Russian Federation: Financial Assessment Program: Detailed Assessment of Implementation: IOSCO Objectives and Principles of Securities Regulation

International Monetary Fund. European Dept.

doi:10.5089/9781475538427.002.A001

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Russian Federation: Financial Assessment Program

Detailed Assessment of Implementation: IOSCO Objectives and Principles of Securities Regulation

Author: International Monetary Fund. European Dept.

Publication Date:: 22 Sep 2016

eISBN:: 9781475538427

Language:: English

Keywords:: ISCR; CR; financial market; investment funds; joint stock; beneficial owner; insider dealing

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This paper assesses the level of implementation of the International Organization of Securities Commissions objectives and principles of securities regulation in the Russian Federation. The findings reveal that there is much that the Central Bank of Russia needs to accomplish if it is to approach good international practice as a securities regulator. Some of the most recent regulatory changes, such as those on credit rating agencies, are clearly based on international standards. In other areas, further initiatives will be required. These include identification of conflict of interest and improving management standards of professional market participants.

Abstract

Executive Summary

1. The Central Bank of the Russian Federation (CBR) has recently completed a two-year process of assuming the powers and functions of the previous “standalone” regulator of the securities markets and the insurance industry. This has included absorbing 1,300 new staff and inducting them into the organizational structures of the central bank. In addition to its new supervisory functions covering a disparate group of markets and professional market participants, it has also assumed a developmental role for nonbank financial markets with an emphasis on developing proportionate regulation and optimizing the regulatory burden on market participants. This is a challenging medium to long-term role while also seeking to ensure that standards are raised and that undesirable elements are removed from the market as rapidly as possible.

2. As is reflected in the ratings for many of the principles, there is much that CBR needs to accomplish if it is to approach good international practice as a securities regulator. The assessors have observed many positive elements in the work that supervisors are undertaking on a daily basis and in the longer-term work of developing policy that can be translated into the supervisory agenda. The fact remains that there is a significant amount of work to achieve full compliance. The departure from the International Organization of Securities (IOSCO) requirements sometimes results from the absence of specific requirements in the legal framework, or insufficient implementation in practice. An additional cause is the complex legislative structure that is highly detailed, consists of many overlapping and in some cases inconsistent provisions that impose many detailed obligations but fail to impose the overarching duties required by IOSCO. The result is not easy to understand or enforce, leaves gaps, and yet creates substantial compliance costs. While some have argued that the absence of overarching provisions is an inevitable consequence of the principles of Russian law, others have correctly pointed out that there are some overarching obligations already in the legal framework and steps are being taken to develop the approach to legislation on these lines.

3. Some of the most recent regulatory changes, such as those on credit rating agencies, are clearly based on international standards. In other areas, further initiatives will be required. These include conflicts of interest identification and improving standards of management in professional market participants. It will also require the creation of legal gateways which will enable supervisors with the necessary skills sets to provide guidance as to what CBR’s reasonable expectations are on a range of issues. These include the necessary components of RM (RM) and internal control systems and the fair treatment of clients. Client facing rules require improved checks and balances within licensees which seek to ensure that clients, particularly unsophisticated retail clients, are advised on and sold products which meet their personal (often multi-dimensional) needs in a way which the current limited criteria for customer profiling fail to do. Further initiatives are also necessary in areas such as the prospectus and continuous disclosure regimes for listed companies and the need for easy to understand disclosure documentation for unit investment funds that still provide sufficient, and sufficiently accurate information to enable the man or woman in the street to understand the risks and rewards and to make an informed investment decision. The retail investor base is small, and such initiatives could make a significant contribution to the numbers participating.

4. CBR faces a major challenge in enforcing the regulatory regime and will need additional resources. Over the financial sector as a whole, there are 19,000 nonbank licensees within the responsibility of CBR. With some 250 members of its inspection team, it was able to carry out scheduled, or routine inspections of just 97 of these in 2014. Most inspection resources were devoted to 499 unscheduled inspections (investigations into complaints or allegations of regulatory breaches). There is scope for greater use of supervisory tools other than inspections. Moreover, the move to place more responsibility on self regulatory organizations (SROs) may reduce the burden on CBR staff in the long term while increasing it in the short term as the new regime is developed. There will be a need for more resources to enable CBR to conduct a fully effective enforcement regime.

5. In other areas where change is underway, the ultimate goal may be clear, but the route will be difficult to follow. One example is accounting standards, where the move to International Financial Reporting Standards (IFRS) is taking place while a requirement to publish accounts according to Russian Accounting Standards (RAS) remains. On insider trading and market manipulation, investors globally will expect to see results from the new law, at least in terms of criminal prosecutions presented in court, in the near term.

Introduction

6. An assessment of the level of implementation of the IOSCO Principles in the Russian Federation was conducted from February 3–16, 2016 as part of the Financial Sector Assessment Program (FSAP) by Richard Pratt and Richard Britton, both external Monetary and Capital Markets Department experts. The last IOSCO assessment was conducted in 2011 when the statutory regulator was the Federal Service for Financial Markets (FSFM). Its powers and functions were subsumed into CBR in September 2013 and the integration process was completed in the course of 2015.

7. CBR has created a three-year strategy on financial market development and stability; one of its goals for the period of 2016–18 is creating conditions for the growth of the financial industry. It has identified as critical to the achievement of that goal “enhancing financial market regulation, inter alia through proportional regulation and optimization of the regulatory burden on financial market participants.” Consistent with that goal is the adoption of international standards as established by IOSCO and appropriately adapted to the Russian market and legal system.

8. The assessment was conducted based on the IOSCO Principles and Objectives of Securities Regulation approved in 2010 and its Methodology adopted in 2011 and updated in 2013. Principle 38 was not assessed since this principle is now covered under the principles for Financial Market Infrastructures (PFMI). As a result, issues related to the central counterparties are not covered in this assessment.

9. The assessors relied on a number of information sources: a review of relevant laws, regulations, directions, instruction codes, and other documents provided by CBR; bilateral discussion with senior CBR staff in the weeks preceding the mission and a self-assessment prepared by CBR. In Moscow the assessors met with Mr. Sergei Shvetsov, First Deputy Governor of the CBR, senior CBR staff, senior officials at the Ministry of Finance (MoF) and the Ministry of the Interior (MoI), and with the Moscow Stock Exchange and other representatives of the private sector.

10. The assessors want to thank CBR staff for their full cooperation as well as their willingness to engage in open conversations regarding their supervisory and regulatory work. The assessors also want to extend their appreciation to the other public authorities and market participants with whom they met.

Regulatory Structure

11. CBR is the supervisor and regulator of the financial services sector; it is also the central bank. It is established under the Federal Law No. 86-FZ of July 10, 2002, “On the CBR” (Central Bank Law). It is a legal entity. Its authorized capital and other property is in state ownership. Its assumption of powers and functions over the nonbank financial sectors was achieved by Federal Law No. 251-FZ of July 23, 2013 “On Amendments to Certain Russian Federation Legislative Acts in Connection with the Transfer to the Russian Federation Central Bank of Powers of Regulation, Oversight and Supervision in the Area of Financial Markets,” which transferred to CBR the powers and functions previously exercised by the Federal Service for Financial Markets (FSFM). The Central Bank Law sets out the governance and management structure of CBR and its powers, duties and functions, including its powers to determine staff hiring and remuneration policies, its duties and functions to act as the central bank, conduct monetary policy, oversee payment systems and to conduct integrated supervision of the financial services sector. It is also responsible for supervising the conduct of takeovers and mergers of companies that have issued securities to the public.

12. Other government-appointed bodies have relevant regulatory roles. The Ministry of Economic Development (MED) is the body responsible for administering the Joint Stock Companies Act, although disclosure requirements for companies offering securities to the public are the responsibility of CBR. The MoF is responsible for setting accounting and auditing standards and it relies upon advice from the National Organization for Reporting Standards and the Audit Council respectively, both of which are independent of the profession. Auditors are relied upon to enforce accounting standards and enforcement of audit standards is undertaken by the Federal Financial and Fiscal Service (for public interest companies) and Self-Regulatory Organizations (for all audit firms). The SROs of auditors are supervised by the MoF. The Federal Anti-Monopoly Service can intervene in markets supervised by CBR.

Market Structure

A. Market Intermediaries

13. The intermediaries licensed by CBR are brokers, dealers, investment managers, custodians, and registrars. Investment advisers are not separately licensed. Underwriting is considered to be an activity encompassed within the definitions of brokering and dealing.

14. Most intermediaries hold multiple licenses. According to the National Association of Professional Securities Participants (NAUFOR), 59.7 percent of the licensees held licenses as brokers, dealers and investment managers. Of these, 65 percent also had licenses as depositories. Data from CBR confirm this. On January 21, 2016, there were 826 brokers, dealers, asset managers and custodians, most of which had multiple licenses.

Table 1.

Securities Licensees

Source: CBR.

15. The number of intermediaries has been declining as is shown in the figure below.

16. This trend has continued, as CBR has been reviewing the status of intermediaries that undertake very little business. By the beginning of 2016, according to CBR, the total number of intermediaries had fallen to 826, a reduction of 18.7 percent over the year.¹ CBR has noted that the steady and substantial reduction in the number of intermediaries has not had any appreciable effect on trading volume.

17. The trend of license granting and cancellation has varied considerably since 2008. The number of new licenses has reduced over time and the number of licences cancelled has exceeded those granted since 2010.

18. According to NAUFOR, 536 organizations traded on the exchanges in 2014, of which the top ten firms accounted for 63.9 percent of the volume of trading, up from 61.9 percent the previous year. The most active trader in non-government securities was CBR which accounted for 21.4 percent of the total turnover, down from 22.7 percent in 2013. CBR was particularly dominant in the market for corporate bonds (where its share was 32.9 percent, as opposed to 3.4 percent of the market for shares). The Sberbank Group (in which CBR has a shareholding of 50 percent plus one share) accounted for 15.5 percent of the market in shares (where it was the most significant trader) and 10.0 percent of the market in corporate bonds, where it was second largest to CBR.²

19. Top ten traders in non-government securities by volume are shown in the Table below.

Table 2.

Top Government Securities Traders

Source: CBR.

Table 2.

Top Government Securities Traders

	Name of Organization	Share of Volume (In percent)
1	CBR	21.4
2	Otkrytiye Group	9.7
3	Sberbank Rossii Group	8.9
4	VTB Group	8.5
5	BCS Group	3.9
6	Gazprom Group	3.2
7	Renaissance Group	2.5
8	Vnesheconombank Group	2.1
9	Bank Saint Petersburg JSC	1.9
10	BC REGION LLC	1.9
	TOTAL	63.9

Source: CBR.

Table 2.

Top Government Securities Traders

	Name of Organization	Share of Volume (In percent)
1	CBR	21.4
2	Otkrytiye Group	9.7
3	Sberbank Rossii Group	8.9
4	VTB Group	8.5
5	BCS Group	3.9
6	Gazprom Group	3.2
7	Renaissance Group	2.5
8	Vnesheconombank Group	2.1
9	Bank Saint Petersburg JSC	1.9
10	BC REGION LLC	1.9
	TOTAL	63.9

Source: CBR.

B. Collective Investment Schemes

20. At the end of 2014, there were 1,584 unit investment funds (1542 as of 3Q2015), a decline of 2.3 percent from 2013. The number of open-end mutual funds, which are focused on retail investors, decreased by 5.5 percent, while the number of closed-end mutual funds decreased by 2.2 percent. Closed-end funds remained the most common type of fund, amounting to 72 percent of the total number of unit investment funds. The assets under management (AUM) decreased by 3.1 percent to RUB 569 billion (470 as of 3Q 2015). The AUM of open and interval funds decreased by 24 percent to RUB 92.6 billion.³ This was the first time the value of open and interval funds had dropped below RUB 100 billion since 2010. AUM represented 0.13 percent of GDP.

21. The most significant structural change for 2014 was related to mixed investment funds.⁴ These funds became the largest group. comprising 63.9 percent of the total net asset value (NAV) of open and interval funds.

22. Since 2007, the share of the ten largest management companies of total AUM has been on an upward trend. At the end of 2014, the AUM of the ten largest management companies made up 84.1 percent of the total market of open and interval funds. Notably, the second largest management Company (MC) is part of the largest Austrian banking group (by balance sheet size).

Table 3.

Largest Asset Management Companies (end 2014)

Source: BCR.

Table 3.

Largest Asset Management Companies (end 2014)

No.	Managing Company	AUM (In millions of rubles)	Share in the Total NAV (In percent)	Number of Funds
1	Sberbank Asset Management CJSC	20,074.0	21.9	19
2	Raiffeisen Capital LLC	16,304.1	17.8	18
3	URALSIB LLC	8,933.9	9.8	19
4	Alfa-Capital LLC	7,706.6	8.4	17
5	Trust Investment Company, LLC	6,918.7	7.6	3

Source: BCR.

Table 3.

Largest Asset Management Companies (end 2014)

No.	Managing Company	AUM (In millions of rubles)	Share in the Total NAV (In percent)	Number of Funds
1	Sberbank Asset Management CJSC	20,074.0	21.9	19
2	Raiffeisen Capital LLC	16,304.1	17.8	18
3	URALSIB LLC	8,933.9	9.8	19
4	Alfa-Capital LLC	7,706.6	8.4	17
5	Trust Investment Company, LLC	6,918.7	7.6	3

Source: BCR.

C. Markets

23. The Moscow Exchange Group (MEG) is the largest exchange group in Russia, operating trading markets in equities, bonds, derivatives, the foreign exchange market, money markets, and precious metals. MEG also operates Russia’s central securities depository (National Settlement Depository) and the country’s largest clearing service provider (National Clearing Centre). The exchange was established in December 2011 by merging the Moscow Interbank Currency Exchange (MICEX) and the Russian Trading System (RTS). MEG’s shares are publicly traded on the exchange. As of November 2014, the largest shareholders of the Exchange were CBR (11.75 percent), Sberbank (9.9 percent), Vnesheconombank (8.4 percent), European Bank for Reconstruction and Development (6.1 percent), and Shengdong Investment Corporation (5.6 percent). Commodities trading is provided by five exchanges (St. Petersburg International Mercantile Exchange; “Exchange Saint-Petersburg” CJSC; Moscow Energy Exchange; Saint-Petersburg Exchange; NAMEX).

