BUSINESS AND THE LAW: Investor Law an Overlooked Gem
One year ago, the adoption of a new law on protection of investor rights would have been big news and the usual deluge of analysis in the press would follow. The new federal law "On Defense of Rights and Legal Interests of Investors on the Securities Market," also called the "Investor Protection Law," was signed into law March 5 and published March 11 with little fanfare or comment. Likewise, the various programs to rebuild investor confidence being discussed at both the legislative and self-regulatory level have regrettably received virtually no public attention.
The new Investor Protection Law expands the protections available to investors and introduces new concepts designed to enhance an investor's ability to bring successful claims in court and receive compensation for damage. The law also repeats several of the protections contained in subordinate legislation, but elevates their status by including them in a federal law. The law applies only to emission securities, not to state securities or securities of insurance companies, banks and other credit organizations or nonstate pension funds. The most important provisions of the new law can be divided into four categories: (a) various restrictions relating to issuance and circulation of securities; (b) detailed disclosure requirements for professional market participants; (c) new fines, prescriptive orders and sanctions for violations of securities legislation; and (d) an expanded role for self-regulatory organizations, social associations of investors and compensatory and other funds.
Restrictions on issuance and circulation. Professional market participants may lose their license, their license may be suspended and/or fines may be levied against them for advertising or offering securities to an unlimited number of persons if the issuer has not disclosed information in the procedure required by Russian legislation for public placements or if the professional market participant requires aclient to conclude a contract that limits the rights the client has under legislation protecting the rights of the investor. The latter contract provisions are void. The law also prohibits the public placement, advertisement and offer, in any form, of securities to an unlimited number of persons if the issuance has not been registered. The completion of any transaction in a security that is not fully paid for and with respect to which the required report on the details of the issuance of the security have not been registered is also prohibited. Various new supermajority voting rights are introduced, but they come into force only upon amendment of the Law on Joint Stock Societies. The law also provides for "joint and several subsidiary" responsibility (liability) for persons signing a prospectus (as well as independent evaluators and auditors) with respect to damages caused by incomplete or misleading information.
Detailed Disclosure Requirements. The new law contains an extensive list of information which a professional market participant is required to provide to the investor, such as information regarding the valuation of the securities by rating agencies, other market information on the securities and the issue and so forth. It is essential that investors demand this information to protect their rights.
New Fines, Prescriptive Orders and Sanctions. The law also further elaborates the role of the Federal Securities Commission in issuing prescriptive orders (orders requiring or prohibiting actions) that prevent professional market participants from taking specific actions which may harm the rights of investors. The commission will also conduct public hearings on questions affecting securities legislation. New fines and procedures for bringing claims relating to violations of legislation on to the placement and circulation of securities are set forth.
Role of Social Association of Investors, Self-Regulatory Organizations and Funds. In addition to an expansion of the role of self-regulatory organizations, the new law provides for the possibility of the formation of social associations of investors who may join to bring concerted actions against issuers or professional market participants who have violated investor rights.
NAUFOR, the principal self-regulatory organization in the Russian securities market, has as one of its principal goals the protection of investor rights. Most recently, it has been very active in developing a related protect entitled "The Program for the Protection of the Rights and Legal Interests in the Russian Federation." In part, the program is designed to identify issuers who are "repeat offenders," violators of laws meant to protect investors, and to defend the interests of investors through organized mediation or litigation with the issuers.
Professor William E. Butler and Maryann Gashi-Butler are partners with ZAO PricewaterhouseCoopers CIS Law Firm in Moscow.