed prior to the proper registration of the securities): fines for responsible managers of up to 10,000 roubles (or criminal liability) and fines for legal entities of up to 500,000 roubles;
- violations in the sphere of disclosure of information in the securities market (non-disclosure, insufficient disclosure, false information, failure to comply with time frames or follow prescribed procedures): fines for responsible managers of up to 30,000 roubles (or criminal liability) or disqualification (prohibition on holding certain management positions) for up to a year, and fines for legal entities of up to 700,000 roubles;
- failure to make due and timely reports to the CBR: fines for responsible managers of up to 30,000 roubles or disqualification (prohibition on holding certain management positions) for up to a year, and fines for legal entities of up to 700,000 roubles;
- limitations on the use of securities and affecting the rights pertinent to the securities: fines for responsible managers of up to 30,000 roubles (or criminal liability), and fines for legal entities of up to 700,000 roubles;
- illegal use of insider information: fines for individuals of up to 5,000 roubles, fines for responsible managers of up to 50,000 roubles (or criminal liability) or disqualification (prohibition on holding certain management positions) for up to two years, and fines for legal entities equal to the amount of the profit received as a result of the illegal use of the insider information (or losses avoided) but not less than 700,000 roubles; and
- violations in the sphere of maintaining securities registers: fines for responsible managers of up to 50,000 roubles (or criminal liability) or disqualification (prohibition on holding certain management positions) for up to two years, and fines for legal entities of up to 1 million roubles.
Other fines for administrative wrongdoing in the securities market do not differ materially from the fines indicated above.
The Criminal Code shall be applicable (Article 185 of the Criminal Code) if the cost of damage or losses (or illegal income) arising from wrongdoing in the securities market exceeds 1.5 million roubles (large damage) or in certain cases 3.75 million roubles (extra-large damage).
The Criminal Code provides various sanctions for aggravated crimes (conspiracy, crimes committed by organised groups, with large or extra-large damage, etc.). The most serious sanctions are as follows:
- abuses in the issuance of securities (large damage) (failure to disclose information upon issuance and registration of securities, placement of securities prior to registration, etc.): fines of up to 500,000 roubles or three times the annual income of the accused, or imprisonment of up to three years;
- abuses in disclosing information (large damage): fines of up to 300,000 roubles or two times the annual income of the accused, or imprisonment of up to two years;
- market manipulation if the cost of damage or losses exceed 15 million roubles: fines of up to 1 million roubles or five times the annual income of the accused, or imprisonment of up to seven years with a fine or without one and disqualification for three years; and
- illegal use of insider information (or illegal transfer of such information for subsequent illegal use) (extra-large damage): fine up to 1 million roubles or four times the annual income of the accused, or imprisonment of up to six years with a fine or without one and disqualification for four years.
IV CROSS-BORDER ISSUES
Russian securities regulations apply exclusively to the Russian securities market and Russian state authorities (including the CBR) have jurisdiction only for market abuses that occur in the Russian securities market.
Similarly, the Russian state criminal authorities and Russian criminal law apply only to crimes committed entirely (or partially) in Russia.
Foreign investors operating in the Russian securities market become subject to Russian legislation and shall follow the Russian law requirements as discussed above.
Russian arbitration courts have authority to consider cases with the participation of foreign parties for the following disputes:
- in respect of depository activities and the registration of title for securities in Russia;
- if the dispute is in respect of property located in Russia belonging to a foreign company;
- corporate disputes;
- if the dispute is based on an agreement according to which the performance shall be in Russia;
- if the damage occurred in Russia; and
- disputes in respect of securities registered in Russia.
V YEAR IN REVIEW
As discussed, Russia has not yet reached the stage where securities legislation has developed into a solid and consolidated set of rules and practices, with substantial supporting court practice and legislative guidance. Despite a lot of amendments to the corporate and securities legislation, it is still in a transitional stage, and it is quite fragmentary and sometimes controversial.
We do note, however, an increasing number of securities disputes as a result of the development of the securities market, and following this the CBR and legislators have introduced some guidance on the existing legislation, detailing the rights and obligations, and increasing liabilities, under the securities market legislation.
VI OUTLOOK AND CONCLUSIONS
In view of the current political environment and sanctions against Russia, to become more attractive to foreign investors, the Russian government recently introduced a corporate law reform that is the most significant development since the establishment of modern corporate law in Russia. The legislator's rationale behind the reform of corporate law is to create a more favourable and democratic environment for businesses, while at the same time taking into account the rights and interests of creditors, participants or shareholders and the companies themselves. New legislative mechanisms have also been designed to increase the attractiveness of Russian joint ventures for foreign investors.
More changes in the sphere of corporate legislation and the securities market are expected in 2019 and this will obviously affect the regulation of the securities market, ensuring more transparent rules and practices.
Current Russian legislation and CBR regulations ensure the basic minimum required standards for regulation of the securities market. This is especially true for the regulation of insider trading, market manipulation and prevention of various other securities market abuses in Russia. It is expected that the gaps that remain will be eliminated by the legislators and the CBR with the practical implementation of the very significant corporate law reform mentioned above.
1 Sergey Yuryev is a partner at CMS Russia.
3 Courts dealing in commercial cases not involving individuals constitute a system of 'arbitration' courts (this can be confusing since the arbitration courts are state-run like their counterparts in the west and should not be confused with commercial arbitration bodies that administer private arbitrations by agreement between the parties).