On 1 October 2013 the legal framework of securities regulation in Russia saw a number of substantial changes. This was a result of the entry into force of the Federal Law on Amending section 1(3) of Part One of the Civil Code of the Russian Federation no. 142-FZ of 2 July 2013 (the Law). One of the novelties introduced by the Law was the division of Chapter 7 (“Securities”) of the Civil Code into three paragraphs: Paragraph 1 “General Provisions”, Paragraph 2 “Certificated Securities” and Paragraph 3 “Uncertificated Securities”.
Public Authenticity Principle
The Law pays special attention to the principle of public authenticity, which limits the defences of the obligor on a security against claims of a mala fide purchaser. In particular, Article 145(1) of the Civil Code, as amended by the Law, explicitly states that the obligor on a security shall be entitled to advance against claims of a security owner only the defences which derive from the security or are based on the relations between the obligor and the security owner. Additionally, the obligor on a security shall be liable even if the security entered into business circulation in circumstances other than through the obligor’s own will. However, the public authenticity of the rights deriving from the security is be affected by the good faith of the security owner: the amended Article 145 of the Civil Code explicitly states (in paragraph 3 of Clause 1) that the rules limiting the obligor’s defences shall not extend to cases where the owner of the security knew, or should have known that there are no grounds on which the rights certified by the security could have been based, or that such grounds are not valid, or that the previous holders of the security did not have such rights. Such limitations shall also not apply where the owner of the security is not its bona fide purchaser.
Certificated securities are documents which (i) meet the requirements established by law and (ii) certify rights, the exercise and transfer of which is only possible if such documents themselves are presented. If the document lacks any of the mandatory requirements of a certificated security set forth in law, or does not satisfy the requirements as to the form and other requirements established by law, such document shall not be recognised as a security but shall be admitted as a written evidence if need be.
The Law established more precise procedures for the transfer of rights to certificated securities. As a general rule, the transfer of rights to certificated securities entails the transfer of rights which such securities certify, consequently the existence of unequivocal requirements applying to securities transfers is of paramount importance. The most important novelty introduced by the Law is that the transfer of rights to a registered documentary security shall from now on require the signing by the transferor and the transferee of a transfer certificate in front of the registrar. Otherwise, presenting a notarised transfer certificate to the registrar shall be necessary in order to transfer securities from one person to another.
The Civil Code as amended by the Law also provides for the possibility to immobilise certificated securities, which means the possibility to transfer certificated securities into the deposit of a person who is authorised by law to carry out such deposit operations and/or maintain securities records.
Pursuant to the Law, uncertificated securities are liability rights alongside other rights set out either in the decision on the issue of securities or in another act of the person who issued the securities. The exercise and transfer of such rights is only possible if the rules applying to the recording of such rights are respected.
The persons responsible for the performance of obligations arising from uncertificated securities are the issuer and persons who have undertaken to secure the performance of the obligations. Such persons shall be named by the issuer either in its securities issuance decision or in another document provided for by law.
Performance arising from uncertificated securities may be claimed either by the person named in the records as a titleholder with respect to such securities or the person entitled by law to dispose of the rights thereunder. Any disposal of uncertificated securities including their transfer, pledge or disposal restriction may be exercised only through the duly licensed person who carries out the keeping of records with respect to such securities.
The Law extended the grounds for the transfer of rights arising from uncertificated securities. Before 1 October 2013 the writing-off of uncertificated securities from the transferor’s account and their placement into the transferee’s account was generally possible and performed on the basis of a transferor’s order to that effect. Beginning from 1 October 2013 the transfer of uncertificated securities to the transferee shall be possible without such a transferor’s order if such possibility is explicitly provided for by contract or by law.
Uncertificated securities are not subject to the immobilisation procedure described above (i.e., they may not be transferred into the deposit of the person who is authorised by law to carry out such deposit operations and/or maintain securities records).
In case of loss of uncertificated securities records, such records become null and void from the moment of their loss and remain so up to the date when a relevant court decision about the restoration of the records comes into force. The information about the restoration of the data relating to the lost uncertificated securities records must be published in mass media that publishes information about bankruptcies. The publication shall be at the expense of the person who maintained the keeping of the records as at the date of their loss.
Important: New Rules for Keeping Registers of Shareholders
One of the amendments to the Law is that the keeping of records with respect to uncertificated securities is now carried out by means of entries in the respective accounts. The entries are made either by the person acting in accordance with the instructions of the obligor with respect to such securities, or by the person acting on the basis of (i) an agreement with the holder of rights with respect to those securities, or (ii) an agreement with a person other than the holder of rights with respect to the securities who is authorised by law to exercise the rights attached to those securities. Only persons who are licensed to carry out the activities relating to the keeping of records with respect to securities are allowed to make entries.
The Law allows joint stock companies that have maintained on their own the registers of their shareholders to continue the maintenance of the registers for a maximum of one year following the date of the entry into force of the Law. Upon expiration of this one-year term, the affected joint stock companies shall be obliged to transfer the maintenance of their shareholders’ registers to the person to whom a relevant license has been issued to carry out such activity. Therefore, beginning from 1 October 2014, the maintenance of shareholders’ registers shall only be possible by professional participants of the securities market industry who have relevant licenses issued by the securities market regulator.
Who Regulates the Securities Market Now?
Pursuant to the Decree of the President of the Russian Federation no. 645 dated 25 July 2013, the Federal Financial Markets Service (FFMS) has ceased to exist. Beginning from 1 September 2013, the functions of the federal executive body regulating Russian financial markets have been transferred to the Central Bank of the Russian Federation (the Bank of Russia), which has also received all immovable property of the FFMS necessary to perform the transferred functions. Former FFMS officers are now employed by the Bank of Russia.
Thus, the Bank of Russia has turned into a mega-regulator of the Russian financial markets. The Government of the Russian Federation shall ensure the continuity of the performance of the functions transferred from the FFMS to the Bank of Russia and shall also put its regulatory acts in line with the changes that ensued following the enactment of the abovementioned Presidential Decree. A new division within the organisational structure of the Bank of Russia (the Service of the Bank of Russia for Financial Markets) has been created to ensure the proper performance of the regulatory, controlling and supervisory functions in the sphere of financial markets.