24. In 2014, the behavior of the markets was determined not primarily by fundamental factors such as poor economic indices but by the evolving geopolitical situation such as sanctions imposed against Russia by the United States (U.S.) and European Union (EU), the fall in oil prices, and capital outflows. The stock market showed negative results in almost all respects. The turnover ratio of the domestic share market was 36.0 percent in 2014, which was slightly greater than that in the previous year. However, comparing with the maximum level observed in 2009, the domestic share market liquidity decreased by 2.6 times.

Investor profiles

25. Although the number of private investors rose from 838,000 people to 906,000 people, the number of active private investors’ customers decreased slightly to 62,500 from 62,900 people in the previous year. Private (resident) investors, who make up 90.3 percent of the total number of transactions on the Moscow Exchange, invest predominantly (89 percent) in shares. The number of corporate investors increased in 2014 by 8.8 percent to 19,800. However, the number of active corporate investors decreased to 1,422 companies or some 4.0 percent of the total number of investors.

Table 4.

Capitalization of Russian Market (Equities) on MEG in 2010–14

Source: MICEX.

Table 4.

Capitalization of Russian Market (Equities) on MEG in 2010–14

Period	In billions of rubles	In billions of U.S. dollars (Estimate)	Capitalization as percent of GDP
2010	29,253.2	1,379.2	63.2
2011	25,708.0	1,096.2	46.1
2012	25,212.5	1,079.4	40.4
2013	25,323.8	1,041.1	38.0
2014	23,155.6	517.3	32.6

Source: MICEX.

Table 4.

Capitalization of Russian Market (Equities) on MEG in 2010–14

Period	In billions of rubles	In billions of U.S. dollars (Estimate)	Capitalization as percent of GDP
2010	29,253.2	1,379.2	63.2
2011	25,708.0	1,096.2	46.1
2012	25,212.5	1,079.4	40.4
2013	25,323.8	1,041.1	38.0
2014	23,155.6	517.3	32.6

Source: MICEX.

Table 5.

Number of Listed Companies on the Moscow Exchange ¹/

Source: MICEX.

^¹/Despite the trend of reduction in the total number of open joint-stock companies, there are currently 30,360 such legal entities. Less than one percent of them are represented on the stock exchange.

Table 5.

Number of Listed Companies on the Moscow Exchange ¹/

	Moscow Exchange Group
Period	Number of Share Issuers	Number of Share Issues (ordinary, preferred) in Quotation Lists
2011	320	119
2012	275	118
2013	273	110
2014	254	106

Source: MICEX.

Table 5.

Number of Listed Companies on the Moscow Exchange ¹/

	Moscow Exchange Group
Period	Number of Share Issuers	Number of Share Issues (ordinary, preferred) in Quotation Lists
2011	320	119
2012	275	118
2013	273	110
2014	254	106

Source: MICEX.

26. After a strong start to 2015 the market (as represented by the MICEX Composite Index) traded in a narrow range for the rest of the year.

27. Corporate Bond Market. In 2014, new issues of corporate bonds totaled RUB 1.8 trillion, which was 6.6 percent more than in the previous year. The share of off-market over-the-counter (OTC) placements grew sharply to 68 percent. The number of bond issuers on the Moscow Exchange remained unchanged at 323 companies. The total value of exchange transactions (at cost, without taking into account repurchase agreement (repo) transactions and placements) involving corporate bonds was RUB 4.3 trillion, which was 30 percent lower than in 2013. Secondary market trading in on-exchange bonds made up 30 percent of the secondary market volume. 45 percent of the turnover was in the bonds of 10 issuers.

28. Government Bond Market. The value of government bond issues traded on the exchanges continued growing in 2014 and, at year-end, had increased by 26 percent (par value), reaching RUB 4.7 trillion or 6.6 percent of GDP. However, exchange turnover was sharply lower—the secondary market volume (at cost, without taking into account repo transactions and placements) decreased by 36 percent to RUB 3.8 trillion for the year.

29. Sub-federal and Municipal Bond Market. This market segment has been and remains the most illiquid sector of the domestic debt securities market. The value of these bond issues made up less than RUB 500 billion, with the value of trading (without taking into account placements of new issues and repo transactions) being RUB 379 billion.

30. Repo Market. The Moscow Exchange is unusual globally in that it hosts a very large repo business. The value of exchange repo transactions on the Moscow Exchange in 2014 was RUB 183 trillion, which was 10 percent lower than in 2013. The share of corporate bonds in the total transaction volume shrank to 39 percent. The share of direct repos with CBR reached 55 percent at the end of the year.

Unit investment funds

31. In 2014, the value of trading in investment units on the Moscow Exchange was RUB 177.3 billion, +28.6 percent over 2013. A significant innovation was the introduction in 2013 of stock exchange trading in foreign exchange traded funds (ETF). The aggregate volume of transactions in ETF units has grown by seven times for the year and made up RUB 3.5 billion. However, it accounted for about two percent in the total value of transactions in investment units.

Derivatives markets

32. Futures and options trading is dominated by trading in contracts on the Moscow Exchange (MOEX) indices. In 2014, the value of trading in futures contracts for securities and stock indices declined for the third year in a row at RUB 28,929 billion (-8.2 percent versus 2013). From 2011, when the maximum trade volumes were recorded, the decrease was 37.3 percent. The proportion between trade in futures and options was unchanged: 87 percent in futures and 13 percent in options.

D. Preconditions

The legal framework

33. One important precondition for securities markets is a stable and transparent legislative and regulatory framework, but the Russian Federation regulatory framework cannot be so described.

34. The Russian Federation legislative system follows many of the principles of civil law. Like most countries (civil or common law), there is a legislative hierarchy, with the Constitution at the top. As with other Civil Law countries, the Russian Federation incorporates a fundamental Civil Code. CBR is able to issue by-laws on matters within its competence and can do so on its own authority, where there is explicit provision in primary legislation. These by-laws, which all have to be registered with the Ministry of Justice (MoJ), take the form of Regulations, Directions and Instructions. The main difference is their internal structure. Regulations set basic or systemic rules, Directions set other rules, and Instructions tend to deal with the procedural application of the rules. These instruments are binding on all federal governing bodies, governing bodies of the constituent entities of the Russian Federation and local authorities, and all legal and natural persons. In practice, most of them are directed at securities businesses.

35. The assessors have noted a number of issues arising from the structure of the legislation. In particular, it is clear that:

The legislation is subject to constant change. Even primary laws are often amended several times a year. For example, the Securities Law was amended five times in 2015, each amendment resulting in multiple changes to a substantial number of articles. Although the legislative system is highly efficient at showing the legislative history in each act, it remains difficult to keep track of the implications and consequences of all the changes.
Not all of the provisions in new or amended legislation result in comprehensive amendments or repeal of previous provisions. Some examples are given in the text of this assessment and include the law on SROs, which was brought into effect in January 2016, without repealing the existing articles relating to SROs in the Securities Law and the Investment Funds Laws. The provisions regarding the process and criteria for registration of SROs, their rights and duties were different in each of the Securities Law, the Investment Funds Laws and in the new provisions in the new SRO Law and yet all remained in force at the same time. This resulted in membership in SROs being both voluntary and mandatory (at the same time) for professional securities firms. The transition to the new regime has been constructed in a way that results in securities firms being obliged to comply with basic standards that are not yet drafted. CBR have explained the principles for resolving inconsistencies and these are discussed below. However, reliance on such general principles will still leave uncertainty and the existence of such principles is no substitute for a proper analysis of the potential conflicts or inconsistencies between new and previous legislation and the introduction, simultaneously with new legislation of all necessary repeals and amendments to previous legislation.
Provisions relating to any one matter can be found in a large number of different legislative instruments. Again examples are given in the text of the assessment and include the range of obligations placed on the staff of CBR that extend across several pieces of legislation. Another example concerns the obligations on issuers of securities, which appear in various laws and the Civil Code, all of which have to be read together to get the full picture even though the existing provisions in different laws do not always make reference to the relevant qualifying provisions in other laws. Disclosure requirements relating to substantial shareholdings are set out in the Joint Stock Company but can only be properly understood by referring to the definition of an affiliated person which appears in other legislation. While the notes to the Joint Stock Company Law give references for this definition, CBR has stated that the true definition can only be found by referring to two competition laws.
The approach to the nature of legislative provisions also changes in different laws. For example, in many laws, including the Securities Law, the duty of CBR to keep information confidential is explicitly overridden where disclosure is required or permitted by law. In the Investment Funds Law, by contrast, the threat of personal civil liability that hangs over all CBR staff in the event that they make a disclosure (Article 56) is not explicitly overridden by any other legal requirement, although CBR has explained that this should be inferred. The right of CBR to refuse to give a license if criteria are not met is explicit in some laws but must be inferred in others. For example, the Investment Funds Law explicitly states that CBR has the right to give or refuse licenses based on the criteria. However, the Securities Law does not include such a provision for CBR in respect of brokers, dealers or investment managers, even though it is stated that CBR is the licensing authority and that there are licensing criteria. The power of CBR to give or withhold licenses based on the criteria has to be inferred.
The introduction of a new requirement is not always accompanied by the repeal of the existing requirement. The legally binding requirements in CBR Regulations, Instructions, and Directions, sometimes overlap with existing provisions in Regulations and Orders published by the former securities regulator.
Some legislative instruments contain requirements at an inappropriate level of detail. For example, firms are given legally binding instructions on the persons to whom copies of a quarterly report should be given, how many copies to make, and how to indicate that they have been read.

36. CBR has explained that there are legal principles for resolving inconsistencies between laws. Like most countries, inconsistencies are resolved on the basis that the later law overrides the former one. Like most civil law countries, there is an additional principle that the more specific law overrides the more general one. Moreover, in the case of conflict, the courts will take the position that the interpretation that restricts liberty the least will prevail. It may well be that in many cases, this will result in clarity as to which provisions prevail. However, it may well also be that in other cases, this will not be so, and there will be some who are genuinely unclear as to the proper interpretation in any one case, without resorting to judicial decision.

37. CBR has also explained that the recent history of the Russian Federation has resulted in suspicion in the Duma and the public at large of state agencies and this militates against the granting of broad discretion to such agencies. This is the historical background behind the attempt to create a comprehensive set of specific requirements, rather than by setting overarching obligations. Inevitably, this approach leaves overlaps, loopholes and gaps (which are identified in the report), and which have to be addressed by new and amended regulations (which in turn exacerbates the problems caused by detailed requirements that are frequently changed).

38. The consequence of this approach is likely to be to increase costs. One intermediary informed the assessors that the legal department was larger than their trading department. In particular:

Proper compliance is very costly because of the need to employ staff to keep up with the changes, to identify the overlaps, seek advice on the interpretation of the latter, assess the implications and consequences of the changes, and implement those changes in terms of amended internal procedures, staff training, revised manuals and so on.
Costs also arise from the payment of fines for failure to comply with detailed rules.
Detailed requirements in effect micromanage the operations of firms, and are viewed by firms as inhibiting innovation and development.
CBR is obliged to spend considerable time explaining the intention behind its regulations.
The focus on detailed rules means that overarching principle based requirements, even where they exist, can be ignored by securities firms as there is a reluctance to take enforcement action for a breach of a principle in the absence of a specific rule.
The detailed rules will sometimes miss key requirements altogether—for example:
- ➢ The internal controls regulation focuses exclusively on the appointment and duties of a compliance officer but does not contain requirements that would be essential to an effective system, such as an obligation to conduct a risk assessment, to prepare policies and procedures that followed from that risk assessment, to develop a management information system that allowed the management to monitor the effectiveness of its policies and procedures in mitigating risk, to train staff in the risk appetite of the firm and the policies and procedures, and to re-evaluate the policies and procedures at least annually;
- ➢ Provisions on conflicts of interest for securities firms are incomplete and do not include a general requirement to identify conflicts of interest, avoid them, manage them, or decline to act; and
- ➢ There are detailed requirements to obtain specific items of information on customer’s objectives and circumstances but not an overarching requirement to obtain all information necessary to be able to judge the suitability of services.
In practice, firms act in a way that is consistent with the detail of the rule but not the underlying intention, for example:
- ➢ There are practices by the audit profession that are consistent with the detailed rules, but not the principle, regarding independence;
- ➢ Disclosures by companies are consistent with detailed requirements but not the general principle that all material matters should be disclosed where they may affect the price of securities (as is evidenced by the absence of profit warnings which although relevant to a securities value is not specifically included in the list of mandated disclosures).

39. The complex regime is difficult to comprehend and enforce. The assessors could not help noticing that regulations were suddenly identified at a very late stage in the mission (or in some cases after the mission). These regulations, such as Regulation 44 of 1998, were clearly relevant to a number of principles, but were not discussed by CBR in the self-assessment, or in the discussions (until the final meeting). This suggests to the assessors that CBR do not themselves have a clear and comprehensive picture of the regulations that apply and, it is highly likely that the intermediaries do not. This will mean that it is unlikely that all such regulations can be effectively enforced.

40. A regulatory regime that includes contradictions and inconsistencies can undermine respect for the rule of law. CBR have confirmed that they will not take enforcement action under the SRO Law against securities firms for failing to comply with non-existent SRO basic standards. However, it is not appropriate to have legal and regulatory provisions that cannot be complied with and must be ignored—even if, or, in fact, especially if, the enforcement authority has stated that they will take no action. If it were to become accepted that there may be some mandatory legal requirements that are impossible to comply with (and can safely be ignored with the agreement of CBR as enforcement authority), then the principle of the rule of law is undermined.

41. The reluctance to draft general, overarching requirements is gradually diminishing. The assessors have noted that there are some more general obligations (such as the requirement to have adequate RM and to have systems to identify and monitor conflicts of interest). Indeed, CBR found an old regulation issued in 1998, which contains very general and broad brush requirements on conflicts of interest. However, in these cases, there is no supporting detail and so it is not easy to judge the expectations of CBR. Moreover, even though these general requirements exist in some cases, some CBR staff continued to insist, from time to time in discussion and in comments in this report that such general requirements would be regarded as simply declaratory in the Russian legal system and would not be legally binding.

42. A reasonable balance between high level obligations, supported by a list of detailed but not exclusive examples, can clearly be struck and has sometimes been struck in the securities legislation.

43. The assessors understand that CBR is considering embarking on a simplification exercise and would encourage them to do so as soon as possible. In particular, it would be most helpful if:

All new legislative instruments identified existing conflicting provisions (especially where these exist in laws administered by CBR) and repealed or amended them, so as to remove the potential for inconsistency;
Provisions which deal with a particular subject should, so far as possible, be brought together, or at least cross referenced, so that those seeking to comply with their obligations can be confident that they can find them in a single place, where they relate to the same matter;
The degree of detail that is required should be reviewed, so as to limit the extent to which the actions of securities firms are micromanaged;
Greater use should be made of the kind of high-level obligations that are beginning to appear in legislation, so that those subject to the law can see the overall objective of the regulations and do not have the scope for slipping through the gaps created by different detailed provisions;
Such overarching requirements should be supported by sufficient detail that focuses on the key elements that CBR regard as essential;
CBR should seek to limit the number of amendments (an objective that should be easier to meet if there is less minute detail in individual instruments).

