Amendments to Russian Securities Legislation: Securities of Foreign Issuers

Practical Law UK Articles 9-386-3779 (Approx. 5 pages)

Amendments to Russian Securities Legislation: Securities of Foreign Issuers

by Simon H.P. Morgan and Dmitry Lapshin, White & Case LLP

Federal Law No. 74-FZ passed, amending Russian securities legislation

This special update discusses recent amendments to Russian securities legislation. It considers, in particular, amendments to the Securities Market Law (Federal Law No. 39-FZ dated 22 April 1996) and the Securities Market Investors Protection Law (Federal Law No. 46-FZ dated 5 March 1999) that were introduced by Federal Law No. 74-FZ dated 28 April 2009 (New Law).

The Law entered into force on 16 May 2009.

The New Law establishes a new regime for offering foreign securities to Russian investors and changes the procedure for placement and public circulation of foreign securities on the Russian markets.

In particular, the New Law amends:

Article 51.1 (Peculiarities of Placement and Circulation of Securities of Foreign Issuers in the Russian Federation) of the Russian Securities Market Law.
Article 5 (Limitations Connected with the Issuance and Circulation of Securities) of the Russian Securities Market Investors Protection Law.

Previous regulation of foreign securities

Under the original regime established by the Russian Securities Market Law, foreign securities were eligible for placement (the alienation of securities by the issuer to initial holders by entering into civil law transactions) and public circulation (the offering of securities through stock exchanges or otherwise through organisers of trades on the securities market, and offering of securities to an unlimited circle of persons, including by way of advertising), provided there was either:

A relevant international treaty between the Russian Federation and the country of incorporation of the foreign issuer.
A co-operation agreement between the federal executive body responsible for the securities market in Russia (Federal Service for Financial Markets of the Russian Federation (FSFM)) and the relevant securities market regulatory authority of the country of incorporation of the foreign issuer.

The Russian Securities Market Law also specifically restricted any private civil law transactions in the Russian market between brokers/trustees and Non-qualified Investors (see below) in respect of securities and other financial instruments designated only for Qualified Investors (see below).

However, it also granted professional participants on the securities market a right to trade in foreign financial instruments and derivatives (which do not qualify as foreign securities) only on behalf of Qualified Investors (restricting them from conducting such trading for and at the expense of Non-qualified Investors) and to enter into private secondary transactions in the Russian market only in respect of foreign financial instruments properly qualified as foreign securities (Qualified Securities).

Under Russian securities legislation such Qualified Securities are defined as either:

Foreign financial instruments to which an International Securities Identification Number (ISIN) and a Classification of Financial Instruments code (CFI) have been assigned, and those codes are specifically listed in the Regulation on Recognition of Foreign Financial Instruments as securities, approved by the FSFM Order No. 07-105/pz-n dated 23 October 2007.
Foreign financial instruments which are classified as Qualified Securities by the FSFM on a case-by-case basis.

Qualified Investors. These are listed in the Russian Securities Market Law and defined as including:

Russian banks.
Brokers and dealers.
Fund managers.
Investment funds.
Non-government pension funds.
Management companies of investment and mutual funds.
Insurance companies.
The Central Bank of the Russian Federation.
The Bank for Development (Vnesheconombank) (VEB).
The Russian Deposit Insurance Agency.
Various supranational financial organisations (including the World Bank, IMF, ECB and EBRD).
Persons (individuals or legal entities) recognised as Qualified Investors under the Russian Securities Market Law and the Regulation on Recognition of Persons as Qualified Investors, approved by the FSFM Order No. 08-12/pz-n dated 18 March 2008.

Non-qualified Investors. These are individuals or legal entities not recognised as either:

Professional participants on the securities market (that is, mutual funds, asset management companies, investment funds and pension funds (both state and non-state ones) and Russian legal entities possessing a FSFM' licence to conduct the activities of a broker, dealer, depositor, registrar, stock exchange, and so on).
Qualified Investors.

Overview of the New Law – new regime for foreign securities

Placement and/or circulation of foreign securities in Russia

According to the New Law, a foreign financial instrument (excluding foreign promissory notes, bills of lading and analogous instruments) is eligible for circulation (being entered into civil law transactions leading to the transfer of title to securities) in Russia as a foreign security if it:

Has both ISIN and CFI codes assigned to it; and
Is qualified by the FSFM as a security under the FSFM's rules and regulations.

To be eligible for placement and/or public circulation, foreign securities which meet the above criteria must be issued by any of the following:

Legal entities incorporated in a member state of either the Organisation for Economic Cooperation and Development (OECD), the Financial Action Task Force (FATF ) or the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEVAL).
Legal entities incorporated in a jurisdiction whose securities market regulator has entered into a cooperation agreement with the FSFM.
International financial organisations included in the list approved by the Government of the Russian Federation (currently the IFC, the EBRD and the Eurasian Development Bank).
Foreign states referred to in the above bullet points or their central (national) banks.

