Rules Aim for Strong Securities

The recent wave of legislation regulating the Russian securities market reflects a new stage in the development of the Russian economy and legal regime. This most recent generation of legislation addresses some of the basic weaknesses in the regulatory framework (such as lack of accountable registrars) and also introduces new elements (such as new types of investment funds) to an increasingly sophisticated market system.

Of the recent legislation regulating capital markets, two areas deserve special attention because of their importance as building blocks for a strong securities market and also because of certain fundamental legal issues which they raise -- regulation of registrars and the establishment of new investment funds, the payevoy investment fund (translated inconsistently as "unit," "mutual" or "share" investment fund).

Earlier legislation established that public companies with at least 1,000 shareholders must have independent registrars.

The recent decree of the Federal Securities Commission regulating registrars calls for the transfer of registrars of companies in which the controlling block of stock is in federal ownership to a licensed registrar and the establishment of several large pilot interregional registrars.

It also sets forth rules designed to ensure that registrars are independent and also sets forth the specific licensing requirements for registrars, including minimum charter contributions, limitations on stock ownership of stock and restrictions of their activities.

While this recent decree addresses some of the most critical issues regarding registrars, it also introduces some new questions -- in particular, who may be a registrar? For example, the decree provides that banks and credit institutions can not "combine" the activities of registrar and other forms of professional activities in the securities market. This provision might be interpreted to prohibit banks and credit institutions from acting as registrars all together -- or to require them to engage in such activities through an affiliate, or it might be interpreted merely to require that internal precautions be taken to keep registrar operations separate from other securities operations (to avoid conflicts).

Of equal interest is the new legislation on payevoy investment funds. Although basic legislation introducing the concept of such funds was introduced earlier, the precise nature of these funds will be defined only in future legislation (and hence the difficulty translating "payevoy"). Draft legislation relating to model contracts between management companies and companies providing depository services and the fund and rules for "open" investment funds is expected to be adopted in the next few weeks.

This latest wave of legislation thus raises some fundamental questions, including the very basic question of what constitutes a "security" and what policy concerns should apply to this question, particularly in the context of investment funds. The absence of a law on securities means that the Federal Securities Commission and other regulatory bodies must continue to decide many of these issues.

Maryann Gashi-Butler, a partner at White & Case, has been practicing law in Moscow since 1991.