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. Last Updated: 07/27/2016

Yeltsin to Curb MMM-Style Trade

President Boris Yeltsin has ordered the creation of a new securities commission that experts said Tuesday would help concentrate the government's efforts to curb abuses in Russia's chaotic financial markets.


The move comes after months of widespread anxiety about the lack of regulation in the country's fledgling securities trade, highlighted by the rise and fall of the reputed pyramid scheme MMM and the failures of several other major investment funds.


In a new decree, details of which were released Monday by the president's press office, Yeltsin has ordered the government to set up a federal securities commission headed by newly promoted First Deputy Prime Minister Anatoly Chubais.


The text of the decree had not yet been published Tuesday, but the president's office said the new body would be empowered to rewrite the rules for regulating the markets and punish those companies that breach them.


"It's extremely significant," said Richard Bernard, a partner with law firm Milbank, Tweed, Hadley & McCloy, who specializes in securities legislation. "There's nothing more important at the moment."


Russia already has a securities commission that includes representatives of the Finance Ministry, Central Bank, State Property Committee and Anti-Trust Committee -- all of which have had jurisdiction over different aspects of the securities market -- but analysts say the body has never been allocated a budget and has therefore been able to achieve little.


"The decree will decisively take from the constituent agencies various powers and concentrate them in one body," Bernard said. "The existing commission is at best a coordinating committee."


Chubais' appointment to head the commission will give it added political clout to get things done, analysts said.But Viktor Agroskin, a director of the brokerage firm RINACO-Plus and a member of the expert group advising the State Duma on securities legislation, cautioned that much still depends on whom the government chooses to sit on the new body.


"It's still not clear what the limits of the commission's role will be because a lot depends on the composition of the commission," he said. "We hope the new commission will consist of professional people with authority. We hope it will be positive."


The decree gives the commission three months to come up with a new system for licensing traders on the securities market and regulating the issue and trade of financial instruments.


The commission is also instructed to draft legislation that details the criminal responsibilities of companies that breach securities legislation or operate without a license.


In the interim period, the decree orders the government and Central Bank to halt the activities of unlicensed companies on the securities market by the year's end.


A series of financial scandals has underlined the inadequacy of legislation governing securities in Russia and strengthened calls for reform in recent months.


The release of MMM president Sergei Mavrodi from prison last month highlighted the law's inability to take action against financial swindlers. Mavrodi still faces tax evasion charges in relation to another of his companies, but is now immune from prosecution after his election as a Duma deputy.


Barred from issuing more shares earlier this year, MMM skirted the law by selling securities called "tickets" that had no legal status, and then by having investors sign statements that they had made a charitable donation to Mavrodi. Other companies that buy and sell their own shares, such as Telemarket and Khopyor, are frequently criticized in the Russian press for being MMM-style schemes.


Agroskin said that while steps need to be taken to restrict the activities of companies like MMM, the commission must be careful not to make changes that might damage the legitimate secondary market in state securities and the shares of privatized firms.


Any legislation that the committee puts forward will have to pass through the State Duma, which is currently preparing its own draft law on securities with input from the Finance Ministry, Central Bank and State Property Committee. In theory, this could diminish the role of the commission, but Bernard said: "If you're rational you're going to give the commission a hearing."


While analysts conceded that the formation of the commission is not going to solve problems dogging the markets overnight, they said it was a good start.


"The right answers will come along in developing the regulatory process," Bernard said.