Business laws

44. Business laws in Russia are based on chapter 4 of the Civil Code, the 208-FZ Federal Law on Joint Stock Companies and the 14-FZ Law on Limited Liabilities Companies. The latest major amendments to business legislation were introduced with Federal Law 99-FZ and Federal Law 210-FZ, from 2014 and 2015 respectively, which changed the types of companies allowed in the Russian Federation, increased the protection of investors holding Russian local securities, and improved the conditions for participation in corporate actions (for example by allowing e-voting and e-proxy voting). The Insolvency Law was amended in 2014 to incorporate changes in the insolvency procedures for financial institutions. In 2015, amendments to the Federal Law No.7-FZ “On Clearing and Clearing Activities” empowered the National Clearing Center (NCC) to effectively segregate member positions from their client positions. The current legal structure meets the requirements for close-out netting of contracts under the International Swaps and Derivatives Association master agreements and the global master repo agreement of the International Capital Markets Association. Other important federal laws to register and conduct business are those related to state registration of legal entities and individual entrepreneurs, fundamental principles of Russian legislation on notaries, trade, consumer rights protection, and combating money laundering and the financing of terrorism, as well as the Land code, the CBR Law, and the Tax code. One of the most significant changes in these laws was the introduction of the requirement for financial institutions in 2013 to identify their clients, clients’ representatives, and beneficial owners and to collect information on the reputation of them and on their business purposes. The definition of the “beneficial owner” was also clarified, and it currently is consistent with the Financial Action Task Force (FATF) Forty Recommendations Glossary.

45. The judicial power is formally independent from the legislative and the executive powers. The judiciary is primarily regulated by the Constitution of Russia, the Code of Criminal Procedure, the Code of Civil Procedure, the Code of Administrative Procedure, the Code of Arbitration Procedure, and the 1996 Federal Constitutional Law on the Judicial System of the Russian Federation. According to the Constitution of the Russian Federation, the judiciary should protect all men (and women), and citizen’s rights and freedoms. In addition, the Constitution confirms that courts alone can administer justice and requires that all judges shall be independent and obey only the Constitution and the law. The courts are financed solely from the federal budget in order to ensure a complete and independent administration of justice.

46. The judicial power is exercised by means of constitutional, civil, arbitration, administrative, and criminal proceedings. Examination of cases in all courts is open. Judges adopt the Code of Judicial Ethics which asserts the need to guarantee everyone’s right to a fair consideration of a case by a competent, independent, and impartial court. The judicial system is composed of the Constitutional Court of the Russian Federation, the Supreme Court of the Russian Federation, federal courts, district courts, magistrate courts, military courts, and arbitration courts.

47. All judges of the Supreme Court are appointed by the Council of the Federation of the Federal Assembly of the Russian Federation upon recommendation of the President of the Russian Federation. All other judges, including military and arbitration, are appointed by the President of the Russian Federation.

48. The World Bank Global Competitiveness Report for 2014–15 ranks Russia as 109th out of 144 in judicial independence. In terms of the efficiency of the legal framework in settling disputes and in challenging regulations, Russia ranks 110th and 99th, respectively, and in the area of protection of property rights, Russia ranks 120th.

Legal profession

49. The legal profession is governed by the Constitution, the Law on the Status of Judges, the Law on Attorneys’ Practice and the Bar, and the Foundations of the Legislation on Notary. The main legal professions in Russia are the public prosecutor, investigator, judge, attorney (advokat), and notary.

50. The public prosecution service consists mainly of the Prosecutor General’s Office of the Russian Federation, the prosecutor’s offices of the subjects of the Russian Federation, city, district and other territorial prosecutor’s offices, and military and other specialized prosecutor’s offices. The Prosecutor General of the Russian Federation must be appointed and removed from office by the Federation Council of the Federal Assembly of the Russian Federation by the recommendation of the President of the Russian Federation. The term of office of the Prosecutor General is five years. Prosecutors and investigators employed in the prosecution bodies should not be members of any elective or other bodies set up by state authorities and local self-government bodies.

51. The Investigative Committee of Russia is the main federal investigating authority in Russia. From 2011, this committee is not included in the structure of government authorities, and only the President of the Russian Federation carries out any control over the Committee. The Chairman is appointed and dismissed by the President without the approval of any body of legislative power and reports annually to the President on its activities.

52. All judges of the Supreme Court are appointed by the Council of the Federation of the Federal Assembly of the Russian Federation upon recommendation of the President of the Russian Federation. All other judges, including military and arbitration, are appointed by the President of the Russian Federation.

53. Lawyers must have a license to practice law in order to appear in court on criminal matters. Under the 2002 Law “On Attorneys’ Practice and the Bar,” each of the Russian regions has a single bar body called Bar Chamber. Lawyers need to be a member of one of such Bar Chamber to be recognized as an attorney.

Credit bureaus

54. Russia has 21 functioning credit bureaus according to the State Register of Credit Bureaus. These bureaus process and store credit histories and provide credit reports and related services. As of December 2014, the number of borrowers whose information is recorded in the credit bureaus is 61 million (60.7 million are individuals and 358,000 are legal entities). Some credit bureaus are owned by banks.

55. Credit bureaus are supervised by CBR and have been the subjects of reforms to strengthen the financial and real sector. The Federal Law “On Credit Histories” entitles the CBR to keep the central catalogue of credit histories which informs users, subjects of credit histories, and some other persons defined by law about the location of the credit histories. CBR has the power to request and receive credit history reports from credit bureaus.

Main Findings

Principles relating to the regulator (Principles 1–8)

56. CBR is making significant advances in the regulation and supervision of financial markets since taking over responsibility for this sector. Full integration of the 1,300 staff of the FSFM was achieved only in 2015. In terms of governance, there are some concerns about the direct involvement of government at the Board level and in setting the bank’s budget. A more significant concern is the lack of legal protection for staff in the proper performance of their supervisory duties. The Central Bank Law and other legislative requirements seek to impose high standards of personal conduct and ethics on CBR staff, but greater clarity would be beneficial. On other matters, such as systemic risk in securities markets and perimeter policing, CBR meets IOSCO standards with only minor issues to be dealt with in the latter case. More needs to be done on developing an effective regime to deal with conflicts of interest and misaligned incentives.

Self-regulatory organizations, enforcement, and cooperation (Principles 9–15)

57. CBR has a comprehensive set of enforcement powers and is moving to a more risk-based approach to supervision and enforcement, but the resources devoted to supervision and particularly inspections are inadequate. CBR has enforcement powers that cover most of the requirements of the principles. These powers are now being used with determination to identify and remove securities firms which conduct little or no securities market activity (and which probably should not have been licensed in the first place). For the remaining firms, CBR focuses on identifying breaches of the many detailed rules and applying penalties for such breaches. Most onsite visits to firms are “unscheduled”—i.e., are investigations arising from complaints or suspicions of breaches arising from other sources. The number of routine inspections is very low. In 2014, for the 19,000 nonbank licensees for whose supervision CBR is responsible in all financial sectors, there were 499 unscheduled inspections (i.e., investigations) and only 97 scheduled inspections.⁵ Only 250 inspectors are available to inspect all these licensees. This number of routine scheduled inspections is far too low for this to be described as an effective compliance program. Securities firms themselves report that CBR inspectors are beginning to engage in useful qualitative discussions of the effectiveness of RM as a whole. This is a positive development. CBR is moving towards a new regime where front line enforcement will be the responsibility of SROs and this will involve the transformation of the role of such organizations. This transformation needs careful management. Market abuse was criminalized only in 2013 and criminal penalties available only in 2015, and as yet only administrative penalties have been imposed.

58. CBR is a signatory to the multilateral memorandum of understanding (MMoU) and is actively responding to requests for information, even though some ambiguities in the law need to be removed. CBR became a signatory to the IOSCO MMoU in 2015. It has received and responded to requests for information. The Central Bank Law has been amended specifically to allow for CBR to use its powers to obtain confidential information in response to requests from foreign authorities. In most cases, but not all, the duties of confidentiality placed on the regulatory authorities contain an explicit gateway to allow disclosure when permitted by law and this practice needs to be comprehensive. The drafting of the Central Bank Law prohibits the provision of unsolicited assistance and this restriction on the otherwise wide powers of CBR need to be removed.

Issuers (Principles 16–18)

59. Disclosure provisions on issuers are reasonably comprehensive, but the continuing disclosure obligations need to be strengthened. Companies that have issued shares or bonds to the public are required to publish prospectuses and are also required to publish quarterly and annual reports. The requirements for prospectuses and for periodic reports are comprehensive. There is a general obligation to disclose all material facts relevant to a decision to invest in a prospectus and a corresponding continuing obligation to disclose all material facts that might affect the price of a security. In practice, however, disclosures are mostly limited to those included in a list of specifically required disclosures in the law, which includes routine matters such as the holding of a general meeting, or the terms and conditions of securities, but excludes many significant matters such as a material change in prospects or risks, or important events affecting performance and profits. These significant disclosures would be categorized as “any other matter” in the law and CBR has confirmed that they would expect significant disclosures to be made under that category, although very few disclosures (just over 1 percent of the total) are made on this basis. There is no formal derogation from the disclosure obligation for state or commercial secrets, although such omissions from disclosure are made and accepted without any effective statutory safeguards. The exchange does not monitor continuing disclosure obligations by issuers, although CBR states that it is under an obligation to do so. It is important to strengthen the obligation to promptly disclose any matter that might reasonably be expected to affect the value of securities, monitor compliance, and to enforce it by taking appropriate action.

60. Requirements to adopt IFRS are already in place for many companies, with the remaining companies with securities offered to the public, coming into IFRS by 2019, but in practice, the requirement is often observed in form rather than substance. A complex set of provisions in various laws, when taken together, impose a requirement on all listed companies and all companies that publish consolidated financial statements to adopt IFRS. Other companies that issue securities to the public will have to adopt IFRS on a schedule ending in 2019. However, the market perception is that of those currently subject to the IFRS requirement, only those 60–70 companies that seek listings on foreign markets presently comply with this requirement in substance. For all other companies, the general practice is to use RAS as the basis for the narrative and other disclosures in the prospectus, annual reports, and quarterly reports. Formal financial statements, prepared according to both RAS and IFRS are included in the Appendix. RAS standards are described by the CBR as differing from IFRS in a number of ways, mostly with regard to a focus (in practice, although not in principle) on form rather than substance, which could result in very different results, especially at times of volatility in the value of assets. It will be important to ensure full compliance with IFRS in all financial reporting.

Auditors, credit rating agencies and other evaluative services (Principles 19–23)

61. The MoF is at the head of an oversight regime that allows auditing self-regulatory bodies to contribute to, but not take final decisions on, auditing standards and includes enforcement by both the MoF and SROs of auditors. The MoF appoints an Audit Council that is independent from but can consider detailed proposals relating to audit standards prepared by SROs. This independent Audit Council takes final decisions on what to propose to the MoF. As a matter of policy, the MoF accepts the Audit Council recommendations. The Audit Council also approves standards of ethics and independence to be enforced by SROs and the MoF (through the Federal Fiscal and Financial Supervision Service (FFFSS)). SRO enforcement activity is monitored by the MoF. FFFSS enforcement is focused on the auditors of public interest companies (including all listed companies). All auditors and audit firms must belong to one of five competing SROs and, to gain membership, must meet qualification requirements and continuing professional development obligations. Independence provisions in the Law consist largely of descriptions of prohibited relationships. The Code of Ethics and Independence Rules adopt a more principle-based approach. Both the FFFSS and the market agree, however, that it is not easy to enforce the independence rules on the basis of these principles. The market perception is that many audit firms adopt practices that clearly breach the substance of the independence principles but not necessarily the specific provisions in the law. It will be important to enhance the enforcement regime so as to address this problem.

62. A new Credit Ratings Agency (CRA) Law is currently in place but cannot yet be fully enforced and there are no effective requirements for other evaluative services. The new CRA law is reasonably comprehensive and is clearly designed to meet the provisions of the IOSCO Code of Conduct and the IOSCO CRA Principle. All of the requirements relating to registration, disclosure, conflicts of interest, methodology, and internal governance are there. There are some enhancements that should be made with respect to CBR’s powers to collect further information from license applicants and the imposition of stronger integrity requirements and overarching recordkeeping provision. CBR is also working on detailed regulations, and these were not all fully in place at the time of the assessment. Therefore, no CRA could register, and the law could not be enforced. CBR does not have a process for identifying new evaluative services that may warrant regulation. It proposes to bring investment advice into regulation, but until it does, there are no specific requirements for analysts employed by brokers. Detailed independence requirements for appraisers (for example, of assets of issuers and collective investment schemes—CIS) are in a Code of Ethics and Independence prepared by SROs, and these were not supplied to the assessors.

Principles for collective investment schemes (Principles 24–28)

63. The market sector is small and does not raise systemic risk concerns; hedge funds and money market funds are not a significant factor. Operators of collective investments schemes require a license from CBR, as do custodians (specialized depositories), the use of which is mandatory. Integrity tests for licensees should be enhanced. Operators and custodians are subject to capital and organizational requirements. Operators are also subject to conduct of business requirements, but improvements should be made. Agents who market shares or units are also subject to licensing. CBR supervises all three groups. The regulatory framework places strong reliance on the specialized depositories to ensure that the operators (management companies) comply with the rules of the funds, the law, and regulatory acts of CBR. Risk-based supervision is being applied in a comprehensive and constructive way. The legal form of CIS is well established, as are the rights of share and unit holders. There is a disclosure regime with mandatory standards for documentation, but improvements should be made.

Market intermediaries (Principles 29–32)

64. All market intermediaries must be licensed and are subject to an evaluation by CBR, but the criteria need to be enhanced and the capital requirements tailored to risk. CBR is the licensing authority (although it cannot impose a license condition). The criteria cover competence, integrity, and financial standing, but the detailed provisions on integrity, in particular, are too narrow and inflexible, giving insufficient discretion to CBR to determine what matters are relevant to the individual and the post in question. The legal entity for which a license is sought must demonstrate compliance with a range of matters including internal controls, RM, and capital. Capital requirements are flat rate and not risk-based. CBR should develop appropriate criteria for judging the adequacy of RM and internal controls, and should be able to make a judgement on the willingness and capacity of the applicant to comply with their obligations. Capital requirements should be risk-based, and CBR should institute early warning reporting for deterioration of capital while enhancing its powers to take action to avoid default. CBR will need to develop a contingency plan for such occurrence.