Foreign securities that meet the above criteria can be admitted to public circulation in Russia where the relevant approval of a Russian stock exchange is obtained.

Russian stock exchanges can grant such approval only if the foreign securities (excluding securities issued by international financial organisations) are both:

Listed on a foreign stock exchange approved by the FSFM (that is, are included in the FSFM's approved list of foreign stock exchanges).
Capable of being offered to an unlimited circle of persons under the law of the jurisdiction of the foreign stock exchange.

Also, under the New Law, where the foreign securities have been delisted from the foreign stock exchange or the foreign stock exchange has been excluded from the FSFM's approved list, trading of such foreign securities on the Russian stock exchange is no longer permitted.

Foreign securities that meet the eligibility criteria for placement and/or circulation (both public and private) but are not listed on an appropriate foreign stock exchange may be admitted to public placement and/or public circulation in Russia by the FSFM on a case-by-case basis, provided that:

The securities may be offered to an unlimited circle of persons under the law of the jurisdiction of the issuer.
The securities' prospective liquidity is not lower, and investment risks are not higher, than those of other relevant securities admitted for trading on a Russian stock exchange (the precise rules for the calculation of the prospective liquidity and investment risks are to be determined by the FSFM).

The application to the FSFM must be submitted by the relevant Russian stock exchange and needs to be accompanied by the relevant securities issue prospectus (Prospectus) and other documents to be determined by the FSFM.

Circulation in Russia of foreign securities which have been placed in Russia is allowed only after the foreign issuer:

Submits a notification to the FSFM regarding the completion of placement of such securities in Russia.
Discloses details of the completion of placement in Russia.

Securities of international financial organisations are admitted to public placement and/or public circulation in Russia provided that terms and conditions of such securities do not contain any restrictions on them being offered to, and circulated among, an unlimited group of persons, and the Prospectus with respect to such securities is properly registered with the FSFM.

The record keeping and transfers of rights associated with foreign securities which have been successfully admitted to public placement and/or public circulation in Russia is carried out by properly licensed Russian depositories (which may also keep the relevant certificates of securities where these are issued in bearer form).

The New Law also specifically states that placement and circulation of securities designated for Qualified Investors through Russian stock exchanges or otherwise through organisers of trades on the securities market must not be treated as public placement and public circulation of securities in Russia.

Offering of foreign securities and foreign financial instruments in Russia

Under the New Law, securities of foreign issuers which have not been admitted to public placement and/or public circulation in Russia, as well as foreign financial instruments that have not been qualified as securities in Russia, cannot be offered "in any form or by any means" to an unlimited number of investors or to persons who are not Qualified Investors.

Disclosure of information - Prospectus

The New Law states that a placement of foreign securities in Russia requires the registration of a Prospectus with the FSFM. The Prospectus should be prepared in the Russian language and signed by a licensed Russian broker (excluding Prospectuses of international financial organisations duly executed by such organisations) and by foreign issuers where the Prospectus relates to either:

The placement of foreign securities.
Their public circulation in Russia (if the relevant securities are not traded on a foreign organised (regulated) financial market).

By signing the Prospectus:

The foreign issuer takes responsibility for the truth, accuracy and completeness, of information supplied to the Russian broker for the purposes of the preparation of the Prospectus. It assumes liability for:
- any losses caused to investors as a result of the information supplied to the Russian broker being inaccurate, incomplete and/or misleading; or
- where the Prospectus is not signed by a Russian broker, any losses resulting from the above information being inaccurate, incomplete and/or misleading;
The Russian broker confirms that:
- the securities meet the eligibility criteria for being qualified as foreign securities and/or being admitted for placement and/or circulation (including public placement and/or circulation) in Russia; and
- the information disclosed in the Prospectus is consistent with that disclosed by the issuer on a foreign regulated financial market and/or supplied by the issuer for the purposes of the preparation of the Prospectus.
The broker assumes responsibility for losses caused to investors as a result of any information in the Prospectus being untrue, incomplete and/or misleading.

A Russian stock exchange which admits a foreign security for trading is required to disclose information regarding the security itself and its foreign issuer (in the foreign language accompanied by a corresponding Russian translation). The extent and scope of disclosure in relation to foreign securities traded on a foreign stock exchange must conform with the disclosure rules established by the foreign stock exchange (where the foreign securities are not traded on a foreign stock exchange, Russian disclosure rules must be applied).

Implementation of provisions of the New Law remains subject to the adoption of the respective FSFM regulations which, as of the date of this special update, are yet to be adopted.

Amendments to Russian Securities Legislation: Securities of Foreign Issuers | Practical Law