Principles for the secondary markets (Principles 33–37)

65. Exchanges and non-exchange trading systems are permitted, and both are required to be licensed. Currently there are none in the second category and no applications are pending. The largest exchange, MOEX, has a near monopoly in many of its markets, particularly equities. Exchanges must be fit and proper to conduct operations, maintain capital, and have rules to ensure they conduct fair, orderly and transparent markets. There must be fair access to the markets, and they must comply with CBR requirements for conducting their operations. They also must monitor the conduct of their members and secure compliance of companies admitted to trading with the listing rules; these areas merit closer examination. There are no effective controls or disclosure of on-exchange short selling. More generally, the supervisory system is relatively new and has yet to be fully tested in highly stressed market conditions. Criminal enforcement of breaches of insider dealing and market manipulation is also new and untested. CBR’s taking of administrative action in such cases is developing a reasonably successful track record.

Summary Implementation of the IOSCO Principles

Table 6.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Note: Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA).

Table 6.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Principle	Grade	Findings
Principle 1. The responsibilities of the Regulator should be clear and objectively stated.	BI	At the level of the federal laws, the powers and authority of CBR are set out comprehensively and with reasonable clarity. However, the complex interaction of laws, regulations, directions, etc., coupled with frequent changes and very detailed requirements, has resulted in numerous cases of one group of market participants being subject to obligations to which others are not, for no obvious reason. It is doubtful that even with substantial and highly skilled compliance departments, most licensed firms (or their SROs) are able to stay fully compliant on a consistent basis. Investors, too, face substantial difficulties in understanding what their rights are in their relationship with market participants or through ownership of a particular financial product.
Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers.	PI	Although the independence of CBR is set out in the Central Bank Law and the Board of Directors’ functions are limited under that law to certain administrative matters excluding regulatory policy making and enforcement matters, the right of the Ministers of Finance and Economic Development to attend board meetings with a right to participate in discussions and express opinions to be recorded in the minutes’ risks creating the impression of possible political involvement in CBR’s operational activities. There is a lack of legal protection for staff when performing regulatory functions such as carrying out investigations into possible breaches of the law and normative acts of CBR made under it.
Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.	BI	Although CBR has control of its operational budget once it has been agreed, the overall size of the budget is established by a decision of the National Financial Board of which the CBR member (the Governor) has one vote among 12. The others are from the Presidential administration, the federation government, and the legislature. Since staff salaries and administrative expenses constitute the major part of the bank’s expenses, there is potential for the Presidential administration, federal government, and the legislature to exercise definitive influence over the resources the bank has for regulation and supervision. CBR’s costs of regulation are met from income sources other than fees levied on nonbank financial market participants, which go to the government. The retained profit of CBR appears sufficient to enable CBR to meet its responsibilities as a securities market regulator as well as its responsibilities as a central bank and supervisor of banks, insurance companies, and non-state pension funds. It has the necessary powers. Staffing policies and training appear to be well established and resourced, and CBR’s initiatives in investor education are well regarded by others working in this area.
Principle 4. The Regulator should adopt clear and consistent regulatory processes.	FI	Among industry participants there was a mix of opinions on the commitment of CBR to “real” consultation. There was a clear majority view that CBR is serious in seeking views of market participants and the public, and that engaging with CBR by responding to public consultations or participation in CBR workshops is worthwhile and can secure improvements in proposed regulatory approaches. CBR has reasonable processes intended to secure procedural fairness and transparency.
Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality.	BI	Staff are subject to obligations to maintain high standards in their professional and personal conduct. CBR appears to have made substantial efforts to enable staff to understand their duties and responsibilities as set out in the multitude of laws, regulations, instruction, and orders to which they are subject, and the penalties for breaches, etc. As for the legislative provisions themselves, the assessors were working from translated texts and identified some issues. There may be other ambiguities and weaknesses in the Russian text that the assessors have not identified. Currently, there is a two tier system whereby specific restrictions apply only to a limited number of staff. Staff below middle management are subject only to more general provisions in a multitude of laws, regulations, ordinances, etc. There is substantial scope for clarification.
Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.	FI	The Financial Stability Committee (FSC Com) of CBR has a clear focus on nonbank financial entities (NFEs) and systemically important financial market infrastructures, including the dominant central counterparty for securities markets. Within CBR nonbanking sector departments, staff appear to be fully engaged in the work on systemic risk. Although the published Financial Stability Review (FSR) is primarily banking focused, it addresses systemic issues in securities markets when they arise.
Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly.	BI	Perimeter review of firms and products appears to be undertaken, and the appropriate sources of information have been identified and utilized. There may be scope for further formalizing the process to ensure that issues are not overlooked when first observed.
Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.	NI	CBR is not sufficiently proactive in identifying and evaluating potential, as distinct from actual and current, conflicts of interest and misalignment of incentives. It lacks a process to facilitate this process. Currently, its responses are primarily reactive. The responsibility for identifying and taking action regarding losses caused by the mis-management of a conflict of interest by a professional market participant is placed on the client, who may be unaware that they have suffered a loss.
Principle 9. Where the regulatory system makes use of SROs that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.	NI	The conflict of laws means that CBR cannot enforce the old SRO regulatory regime. The new SRO Law could not be fully enforced at the time of the assessment because of transitional provisions. SRO’s primary purpose is defined in the law as being the protection of members’ interests, market development and efficiency, not investor protection. There are some gaps in CBR’s powers to ensure procedural fairness and effectiveness by SROs. There are some gaps in SRO duties and obligations.
Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers.	FI	CBR has a comprehensive set of powers. There is no overall record keeping obligation imposed on securities firms, although there are extensive and detailed requirements.
Principle 11. The Regulator should have comprehensive enforcement powers.	BI	CBR has a broad range of investigation and sanction powers, and although the level of fines is modest, the fines related to income should be dissuasive. Criminal prosecutions of market abuse offenses are still very rare. Beneficial ownership information may not always be available in practice.
Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	NI	The enforcement regime is found to be not fully effective. The planning of inspections of intermediaries is neither risk based, nor routine and periodic, given that very few scheduled inspections are undertaken. There have been no inspections of the exchanges. Supervision is focused on finding and punishing violations rather than monitoring and enhancing RM. Inspections resources are very limited, with only 250 inspectors for 19,000 nonbank entities across CBR as a whole and used primarily for unscheduled inspections (investigations) rather than routine compliance checks. Periodic reports submitted by intermediaries are concerned mostly with financial information and do not include RM indicators.
Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts.	PI	There are powers to share information via the MMoU and other agreements. There is no power to initiate sharing of information on an unsolicited basis. The confidentiality provisions in the Investment Fund Law conflict with the disclosure provisions in the Central Bank Law. Information on beneficial owners may not always be available.
Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts.	FI	CBR is a signatory to the MMoU and actively meets its obligations.
Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers.	FI	CBR is a signatory to the MMoU and actively meets its obligations.
Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions.	NI	There is no effective general ongoing obligation to disclose any material fact that could affect the value of securities. In practice, disclosures of material information, other than the items specifically listed in the law, are rare with only just over 1 percent of disclosures falling into this category, even though this category effectively includes many of the most important disclosures, such as changes in prospects or risks. There is no explicit derogation from the disclosure obligations for state and commercial secrets, and no effective safeguards when disclosures are not made. There is inadequate provision for advertisements outside the prospectus.
Principle 17. Holders of securities in a company should be treated in a fair and equitable manner.	PI	The necessary protections for majority and minority shareholders are broadly in place. The provisions relating to shareholders acting in concert with others is limited to specified affiliated persons.
Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.	PI	The legal obligation to apply IFRS rests on complex interaction of laws and is not yet comprehensive. Most companies that are obliged to use IFRS continue to use RAS-based financial statements as the basis of the narrative and other disclosures in prospectuses and periodic reports. RAS do not qualify as internationally accepted standards, because of continued dominance of form over substance in practice. The absence of any examples of companies being required to resubmit accounts because of failure to compile them properly according to IFRS indicates limited enforcement.
Principle 19. Auditors should be subject to adequate levels of oversight.	FI	The oversight regime is headed by the MoF and Audit Council as public interest bodies, independently of the auditing profession.
Principle 20. Auditors should be independent of the issuing entity that they audit.	PI	The independence principles defined in the Code of Ethics and Rules of independence of auditors are not yet fully implemented in practice. There are no requirements that the governance arrangements of a public company should result in effective oversight of the appointment of auditors by the risk committee of issuer. There are no requirements to disclose the resignation of an auditor. There is no mandatory requirement for rotation of auditors or the senior officials engaged on an audit.
Principle 21. Audit standards should be of a high and internationally acceptable quality.	FI	International Audit Standards are, in effect, applied to public companies in the Russian Federation.
Principle 22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision.	NI	The new CRA law is comprehensive and broadly meets IOSCO requirements. However, there are a number of regulations that had yet to be issued at the time of the assessment, and so the law could not be effectively implemented, and there were no CRAs yet registered.
Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.	NI	There is no process for identifying areas of activity that may fail to be regulated under this principle. There are insufficient provisions to address conflicts of interest of analysts employed by brokers. Detailed provisions on appraisers contained in the SRO Code of Ethics have not been supplied to assessors.
Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a CIS.	PI	Managers and selling agents are licensed by CBR to the standards applied to all professional market participants. As such, integrity tests should be enhanced. Risk-based supervision has been applied in a comprehensive and constructive way, as lessons learned by CBR as to RM and internal control practices in well-run fund management companies (MC) are being used to increase standards in less well-run MCs. Some detailed rules of dealing in securities by fund managers are missing.
Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.	FI	The legal forms and structures of CIS and investor rights are set out in the law and mandatory model fund rules, which are the equivalent of a prospectus or offering document. The custodian (specialized depository—SD) has onerous responsibilities to ensure that the manager operates the fund within the law, CBR regulatory acts, and the fund rules. The depositories are licensed by CBR and are subject to detailed regulation of their structure, operations, and regulatory reporting requirements.
Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a CIS for a particular investor and the value of the investor’s interest in the scheme.	NI	Disclosure requirements for unit investment funds (UIFs) are reasonably comprehensive, and CBR has the right to demand the retraction of disseminated information which does not satisfy the requirements of the Investment Funds Law or regulatory acts of the CBR; to demand dissemination of corrected information; and to prohibit dissemination. There is, however, no overarching general obligation on MCs to provide a wide range of current information in the fund rules or elsewhere which would enable potential investors to make an informed investment decision; nor an obligation to provide that information in a way that an ordinary person will understand.
Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a CIS.	FI	Valuation of the NAV of funds appears to be carried out to a high standard and with effective checks and balances. Procedures for dealing with a fund which is forced to suspend redemptions appear satisfactory, and the powers of CBR in this situation, and if a winding up proves necessary, appear sufficient but are untested.
Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.	BI	Hedge funds are not a source of potential or actual systemic risk in the Russian Federation, and as such intensive regulation as set out in the Key Questions to this principle is not required. Furthermore, hedge funds and hedge funds managers are regulated at the same level as other funds targeted at qualified investors.
Principle 29. Regulation should provide for minimum entry standards for market intermediaries.	PI	The licensing power is exercised carefully and with thorough examination of applications. However, there is no regulation of investment advisers (and they are not required to submit advice only through licensees). The license criteria are not comprehensive, especially with regard to integrity. There is no power to impose a license condition. There is no general requirement on a licensee to report any change that might affect their suitability to be licensed.
Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.	NI	Capital requirements are not sufficiently tailored to the quantum and nature of risks, nor to risks from outside regulated entity. There is no liquidity requirement for intermediaries. There is no requirement to maintain knowledge of capital at any time and calculate capital daily. There is no requirement that auditors should check that the amount of capital is sufficient to match the risks faced by the intermediary. There is no requirement to report a deterioration of capital to CBR. CBR powers to intervene to protect investors are limited (unless a broker is, in effect, in default, when the Insolvency Law provisions can be used).
Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters.	NI	There are some detailed requirements on client asset segregation, internal controls, and RM. There are no overriding obligations to act with due care and diligence with respect to clients, to give priority to client interests, or to have systems and controls to protect the integrity of the dealing process, or the integrity of the market. There is no requirement to have systems and controls that ensure the fair, honest, and professional treatment of clients. There is no obligation to conduct a risk assessment, tailor policies and procedures to that assessment, have information systems to check effectiveness of controls, to review effectiveness annually, or to re-evaluate risk annually. There is no effective overriding obligation to identify and prevent or manage and disclose conflicts of interest and, if necessary, refuse to act. There is no overriding obligation to segregate duties, where necessary to avoid internal conflicts of interest. There is no overriding obligation to collect sufficient information from a client to ensure services are suitable for the client’s risk appetite and objectives. There is no obligation to disclose enough information to enable an investor to make an informed decision. There is no specific requirement for a client to be provided with a written client agreement that includes fees and charges. There is no effective requirement on an investment manager to segregate client money. There are insufficient safeguards to protect clients of brokers who use client money for their own purposes. There are insufficient provisions for requiring the intermediary to identify the client and beneficial owner of the account. Client money accounts are reconciled only monthly, and client assets reconciled only quarterly, and this is insufficient. It is not appropriate to place primary responsibility for compliance with the law and regulations on the compliance officer; this should be on the management of the intermediary.
Principle 32. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.	NI	There are powers available to deal with an intermediary in default in the Insolvency Law, and these are sufficient once the conditions are met to make them available. There is no documented contingency plan for dealing with failure of an intermediary. There are no early warning systems for potential default. There are only limited powers to take action to protect investors prior to default by intermediary.
Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.	FI	As is typical of most jurisdictions, applications to open a new exchange or non-exchange trading system are rare events. From discussion with exchange supervision staff at CBR, it was apparent that the licensing of the merged Moscow Interbank Currency Exchange (MICEX) and RTS was thorough and skillful and with an awareness of significant issues.
Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.	PI	Although the elements of supervision as set out in this principle appear to be met as far as this can be achieved from the obligation on exchanges to provide substantial ongoing documentation flows to CBR, the system of supervision has yet to be rigorously tested by an onsite inspection of MOEX, a period of intense stress in the markets, the unexpected insolvency of a major listed company, or the failure of one or more large members.
Principle 35. Regulation should promote transparency of trading.	FI	There appear to be no obvious omissions in the transparency regime on MOEX’s markets. The unusual ability of the exchange to have developed markets in products largely traded OTC in other countries such as corporate bonds, foreign exchange, and repos means that there is more transparency in these markets than is typical elsewhere. The absence of dark pools, even informal ones such as broker crossing networks, means that a factor which elsewhere complicates initiatives to maintain or increase levels of transparency in equity markets, and limit the creation of two tier markets, is missing. However, High Frequency Trading (HFT) is a significant factor in equity trading.
Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices.	BI	The Law and the regulatory and technological resources appear to be in place for an effective regime to detect, deter, and punish insider dealing and market manipulation. It is a new law, and no cases have yet come to court to make a judgment as to their effectiveness. While the fines are unlikely to be dissuasive, the loss of three years’ salary should be. The prison sentences and other sanctions should have a high deterrent effect, if persons contemplating insider trading or market manipulation consider that there is an unacceptably high possibility of being detected and convicted in a criminal court. CBR is developing a reasonably good track record in detecting breaches and taking administrative action.
Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.	PI	With one exception, the regime to monitor large exposures appears comprehensive, well-planned, and well-managed. It uses multiple data sources, mostly in real time. Flows of relevant information to the appropriate departments within CBR work well and should generate warning signals in time for CBR and NCC to take appropriate action. Financial Stability Department’s (FSD’s) threshold for concern—a single exposure which equals or exceeds 100 percent of an entities’ own funds—is too high. Recent improvements to the bankruptcy law and the associated clearing law have been formally recognized internationally. There is a lack of effective controls on short selling of equities on MOEX, including the absence of a surveillance regime, and no mechanism for providing information on short selling to market participants or CBR. The NCC takes effective measures to protect itself from exposure to naked short selling by MOEX members and their clients, which is one necessary element of the IOSCO requirements, but it is not sufficient.
Principle 38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective, efficient and that they reduce systemic risk.	Not assessed

Note: Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA).

Table 6.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Principle	Grade	Findings
Principle 1. The responsibilities of the Regulator should be clear and objectively stated.	BI	At the level of the federal laws, the powers and authority of CBR are set out comprehensively and with reasonable clarity. However, the complex interaction of laws, regulations, directions, etc., coupled with frequent changes and very detailed requirements, has resulted in numerous cases of one group of market participants being subject to obligations to which others are not, for no obvious reason. It is doubtful that even with substantial and highly skilled compliance departments, most licensed firms (or their SROs) are able to stay fully compliant on a consistent basis. Investors, too, face substantial difficulties in understanding what their rights are in their relationship with market participants or through ownership of a particular financial product.
Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers.	PI	Although the independence of CBR is set out in the Central Bank Law and the Board of Directors’ functions are limited under that law to certain administrative matters excluding regulatory policy making and enforcement matters, the right of the Ministers of Finance and Economic Development to attend board meetings with a right to participate in discussions and express opinions to be recorded in the minutes’ risks creating the impression of possible political involvement in CBR’s operational activities. There is a lack of legal protection for staff when performing regulatory functions such as carrying out investigations into possible breaches of the law and normative acts of CBR made under it.
Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.	BI	Although CBR has control of its operational budget once it has been agreed, the overall size of the budget is established by a decision of the National Financial Board of which the CBR member (the Governor) has one vote among 12. The others are from the Presidential administration, the federation government, and the legislature. Since staff salaries and administrative expenses constitute the major part of the bank’s expenses, there is potential for the Presidential administration, federal government, and the legislature to exercise definitive influence over the resources the bank has for regulation and supervision. CBR’s costs of regulation are met from income sources other than fees levied on nonbank financial market participants, which go to the government. The retained profit of CBR appears sufficient to enable CBR to meet its responsibilities as a securities market regulator as well as its responsibilities as a central bank and supervisor of banks, insurance companies, and non-state pension funds. It has the necessary powers. Staffing policies and training appear to be well established and resourced, and CBR’s initiatives in investor education are well regarded by others working in this area.
Principle 4. The Regulator should adopt clear and consistent regulatory processes.	FI	Among industry participants there was a mix of opinions on the commitment of CBR to “real” consultation. There was a clear majority view that CBR is serious in seeking views of market participants and the public, and that engaging with CBR by responding to public consultations or participation in CBR workshops is worthwhile and can secure improvements in proposed regulatory approaches. CBR has reasonable processes intended to secure procedural fairness and transparency.
Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality.	BI	Staff are subject to obligations to maintain high standards in their professional and personal conduct. CBR appears to have made substantial efforts to enable staff to understand their duties and responsibilities as set out in the multitude of laws, regulations, instruction, and orders to which they are subject, and the penalties for breaches, etc. As for the legislative provisions themselves, the assessors were working from translated texts and identified some issues. There may be other ambiguities and weaknesses in the Russian text that the assessors have not identified. Currently, there is a two tier system whereby specific restrictions apply only to a limited number of staff. Staff below middle management are subject only to more general provisions in a multitude of laws, regulations, ordinances, etc. There is substantial scope for clarification.
Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.	FI	The Financial Stability Committee (FSC Com) of CBR has a clear focus on nonbank financial entities (NFEs) and systemically important financial market infrastructures, including the dominant central counterparty for securities markets. Within CBR nonbanking sector departments, staff appear to be fully engaged in the work on systemic risk. Although the published Financial Stability Review (FSR) is primarily banking focused, it addresses systemic issues in securities markets when they arise.
Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly.	BI	Perimeter review of firms and products appears to be undertaken, and the appropriate sources of information have been identified and utilized. There may be scope for further formalizing the process to ensure that issues are not overlooked when first observed.
Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.	NI	CBR is not sufficiently proactive in identifying and evaluating potential, as distinct from actual and current, conflicts of interest and misalignment of incentives. It lacks a process to facilitate this process. Currently, its responses are primarily reactive. The responsibility for identifying and taking action regarding losses caused by the mis-management of a conflict of interest by a professional market participant is placed on the client, who may be unaware that they have suffered a loss.
Principle 9. Where the regulatory system makes use of SROs that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.	NI	The conflict of laws means that CBR cannot enforce the old SRO regulatory regime. The new SRO Law could not be fully enforced at the time of the assessment because of transitional provisions. SRO’s primary purpose is defined in the law as being the protection of members’ interests, market development and efficiency, not investor protection. There are some gaps in CBR’s powers to ensure procedural fairness and effectiveness by SROs. There are some gaps in SRO duties and obligations.
Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers.	FI	CBR has a comprehensive set of powers. There is no overall record keeping obligation imposed on securities firms, although there are extensive and detailed requirements.
Principle 11. The Regulator should have comprehensive enforcement powers.	BI	CBR has a broad range of investigation and sanction powers, and although the level of fines is modest, the fines related to income should be dissuasive. Criminal prosecutions of market abuse offenses are still very rare. Beneficial ownership information may not always be available in practice.
Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	NI	The enforcement regime is found to be not fully effective. The planning of inspections of intermediaries is neither risk based, nor routine and periodic, given that very few scheduled inspections are undertaken. There have been no inspections of the exchanges. Supervision is focused on finding and punishing violations rather than monitoring and enhancing RM. Inspections resources are very limited, with only 250 inspectors for 19,000 nonbank entities across CBR as a whole and used primarily for unscheduled inspections (investigations) rather than routine compliance checks. Periodic reports submitted by intermediaries are concerned mostly with financial information and do not include RM indicators.
Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts.	PI	There are powers to share information via the MMoU and other agreements. There is no power to initiate sharing of information on an unsolicited basis. The confidentiality provisions in the Investment Fund Law conflict with the disclosure provisions in the Central Bank Law. Information on beneficial owners may not always be available.
Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts.	FI	CBR is a signatory to the MMoU and actively meets its obligations.
Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers.	FI	CBR is a signatory to the MMoU and actively meets its obligations.
Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions.	NI	There is no effective general ongoing obligation to disclose any material fact that could affect the value of securities. In practice, disclosures of material information, other than the items specifically listed in the law, are rare with only just over 1 percent of disclosures falling into this category, even though this category effectively includes many of the most important disclosures, such as changes in prospects or risks. There is no explicit derogation from the disclosure obligations for state and commercial secrets, and no effective safeguards when disclosures are not made. There is inadequate provision for advertisements outside the prospectus.
Principle 17. Holders of securities in a company should be treated in a fair and equitable manner.	PI	The necessary protections for majority and minority shareholders are broadly in place. The provisions relating to shareholders acting in concert with others is limited to specified affiliated persons.
Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.	PI	The legal obligation to apply IFRS rests on complex interaction of laws and is not yet comprehensive. Most companies that are obliged to use IFRS continue to use RAS-based financial statements as the basis of the narrative and other disclosures in prospectuses and periodic reports. RAS do not qualify as internationally accepted standards, because of continued dominance of form over substance in practice. The absence of any examples of companies being required to resubmit accounts because of failure to compile them properly according to IFRS indicates limited enforcement.
Principle 19. Auditors should be subject to adequate levels of oversight.	FI	The oversight regime is headed by the MoF and Audit Council as public interest bodies, independently of the auditing profession.
Principle 20. Auditors should be independent of the issuing entity that they audit.	PI	The independence principles defined in the Code of Ethics and Rules of independence of auditors are not yet fully implemented in practice. There are no requirements that the governance arrangements of a public company should result in effective oversight of the appointment of auditors by the risk committee of issuer. There are no requirements to disclose the resignation of an auditor. There is no mandatory requirement for rotation of auditors or the senior officials engaged on an audit.
Principle 21. Audit standards should be of a high and internationally acceptable quality.	FI	International Audit Standards are, in effect, applied to public companies in the Russian Federation.
Principle 22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision.	NI	The new CRA law is comprehensive and broadly meets IOSCO requirements. However, there are a number of regulations that had yet to be issued at the time of the assessment, and so the law could not be effectively implemented, and there were no CRAs yet registered.
Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.	NI	There is no process for identifying areas of activity that may fail to be regulated under this principle. There are insufficient provisions to address conflicts of interest of analysts employed by brokers. Detailed provisions on appraisers contained in the SRO Code of Ethics have not been supplied to assessors.
Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a CIS.	PI	Managers and selling agents are licensed by CBR to the standards applied to all professional market participants. As such, integrity tests should be enhanced. Risk-based supervision has been applied in a comprehensive and constructive way, as lessons learned by CBR as to RM and internal control practices in well-run fund management companies (MC) are being used to increase standards in less well-run MCs. Some detailed rules of dealing in securities by fund managers are missing.
Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.	FI	The legal forms and structures of CIS and investor rights are set out in the law and mandatory model fund rules, which are the equivalent of a prospectus or offering document. The custodian (specialized depository—SD) has onerous responsibilities to ensure that the manager operates the fund within the law, CBR regulatory acts, and the fund rules. The depositories are licensed by CBR and are subject to detailed regulation of their structure, operations, and regulatory reporting requirements.
Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a CIS for a particular investor and the value of the investor’s interest in the scheme.	NI	Disclosure requirements for unit investment funds (UIFs) are reasonably comprehensive, and CBR has the right to demand the retraction of disseminated information which does not satisfy the requirements of the Investment Funds Law or regulatory acts of the CBR; to demand dissemination of corrected information; and to prohibit dissemination. There is, however, no overarching general obligation on MCs to provide a wide range of current information in the fund rules or elsewhere which would enable potential investors to make an informed investment decision; nor an obligation to provide that information in a way that an ordinary person will understand.
Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a CIS.	FI	Valuation of the NAV of funds appears to be carried out to a high standard and with effective checks and balances. Procedures for dealing with a fund which is forced to suspend redemptions appear satisfactory, and the powers of CBR in this situation, and if a winding up proves necessary, appear sufficient but are untested.
Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.	BI	Hedge funds are not a source of potential or actual systemic risk in the Russian Federation, and as such intensive regulation as set out in the Key Questions to this principle is not required. Furthermore, hedge funds and hedge funds managers are regulated at the same level as other funds targeted at qualified investors.
Principle 29. Regulation should provide for minimum entry standards for market intermediaries.	PI	The licensing power is exercised carefully and with thorough examination of applications. However, there is no regulation of investment advisers (and they are not required to submit advice only through licensees). The license criteria are not comprehensive, especially with regard to integrity. There is no power to impose a license condition. There is no general requirement on a licensee to report any change that might affect their suitability to be licensed.
Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.	NI	Capital requirements are not sufficiently tailored to the quantum and nature of risks, nor to risks from outside regulated entity. There is no liquidity requirement for intermediaries. There is no requirement to maintain knowledge of capital at any time and calculate capital daily. There is no requirement that auditors should check that the amount of capital is sufficient to match the risks faced by the intermediary. There is no requirement to report a deterioration of capital to CBR. CBR powers to intervene to protect investors are limited (unless a broker is, in effect, in default, when the Insolvency Law provisions can be used).
Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters.	NI	There are some detailed requirements on client asset segregation, internal controls, and RM. There are no overriding obligations to act with due care and diligence with respect to clients, to give priority to client interests, or to have systems and controls to protect the integrity of the dealing process, or the integrity of the market. There is no requirement to have systems and controls that ensure the fair, honest, and professional treatment of clients. There is no obligation to conduct a risk assessment, tailor policies and procedures to that assessment, have information systems to check effectiveness of controls, to review effectiveness annually, or to re-evaluate risk annually. There is no effective overriding obligation to identify and prevent or manage and disclose conflicts of interest and, if necessary, refuse to act. There is no overriding obligation to segregate duties, where necessary to avoid internal conflicts of interest. There is no overriding obligation to collect sufficient information from a client to ensure services are suitable for the client’s risk appetite and objectives. There is no obligation to disclose enough information to enable an investor to make an informed decision. There is no specific requirement for a client to be provided with a written client agreement that includes fees and charges. There is no effective requirement on an investment manager to segregate client money. There are insufficient safeguards to protect clients of brokers who use client money for their own purposes. There are insufficient provisions for requiring the intermediary to identify the client and beneficial owner of the account. Client money accounts are reconciled only monthly, and client assets reconciled only quarterly, and this is insufficient. It is not appropriate to place primary responsibility for compliance with the law and regulations on the compliance officer; this should be on the management of the intermediary.
Principle 32. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.	NI	There are powers available to deal with an intermediary in default in the Insolvency Law, and these are sufficient once the conditions are met to make them available. There is no documented contingency plan for dealing with failure of an intermediary. There are no early warning systems for potential default. There are only limited powers to take action to protect investors prior to default by intermediary.
Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.	FI	As is typical of most jurisdictions, applications to open a new exchange or non-exchange trading system are rare events. From discussion with exchange supervision staff at CBR, it was apparent that the licensing of the merged Moscow Interbank Currency Exchange (MICEX) and RTS was thorough and skillful and with an awareness of significant issues.
Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.	PI	Although the elements of supervision as set out in this principle appear to be met as far as this can be achieved from the obligation on exchanges to provide substantial ongoing documentation flows to CBR, the system of supervision has yet to be rigorously tested by an onsite inspection of MOEX, a period of intense stress in the markets, the unexpected insolvency of a major listed company, or the failure of one or more large members.
Principle 35. Regulation should promote transparency of trading.	FI	There appear to be no obvious omissions in the transparency regime on MOEX’s markets. The unusual ability of the exchange to have developed markets in products largely traded OTC in other countries such as corporate bonds, foreign exchange, and repos means that there is more transparency in these markets than is typical elsewhere. The absence of dark pools, even informal ones such as broker crossing networks, means that a factor which elsewhere complicates initiatives to maintain or increase levels of transparency in equity markets, and limit the creation of two tier markets, is missing. However, High Frequency Trading (HFT) is a significant factor in equity trading.
Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices.	BI	The Law and the regulatory and technological resources appear to be in place for an effective regime to detect, deter, and punish insider dealing and market manipulation. It is a new law, and no cases have yet come to court to make a judgment as to their effectiveness. While the fines are unlikely to be dissuasive, the loss of three years’ salary should be. The prison sentences and other sanctions should have a high deterrent effect, if persons contemplating insider trading or market manipulation consider that there is an unacceptably high possibility of being detected and convicted in a criminal court. CBR is developing a reasonably good track record in detecting breaches and taking administrative action.
Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.	PI	With one exception, the regime to monitor large exposures appears comprehensive, well-planned, and well-managed. It uses multiple data sources, mostly in real time. Flows of relevant information to the appropriate departments within CBR work well and should generate warning signals in time for CBR and NCC to take appropriate action. Financial Stability Department’s (FSD’s) threshold for concern—a single exposure which equals or exceeds 100 percent of an entities’ own funds—is too high. Recent improvements to the bankruptcy law and the associated clearing law have been formally recognized internationally. There is a lack of effective controls on short selling of equities on MOEX, including the absence of a surveillance regime, and no mechanism for providing information on short selling to market participants or CBR. The NCC takes effective measures to protect itself from exposure to naked short selling by MOEX members and their clients, which is one necessary element of the IOSCO requirements, but it is not sufficient.
Principle 38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective, efficient and that they reduce systemic risk.	Not assessed

Note: Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA).

Recommended Action Plan and Authorities’ Response

Table 7.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Table 7.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Principle	Recommended Action
Principle 1	The draft Guidelines for the Development and Stability of the Financial Market of the Russian Federation for the Period of 2016–18 has, as one of its goals, “creating conditions for the growth of the financial industry.” It has identified as critical to the achievement of that goal “enhancing financial market regulation, inter alia through proportional regulation and optimization of the regulatory burden on financial market participants.” It would be consistent with that goal for CBR, perhaps in conjunction with the MoF and industry representatives, to set up a program with the objective of achieving a substantial simplification of the regulatory framework while retaining and enhancing those elements of regulation, supervision, and enforcement which are necessary to achieve the other goals set out in the draft Guidelines, namely “improving the living standards for the Russian population through the use of financial market instruments;” and “facilitating economic growth through granting the competitive access of Russian economic agents to debt and equity financing.”
Principle 2	The authorities should consider measures to secure immunity for CBR staff in the case of decisions properly made on the basis of due diligence. Given the other opportunities for consultation between Government and CBR at Governor and Board level, as set out in the CBR Law, the authorities should consider whether the right of the Ministers of Finance and Economic Development to attend Board meetings and express recorded opinions is necessary or appropriate.
Principle 3	The authorities should consider whether the process by which a very substantial proportion of CBRs’ operational budget is set by the executive and legislature of the Russian Federation in the National Financial Board is consistent with true operational independence of CBR in the performance of its supervisory and regulatory responsibilities.
Principle 4	CBR should keep its consultation process under review to ensure that it engages the willing support of the nonbank licensees for its development of more effective regulation of the financial markets sector.
Principle 5	CBR should review the multitude of legislative and regulatory requirements to which staff are subject to remove any ambiguities and with the longer-term aim of codifying them in a comprehensive Code of Professional Ethics. There is substantial scope for clarification. The currently two-tier system whereby specific restrictions apply only to a limited number of upper-level staff should be reviewed.
Principle 7	Further formalizing the process of perimeter review might include appointing a senior manager and staff with specific responsibility and appropriate reporting lines for the topic. Consideration should also be given, if not already in place, of providing specialized training for the Territorial Units of the bank to enable them better to recognize Ponzi schemes and other outright fraudulent practices.
Principle 8	The assessors have noted the difficulties in drafting legal provisions stating general principles of behavior, but strongly urge the authorities to seek a solution which would enable the Russian regulatory framework to move closer to international standards regarding an effective framework which both requires and assists licensees to identify, manage, and mitigate conflicts of interest and misaligned incentives that arise in their businesses.
Principle 9	Provisions in previous laws relating to SROs that conflict with provisions in the new law should be repealed. The new SRO Law should be amended to provide that: ⚬ the primary purpose of SROs as being to promote high standards of conduct to protect investors and promote fair markets; ⚬ an explicit condition of registration of an SRO should be the ability to demonstrate to CBR that the SRO has the willingness and capacity to provide adequate standards of professional behavior and investor protection; ⚬ an SRO should adopt provisions that prevent any member of the SRO, or any employee from abusing their position to gain unfair competitive advantage; ⚬ an SRO’s internal rules should include provisions on procedural fairness that match those of the CBR itself, and a prohibition on the inappropriate use of information, for example for personal gain; ⚬ an SRO’s internal rules should ensure that all similarly situated members and applicants should be treated equally; ⚬ the membership criteria for the new SROs should not constitute a barrier to entry to the securities or fund management business; ⚬ an SRO should be required to submit its internal rules to CBR for approval, and CBR should be able to approve, deny approval, or insist on changes to the SRO’s internal rules, where necessary, to ensure that they match appropriate standards of fairness, effectiveness, and professionalism; ⚬ an SRO should be required to keep records, for a minimum of five years, which demonstrate that it is complying with its charter and its statutory responsibilities, and which record the operation of its functions; ⚬ CBR has the power to conduct onsite inspections of SROs; ⚬ the power of CBR to collect information from SROs overrides any confidentiality duty imposed by the SRO Law or any other statute; ⚬ CBR has the power to approve, deny approval to, or insist on changes to SRO internal rules; ⚬ CBR has the power to conduct inspections of SROs and should state explicitly that the duty to disclose matters to CBR overrides any duty of confidentiality to members. CBR should develop a new supervisory regime with SROs, where basic standards replace (not add to) existing regulations, and all supervisory tools are used. CBR should develop an oversight methodology for monitoring SRO activity.
Principle 10	The Securities Law, Investment Funds Law, and Organized Trading Law should include an overriding record keeping obligation that requires all securities businesses to keep such records as would be necessary to demonstrate their operation of their business, to demonstrate compliance with the law and regulations, to document their relations with clients and third parties, and to keep such records for five years.
Principle 11	CBR should seek an amendment to the Anti-Money Laundering (AML) Law so that a person subject to the relevant obligations should: ⚬ Always ask a natural person if they are acting on their own behalf or on behalf of another; and ⚬ Refuse to act if they are unable to identify the beneficial owner of a legal entity. CBR should consider reviewing the powers in Article 11 of the Investor Protection Law and seeking amendments as appropriate so as to ensure that they are capable of being used in practice.
Principle 12	CBR should devote sufficient resources to the inspection team so as to be able to conduct a risk-based, or routine/periodic scheduled inspection program. CBR should commence a regular inspection program of the exchanges. The Securities Law should be amended to place specific responsibility for ensuring compliance with regulatory obligations on management. The internal controls regulation should be amended to focus on the essential elements of an internal control system rather than just the detailed provisions for the appointment and functions of the compliance officer. CBR should adopt an approach to enforcement that focuses on the risks to the objectives of securities regulation, identifies the key measures to mitigate those risks, and uses all supervisory tools to ensure compliance with those regulatory requirements. CBR should develop the periodic reporting requirements so as to gain more information relevant to the adequacy of RM and compliance by securities firms. CBR should develop a protocol for mounting investigations into market offenses so as to avoid the risk of “tainting” evidence before a full criminal investigation takes place.
Principle 13	The CBR Law should be amended to enable CBR to provide confidential information to a foreign regulator on an unsolicited basis. The Investment Funds Law should be amended to provide an exception to the commercial secrets provision to allow disclosure where required by law.
Principle 16	The Securities Law should be amended so that it: ⚬ includes an effective provision that requires the disclosure of any material fact that would reasonably be expected to affect the price of a security or the decision to buy or sell that security; ⚬ permits derogations from the disclosure obligations for state and commercial secrets but imposes safeguards, which include CBR powers to approve or deny approval to deferral of disclosure and appropriate trading restrictions to protect market integrity, as well as powers to require immediate disclosure when obligations are not met; ⚬ no longer includes the 50 detailed matters for disclosure from the Securities Law, thereby reinforcing the primacy of the overriding obligation to disclose all material facts; and ⚬ gives CBR specific powers to require issuers to make disclosures when material events have occurred (or CBR discovers that they may be about to occur), but the issuer has failed to meet its disclosure obligation. The 50 detailed matters listed in the Disclosure Regulation should exclude routine events which would not affect the price of a security (such as the announcement of a general meeting) and include a material change in prospects, a significant change in risks, a change in the economic circumstances of the country or region in which the issuer does most of its business, a significant change in the trading environment, the signing of a major new contract, the loss of a major contract, a major physical or weather event that affects the continued operation of the company, a significant change in the line of business, a decision to acquire or sell significant assets, or any other major event which is likely to affect the value of the company’s assets, or its ability to continue to make profits. The Investor Protection Law and the Law on Advertising should deal more comprehensively with advertisements so as to ensure that advertisements issued in connection with a public offer should be issued only by the issuer or advisers acting under the issuer’s authority, should only contain information that is true and not misleading, should refer to the prospectus. and should be subject to approval by CBR. CBR should discuss the simplification of the disclosure regime with the private sector to make it more comprehensible and enforceable.
Principle 17	CBR should seek an amendment to the Joint Stock Company Law to: ⚬ Extend the requirements relating to shareholder disclosures and takeovers to those reaching the specified thresholds when acting in concert with any person; ⚬ Extend the requirements for information to be provided for General Meetings so as to include full information on the consequences of decisions proposed on the agenda; and ⚬ State explicitly the rights of shareholders to receive remaining assets after liquidation, in proportion to the shareholdings (in relation to all assets and not just in respect of dividends credited but not paid).
Principle 18	CBR should continue its program of progressively obliging public companies to publish financial statements according to IFRS. In addition, CBR should require those companies that are subject to a requirement to publish accounts according to IFRS to use the IFRS accounts as the basis for the narrative and other disclosures in the prospectus and quarterly reports. The MoF should consider amending the agreement with the National Organization to give MoF formal oversight powers to enable it to check on the internal processes of the National Organization and thereby ensure they are sufficiently transparent. Such a provision should be included in future agreements with organizations that may win the tender to act as the independent adviser on accounting standards in the future.
Principle 20	The Auditing Law (or other legislation as appropriate) should be amended to include: ⚬ A general provision prohibiting financial business, corporate, and personal relations between an auditor or audit firm and the client and any other relationships or behavior that might threaten or reasonably appear to threaten independence; ⚬ A general provision that prohibits the provision of any non-audit services to an audit client, where such services may be of a nature or scale that would compromise or appear to compromise the independence of the auditor; ⚬ Provisions requiring governance arrangements that ensure that the selection of auditors and the oversight of auditor independence is, in the case of public issuers, carried out by a body independent of management; ⚬ A requirement to disclose the resignation, replacement, or removal of an auditor. The Audit Council should ensure that audit and ethical standards include the requirement that internal quality controls directly address independence, and that there are mandatory measures to require the rotation of individual auditors if not audit firms, so as to safeguard independence. The MoF should increase the priority given to independence in substance as well as form, when conducting inspections.
Principle 22	CBR should complete the process of writing regulations, so that the law can come into effect. The CRA Law should be amended to include: ⚬ A general record keeping requirement that is broad enough to ensure that all appropriate records are kept to demonstrate the compliance of the CRA with the regulatory requirements, the operations of the business and the practical implementation of rating methodology); ⚬ The power for the CBR to require an applicant for registration as a CRA to provide additional information; ⚬ An obligation on CRAs to maintain sufficient resources to be able to apply the methodology with all relevant information rigorously and robustly; and ⚬ An expanded integrity test, with a broader disclosure requirement and the discretion of CBR to consider whether the matters disclosed are relevant.
Principle 23	CBR should create regulations that specifically address the potential conflicts of interests of analysts when introducing a regulatory regime for advisers. CBR should review the ethical standards of the SROs for appraisers to ensure that all the requirements of this principle are met.
Principle 24	While continuing to search for customers carrying out improper transactions, with or without the knowledge of the licensee, onsite inspectors should be equally engaged in seeking evidence of a firm treating its clients unfairly, such as by selling funds or other products not suitable for the client’s risk profile, or where a less expensive (but lower commission generating product) would meet the client’s need equally well or even better. As retail participation in financial markets increases, mis-selling of financial products is likely to increase, and this will damage the confidence of new investors in financial markets. Increase the number of annual planned onsite inspections of MCs and SDs. Introduce rules covering best execution and due diligence. Introduce more comprehensive integrity tests for individuals in key positions in MCs.
Principle 25	Although a SD must be independent of the MC of a UIF, it is able to be a company within the same group as the MC. There is potential in these circumstances, despite the current regulation of the activities of SDs, for collusion or a lack of care to occur. A mechanism to mitigate this risk might be to assign, within the risk-based supervisory framework, a High Risk or “red zone” rating to SDs in this position and submit them to the highest intensity of SD supervision. Alternatively, the Investment Funds Law could be amended to secure actual independence of the SD.
Principle 26	CBR should continue to explore ways, within the constraints imposed by Russian law, to establish general or overarching requirements on MCs to provide a wide range of current information in the fund rules and elsewhere which will enable potential investors to make informed investment decisions; and to provide that information in a way that an ordinary person will understand.
Principle 27	There has not been a failure of a fund for a long time, and the relevant laws and regulatory acts have changed, some repeatedly, in recent years. CBR might wish to consider running an exercise (“war game”) to test the current legal and operational position against a hypothetical failure of a fund or group of funds.
Principle 28	The further development of hedge funds, and funds which, while not being formally categorized as hedge funds, can borrow to invest and thus can be highly leveraged, should be closely monitored by CBR with a view to subjecting them to more intensive supervision should they begin to demonstrate systemic risk characteristics.
Principle 29	The Securities Law and regulations should be amended so as to: ⚬ Expand the fitness and properness criteria for (and matters to be disclosed by) senior managers and owners especially with respect to integrity; ⚬ Give CBR the discretion to determine the relevance of the disclosures when considering whether or not to grant permission to take up a post; ⚬ Give CBR discretion to judge the adequacy of the organization, and governance, including the adequacy of the RM and internal controls of a license applicant; ⚬ Impose a general obligation on a license applicant to disclose any matter that might reasonably affect CBR’s judgement as to the suitability of the applicant to undertake securities activity and extend this to licensees so as to create an obligation to disclose any matter that might reasonably be supposed to affect a decision as to whether they should retain a license or continue to act as manager or owner (as appropriate); ⚬ Give CBR the power to grant a license with conditions, or amend a license to impose terms and conditions as appropriate; and ⚬ Bring investment advice into regulation. ⚬ CBR should develop criteria to assist it in making the qualitative judgements recommended here.
Principle 30	The new regulation on risk-based capital that CBR is contemplating should: ⚬ Set capital requirements that are based on the full range of risks to which a professional securities market firm is subject, taking account of the nature, scope, and scale of its activities, and require that capital be maintained at all times; ⚬ Impose a liquidity requirement that would ensure that a professional securities firm could absorb some losses and wind down the business in an orderly manner; ⚬ Create an obligation on a professional securities firm to report a deterioration in excess capital (i.e., the capital held in addition to the minimum requirement) of 50 percent since the last report; and a further obligation to report to CBR if their capital falls below 120 percent of the minimum; ⚬ Require securities firms to make a daily calculation of capital and place this on the file so that CBR and auditors can select days at random to check that such calculations are being undertaken properly; ⚬ Set a deadline for the submission of annual audited accounts by professional securities firms; and ⚬ Set a requirement on securities firms that they must get an annual opinion from their auditors on whether their capital is sufficient for the full range of risks.
Principle 31	The Securities Law should impose the following obligations on securities firms, in each case, with overall provisions supported by some detail giving clear information about what is required to ensure that the overall obligations are implemented effectively: ⚬ To act with due care and diligence in the interests of a client, to place the interests of the client above its own, and to have systems and controls that ensure the integrity of its dealing practices and the fair, honest, and professional treatment of clients; ⚬ The management to have full responsibility for complying with legal and regulatory obligations; ⚬ The management to undertake a risk assessment of its business, to devise policies and procedures that address those risks, to train staff in those ⚬ procedures, to have an information system for assessing effectiveness of those policies and procedures, to review the effectiveness at least once a year, and to reassess the risks at least once a year; ⚬ An investment manager to hold client funds in a segregated account; ⚬ All securities firms to identify and prevent, or manage conflicts of interest, by disclosure, internal organizational barriers, or by declining to act; ⚬ All securities firms to ensure that there is appropriate segregation of duties where necessary to prevent unmanageable risks of conflicts of interest, undetected errors, breaches of internal controls, or abuse more generally; ⚬ All securities firms to obtain sufficient information about the client’s circumstances and objectives to enable them to provide appropriate services and advice; ⚬ All securities firms to refuse to accept clients where the reasonable and affordable measures have not identified the beneficial owner and to establish in each case if a natural person is acting on his or her own behalf or on behalf of another; ⚬ Those firms that hold client money to have effective protection for those assets including segregation and a requirement to reconcile client money in the bank accounts with the internal records on a daily basis; and ⚬ Those firms that hold client assets to reconcile client assets with internal accounting records weekly for the high-intensity trading client, and monthly for all other clients, except those who do not trade for three months, whose reconciliation should be quarterly. CBR should amend regulations to impose the following obligations: ⚬ To have systems and controls to limit the use of client money in the securities firm’s own interests (to circumstances where it provides scope for covering temporary and minor shortfalls in the client account), to give prominence to this matter in the client agreement, and to explain the risks to the client; ⚬ To identify all clients and the beneficial owners; ⚬ To provide a client with a written agreement with certain specified contents, such as fees and charges; and ⚬ To give a client enough information to make an informed investment decision.
Principle 32	The Insolvency Law should be amended to enable CBR to appoint a provisional administrator if it thinks such action is necessary to protect investors or safeguard market stability from the consequences of a default. CBR should review the powers of the provisional administrator to ensure that they are sufficient to enable it to: ⚬ Restrict activities by the intermediary; ⚬ Move client accounts to another intermediary; and ⚬ Apply other available measures intended to minimize customer, counterparty, and systemic risk in the event of intermediary failure, such as customer and settlement insurance schemes or guarantee funds. CBR should draw up a detailed plan of the specific actions it would take in the event of a failure, including the names and contact details of those who would take the relevant decisions, contact details of the relevant people in other agencies, draft press releases and statement to investors, check lists of steps to be considered to exercise legal powers and protect investors, lists of the necessary physical facilities that may be required, names of possible administrators, and other relevant matters. The plan should be tested from time to time in a trial exercise.
Principle 33	In considering issues which arise in its ongoing supervision of MOEX, the exchange supervision team should look carefully at the exchange’s record of disciplining members and listed companies. The current approach has elements which, while it may be effective in the context of a Russian market with few retail investors, are difficult to reconcile with good international practice.
Principle 34	The upcoming first inspection of MOEX will be an important stage in CBR’s development as a securities market regulator, and it will be critical that the inspectors have the necessary skills and will have been fully briefed by the offsite exchange supervision team to carry out their task efficiently and knowledgeably.
Principle 35	Although dark pools and informal trading systems do not exist in the Russian market currently, some brokers are internalizing trades in overseas markets and CBR should remain alert for any indications that this practice is being adopted domestically.
Principle 36	In order to enhance the cooperation between the Department for Market Manipulation and Division F over the longer term, the two parties could consider whether there are benefits in developing a MoU which sets out the responsibilities and expectations of both parties. The expectation must be that the work load will increase as knowledge and expertise and technical and analytical resources to detect violations increase. Given that market manipulation is now a criminal offense, the exemptions in the Insider Trading Law have particular importance. As is the case in the EU under the Market Abuse Directive and in other jurisdictions, such as Japan and the United States, where the equity and bond markets are an important source of debt and equity capital, CBR should review the current regulation and consider what improvements are necessary to impose suitable limits on trading activities in order to ensure that investors’ interests are adequately protected.
Principle 37	CBR should work with MOEX to research good practice on the regulation and disclosure in other markets and adopt measures best suited to the Russian market, while being consistent with international standards. With one exception the regime to monitor large exposures appears comprehensive, well-planned, and well-managed. It uses multiple data sources, mostly in real time. Flows of relevant information to the appropriate departments within CBR work well and should generate warning signals in time for CBR and NCC to take appropriate action. FSD’s threshold for concern—a single exposure which equals or exceeds 100 percent of an entities own funds—is too high and should be reduced, possibly to a maximum of 25 percent.

Table 7.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Principle	Recommended Action
Principle 1	The draft Guidelines for the Development and Stability of the Financial Market of the Russian Federation for the Period of 2016–18 has, as one of its goals, “creating conditions for the growth of the financial industry.” It has identified as critical to the achievement of that goal “enhancing financial market regulation, inter alia through proportional regulation and optimization of the regulatory burden on financial market participants.” It would be consistent with that goal for CBR, perhaps in conjunction with the MoF and industry representatives, to set up a program with the objective of achieving a substantial simplification of the regulatory framework while retaining and enhancing those elements of regulation, supervision, and enforcement which are necessary to achieve the other goals set out in the draft Guidelines, namely “improving the living standards for the Russian population through the use of financial market instruments;” and “facilitating economic growth through granting the competitive access of Russian economic agents to debt and equity financing.”
Principle 2	The authorities should consider measures to secure immunity for CBR staff in the case of decisions properly made on the basis of due diligence. Given the other opportunities for consultation between Government and CBR at Governor and Board level, as set out in the CBR Law, the authorities should consider whether the right of the Ministers of Finance and Economic Development to attend Board meetings and express recorded opinions is necessary or appropriate.
Principle 3	The authorities should consider whether the process by which a very substantial proportion of CBRs’ operational budget is set by the executive and legislature of the Russian Federation in the National Financial Board is consistent with true operational independence of CBR in the performance of its supervisory and regulatory responsibilities.
Principle 4	CBR should keep its consultation process under review to ensure that it engages the willing support of the nonbank licensees for its development of more effective regulation of the financial markets sector.
Principle 5	CBR should review the multitude of legislative and regulatory requirements to which staff are subject to remove any ambiguities and with the longer-term aim of codifying them in a comprehensive Code of Professional Ethics. There is substantial scope for clarification. The currently two-tier system whereby specific restrictions apply only to a limited number of upper-level staff should be reviewed.
Principle 7	Further formalizing the process of perimeter review might include appointing a senior manager and staff with specific responsibility and appropriate reporting lines for the topic. Consideration should also be given, if not already in place, of providing specialized training for the Territorial Units of the bank to enable them better to recognize Ponzi schemes and other outright fraudulent practices.
Principle 8	The assessors have noted the difficulties in drafting legal provisions stating general principles of behavior, but strongly urge the authorities to seek a solution which would enable the Russian regulatory framework to move closer to international standards regarding an effective framework which both requires and assists licensees to identify, manage, and mitigate conflicts of interest and misaligned incentives that arise in their businesses.
Principle 9	Provisions in previous laws relating to SROs that conflict with provisions in the new law should be repealed. The new SRO Law should be amended to provide that: ⚬ the primary purpose of SROs as being to promote high standards of conduct to protect investors and promote fair markets; ⚬ an explicit condition of registration of an SRO should be the ability to demonstrate to CBR that the SRO has the willingness and capacity to provide adequate standards of professional behavior and investor protection; ⚬ an SRO should adopt provisions that prevent any member of the SRO, or any employee from abusing their position to gain unfair competitive advantage; ⚬ an SRO’s internal rules should include provisions on procedural fairness that match those of the CBR itself, and a prohibition on the inappropriate use of information, for example for personal gain; ⚬ an SRO’s internal rules should ensure that all similarly situated members and applicants should be treated equally; ⚬ the membership criteria for the new SROs should not constitute a barrier to entry to the securities or fund management business; ⚬ an SRO should be required to submit its internal rules to CBR for approval, and CBR should be able to approve, deny approval, or insist on changes to the SRO’s internal rules, where necessary, to ensure that they match appropriate standards of fairness, effectiveness, and professionalism; ⚬ an SRO should be required to keep records, for a minimum of five years, which demonstrate that it is complying with its charter and its statutory responsibilities, and which record the operation of its functions; ⚬ CBR has the power to conduct onsite inspections of SROs; ⚬ the power of CBR to collect information from SROs overrides any confidentiality duty imposed by the SRO Law or any other statute; ⚬ CBR has the power to approve, deny approval to, or insist on changes to SRO internal rules; ⚬ CBR has the power to conduct inspections of SROs and should state explicitly that the duty to disclose matters to CBR overrides any duty of confidentiality to members. CBR should develop a new supervisory regime with SROs, where basic standards replace (not add to) existing regulations, and all supervisory tools are used. CBR should develop an oversight methodology for monitoring SRO activity.
Principle 10	The Securities Law, Investment Funds Law, and Organized Trading Law should include an overriding record keeping obligation that requires all securities businesses to keep such records as would be necessary to demonstrate their operation of their business, to demonstrate compliance with the law and regulations, to document their relations with clients and third parties, and to keep such records for five years.
Principle 11	CBR should seek an amendment to the Anti-Money Laundering (AML) Law so that a person subject to the relevant obligations should: ⚬ Always ask a natural person if they are acting on their own behalf or on behalf of another; and ⚬ Refuse to act if they are unable to identify the beneficial owner of a legal entity. CBR should consider reviewing the powers in Article 11 of the Investor Protection Law and seeking amendments as appropriate so as to ensure that they are capable of being used in practice.
Principle 12	CBR should devote sufficient resources to the inspection team so as to be able to conduct a risk-based, or routine/periodic scheduled inspection program. CBR should commence a regular inspection program of the exchanges. The Securities Law should be amended to place specific responsibility for ensuring compliance with regulatory obligations on management. The internal controls regulation should be amended to focus on the essential elements of an internal control system rather than just the detailed provisions for the appointment and functions of the compliance officer. CBR should adopt an approach to enforcement that focuses on the risks to the objectives of securities regulation, identifies the key measures to mitigate those risks, and uses all supervisory tools to ensure compliance with those regulatory requirements. CBR should develop the periodic reporting requirements so as to gain more information relevant to the adequacy of RM and compliance by securities firms. CBR should develop a protocol for mounting investigations into market offenses so as to avoid the risk of “tainting” evidence before a full criminal investigation takes place.
Principle 13	The CBR Law should be amended to enable CBR to provide confidential information to a foreign regulator on an unsolicited basis. The Investment Funds Law should be amended to provide an exception to the commercial secrets provision to allow disclosure where required by law.
Principle 16	The Securities Law should be amended so that it: ⚬ includes an effective provision that requires the disclosure of any material fact that would reasonably be expected to affect the price of a security or the decision to buy or sell that security; ⚬ permits derogations from the disclosure obligations for state and commercial secrets but imposes safeguards, which include CBR powers to approve or deny approval to deferral of disclosure and appropriate trading restrictions to protect market integrity, as well as powers to require immediate disclosure when obligations are not met; ⚬ no longer includes the 50 detailed matters for disclosure from the Securities Law, thereby reinforcing the primacy of the overriding obligation to disclose all material facts; and ⚬ gives CBR specific powers to require issuers to make disclosures when material events have occurred (or CBR discovers that they may be about to occur), but the issuer has failed to meet its disclosure obligation. The 50 detailed matters listed in the Disclosure Regulation should exclude routine events which would not affect the price of a security (such as the announcement of a general meeting) and include a material change in prospects, a significant change in risks, a change in the economic circumstances of the country or region in which the issuer does most of its business, a significant change in the trading environment, the signing of a major new contract, the loss of a major contract, a major physical or weather event that affects the continued operation of the company, a significant change in the line of business, a decision to acquire or sell significant assets, or any other major event which is likely to affect the value of the company’s assets, or its ability to continue to make profits. The Investor Protection Law and the Law on Advertising should deal more comprehensively with advertisements so as to ensure that advertisements issued in connection with a public offer should be issued only by the issuer or advisers acting under the issuer’s authority, should only contain information that is true and not misleading, should refer to the prospectus. and should be subject to approval by CBR. CBR should discuss the simplification of the disclosure regime with the private sector to make it more comprehensible and enforceable.
Principle 17	CBR should seek an amendment to the Joint Stock Company Law to: ⚬ Extend the requirements relating to shareholder disclosures and takeovers to those reaching the specified thresholds when acting in concert with any person; ⚬ Extend the requirements for information to be provided for General Meetings so as to include full information on the consequences of decisions proposed on the agenda; and ⚬ State explicitly the rights of shareholders to receive remaining assets after liquidation, in proportion to the shareholdings (in relation to all assets and not just in respect of dividends credited but not paid).
Principle 18	CBR should continue its program of progressively obliging public companies to publish financial statements according to IFRS. In addition, CBR should require those companies that are subject to a requirement to publish accounts according to IFRS to use the IFRS accounts as the basis for the narrative and other disclosures in the prospectus and quarterly reports. The MoF should consider amending the agreement with the National Organization to give MoF formal oversight powers to enable it to check on the internal processes of the National Organization and thereby ensure they are sufficiently transparent. Such a provision should be included in future agreements with organizations that may win the tender to act as the independent adviser on accounting standards in the future.
Principle 20	The Auditing Law (or other legislation as appropriate) should be amended to include: ⚬ A general provision prohibiting financial business, corporate, and personal relations between an auditor or audit firm and the client and any other relationships or behavior that might threaten or reasonably appear to threaten independence; ⚬ A general provision that prohibits the provision of any non-audit services to an audit client, where such services may be of a nature or scale that would compromise or appear to compromise the independence of the auditor; ⚬ Provisions requiring governance arrangements that ensure that the selection of auditors and the oversight of auditor independence is, in the case of public issuers, carried out by a body independent of management; ⚬ A requirement to disclose the resignation, replacement, or removal of an auditor. The Audit Council should ensure that audit and ethical standards include the requirement that internal quality controls directly address independence, and that there are mandatory measures to require the rotation of individual auditors if not audit firms, so as to safeguard independence. The MoF should increase the priority given to independence in substance as well as form, when conducting inspections.
Principle 22	CBR should complete the process of writing regulations, so that the law can come into effect. The CRA Law should be amended to include: ⚬ A general record keeping requirement that is broad enough to ensure that all appropriate records are kept to demonstrate the compliance of the CRA with the regulatory requirements, the operations of the business and the practical implementation of rating methodology); ⚬ The power for the CBR to require an applicant for registration as a CRA to provide additional information; ⚬ An obligation on CRAs to maintain sufficient resources to be able to apply the methodology with all relevant information rigorously and robustly; and ⚬ An expanded integrity test, with a broader disclosure requirement and the discretion of CBR to consider whether the matters disclosed are relevant.
Principle 23	CBR should create regulations that specifically address the potential conflicts of interests of analysts when introducing a regulatory regime for advisers. CBR should review the ethical standards of the SROs for appraisers to ensure that all the requirements of this principle are met.
Principle 24	While continuing to search for customers carrying out improper transactions, with or without the knowledge of the licensee, onsite inspectors should be equally engaged in seeking evidence of a firm treating its clients unfairly, such as by selling funds or other products not suitable for the client’s risk profile, or where a less expensive (but lower commission generating product) would meet the client’s need equally well or even better. As retail participation in financial markets increases, mis-selling of financial products is likely to increase, and this will damage the confidence of new investors in financial markets. Increase the number of annual planned onsite inspections of MCs and SDs. Introduce rules covering best execution and due diligence. Introduce more comprehensive integrity tests for individuals in key positions in MCs.
Principle 25	Although a SD must be independent of the MC of a UIF, it is able to be a company within the same group as the MC. There is potential in these circumstances, despite the current regulation of the activities of SDs, for collusion or a lack of care to occur. A mechanism to mitigate this risk might be to assign, within the risk-based supervisory framework, a High Risk or “red zone” rating to SDs in this position and submit them to the highest intensity of SD supervision. Alternatively, the Investment Funds Law could be amended to secure actual independence of the SD.
Principle 26	CBR should continue to explore ways, within the constraints imposed by Russian law, to establish general or overarching requirements on MCs to provide a wide range of current information in the fund rules and elsewhere which will enable potential investors to make informed investment decisions; and to provide that information in a way that an ordinary person will understand.
Principle 27	There has not been a failure of a fund for a long time, and the relevant laws and regulatory acts have changed, some repeatedly, in recent years. CBR might wish to consider running an exercise (“war game”) to test the current legal and operational position against a hypothetical failure of a fund or group of funds.
Principle 28	The further development of hedge funds, and funds which, while not being formally categorized as hedge funds, can borrow to invest and thus can be highly leveraged, should be closely monitored by CBR with a view to subjecting them to more intensive supervision should they begin to demonstrate systemic risk characteristics.
Principle 29	The Securities Law and regulations should be amended so as to: ⚬ Expand the fitness and properness criteria for (and matters to be disclosed by) senior managers and owners especially with respect to integrity; ⚬ Give CBR the discretion to determine the relevance of the disclosures when considering whether or not to grant permission to take up a post; ⚬ Give CBR discretion to judge the adequacy of the organization, and governance, including the adequacy of the RM and internal controls of a license applicant; ⚬ Impose a general obligation on a license applicant to disclose any matter that might reasonably affect CBR’s judgement as to the suitability of the applicant to undertake securities activity and extend this to licensees so as to create an obligation to disclose any matter that might reasonably be supposed to affect a decision as to whether they should retain a license or continue to act as manager or owner (as appropriate); ⚬ Give CBR the power to grant a license with conditions, or amend a license to impose terms and conditions as appropriate; and ⚬ Bring investment advice into regulation. ⚬ CBR should develop criteria to assist it in making the qualitative judgements recommended here.
Principle 30	The new regulation on risk-based capital that CBR is contemplating should: ⚬ Set capital requirements that are based on the full range of risks to which a professional securities market firm is subject, taking account of the nature, scope, and scale of its activities, and require that capital be maintained at all times; ⚬ Impose a liquidity requirement that would ensure that a professional securities firm could absorb some losses and wind down the business in an orderly manner; ⚬ Create an obligation on a professional securities firm to report a deterioration in excess capital (i.e., the capital held in addition to the minimum requirement) of 50 percent since the last report; and a further obligation to report to CBR if their capital falls below 120 percent of the minimum; ⚬ Require securities firms to make a daily calculation of capital and place this on the file so that CBR and auditors can select days at random to check that such calculations are being undertaken properly; ⚬ Set a deadline for the submission of annual audited accounts by professional securities firms; and ⚬ Set a requirement on securities firms that they must get an annual opinion from their auditors on whether their capital is sufficient for the full range of risks.
Principle 31	The Securities Law should impose the following obligations on securities firms, in each case, with overall provisions supported by some detail giving clear information about what is required to ensure that the overall obligations are implemented effectively: ⚬ To act with due care and diligence in the interests of a client, to place the interests of the client above its own, and to have systems and controls that ensure the integrity of its dealing practices and the fair, honest, and professional treatment of clients; ⚬ The management to have full responsibility for complying with legal and regulatory obligations; ⚬ The management to undertake a risk assessment of its business, to devise policies and procedures that address those risks, to train staff in those ⚬ procedures, to have an information system for assessing effectiveness of those policies and procedures, to review the effectiveness at least once a year, and to reassess the risks at least once a year; ⚬ An investment manager to hold client funds in a segregated account; ⚬ All securities firms to identify and prevent, or manage conflicts of interest, by disclosure, internal organizational barriers, or by declining to act; ⚬ All securities firms to ensure that there is appropriate segregation of duties where necessary to prevent unmanageable risks of conflicts of interest, undetected errors, breaches of internal controls, or abuse more generally; ⚬ All securities firms to obtain sufficient information about the client’s circumstances and objectives to enable them to provide appropriate services and advice; ⚬ All securities firms to refuse to accept clients where the reasonable and affordable measures have not identified the beneficial owner and to establish in each case if a natural person is acting on his or her own behalf or on behalf of another; ⚬ Those firms that hold client money to have effective protection for those assets including segregation and a requirement to reconcile client money in the bank accounts with the internal records on a daily basis; and ⚬ Those firms that hold client assets to reconcile client assets with internal accounting records weekly for the high-intensity trading client, and monthly for all other clients, except those who do not trade for three months, whose reconciliation should be quarterly. CBR should amend regulations to impose the following obligations: ⚬ To have systems and controls to limit the use of client money in the securities firm’s own interests (to circumstances where it provides scope for covering temporary and minor shortfalls in the client account), to give prominence to this matter in the client agreement, and to explain the risks to the client; ⚬ To identify all clients and the beneficial owners; ⚬ To provide a client with a written agreement with certain specified contents, such as fees and charges; and ⚬ To give a client enough information to make an informed investment decision.
Principle 32	The Insolvency Law should be amended to enable CBR to appoint a provisional administrator if it thinks such action is necessary to protect investors or safeguard market stability from the consequences of a default. CBR should review the powers of the provisional administrator to ensure that they are sufficient to enable it to: ⚬ Restrict activities by the intermediary; ⚬ Move client accounts to another intermediary; and ⚬ Apply other available measures intended to minimize customer, counterparty, and systemic risk in the event of intermediary failure, such as customer and settlement insurance schemes or guarantee funds. CBR should draw up a detailed plan of the specific actions it would take in the event of a failure, including the names and contact details of those who would take the relevant decisions, contact details of the relevant people in other agencies, draft press releases and statement to investors, check lists of steps to be considered to exercise legal powers and protect investors, lists of the necessary physical facilities that may be required, names of possible administrators, and other relevant matters. The plan should be tested from time to time in a trial exercise.
Principle 33	In considering issues which arise in its ongoing supervision of MOEX, the exchange supervision team should look carefully at the exchange’s record of disciplining members and listed companies. The current approach has elements which, while it may be effective in the context of a Russian market with few retail investors, are difficult to reconcile with good international practice.
Principle 34	The upcoming first inspection of MOEX will be an important stage in CBR’s development as a securities market regulator, and it will be critical that the inspectors have the necessary skills and will have been fully briefed by the offsite exchange supervision team to carry out their task efficiently and knowledgeably.
Principle 35	Although dark pools and informal trading systems do not exist in the Russian market currently, some brokers are internalizing trades in overseas markets and CBR should remain alert for any indications that this practice is being adopted domestically.
Principle 36	In order to enhance the cooperation between the Department for Market Manipulation and Division F over the longer term, the two parties could consider whether there are benefits in developing a MoU which sets out the responsibilities and expectations of both parties. The expectation must be that the work load will increase as knowledge and expertise and technical and analytical resources to detect violations increase. Given that market manipulation is now a criminal offense, the exemptions in the Insider Trading Law have particular importance. As is the case in the EU under the Market Abuse Directive and in other jurisdictions, such as Japan and the United States, where the equity and bond markets are an important source of debt and equity capital, CBR should review the current regulation and consider what improvements are necessary to impose suitable limits on trading activities in order to ensure that investors’ interests are adequately protected.
Principle 37	CBR should work with MOEX to research good practice on the regulation and disclosure in other markets and adopt measures best suited to the Russian market, while being consistent with international standards. With one exception the regime to monitor large exposures appears comprehensive, well-planned, and well-managed. It uses multiple data sources, mostly in real time. Flows of relevant information to the appropriate departments within CBR work well and should generate warning signals in time for CBR and NCC to take appropriate action. FSD’s threshold for concern—a single exposure which equals or exceeds 100 percent of an entities own funds—is too high and should be reduced, possibly to a maximum of 25 percent.

A. Authorities’ Response to the Assessment

Introduction

66. The CBR extends its appreciation to the representatives of the International Monetary Fund who worked closely and remotely on the assessment of implementation of the IOSCO Objectives and Principles of Securities Regulation in the Russian Federation.

67. Financial sector surveillance conducted by the International Monetary Fund represents a distinct opportunity for understanding the key linkages that affect the stability and vulnerability of the Russian financial sector. The results of the mission have deepened the CBR’s understanding of the improvements to be made, helped to articulate policy recommendations, and could be used for better discussions with market participants, which are also called for to provide support for policy and institutional changes.

Principle-by-Principle Response Principle 6

68. We suggest rephrasing the summary passage referring to Principle 6 in the following way: The FSR addresses systemic issues in all segments of the financial markets, including securities markets, when they arise, and these issues are given appropriate focus and analysis. Within the CBR, nonbanking sector departments’ staff appears to be fully engaged in the work on systemic risk. While FSC com is responsible for the assessment and analysis of systemic risks and the stability of the financial system, it also has a special focus on NFIs and systemically important financial market infrastructure.

Principle 9

69. It is significant to reflect that on March 10, 2016, seven SROs were registered under the new SRO Law, and moreover four of them are SROs of professional securities firms. CBR thus suggests eliminating the inconsistences in the text of Principle 9 implementation assessment.

70. Furthermore, the assessment states that the CBR must approve basic standards no later than three months after the first SRO is registered. This statement is not accurate. Rather, the CBR sets a list of basic standards not later than three months after the first SRO is registered (Article 33(9) of the SRO Law).

Principle 12

71. As the grade for Principle 12 (“The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program”) was downgraded from partly implemented to not implemented, we suggest taking into consideration the comments below.

72. Please consider that the grade not implemented involves the identification of serious deviations from the criteria, and that this judgment is not substantiated. Specified criteria regarding the competencies of the Chief Inspection are implemented without any significant deviations, and therefore are partly implemented.

73. Moreover, please take into consideration the data on the number of inspections: in 2014 the Chief Inspection carried out 37 onsite inspections of professional securities market participants, including 9 (24 percent) unscheduled inspections. In 2015, 27 onsite inspections of professional securities market participants were carried out, including 4 (15 percent) unscheduled inspections. As regards asset management companies, the Chief Inspection carried out 43 onsite inspections, including 36 (84 percent) unscheduled inspections in 2014, and 25 onsite inspections, including 13 (52 percent) unscheduled inspections in 2015.

74. CBR also suggests taking into account the following observations:

Inspections are in general conducted at the suggestion of the off-site team and based on facts regarding the deterioration of the financial position, breaches of regulations, complaints by clients and the federal authorities, profile, exposure and concentration of risk, business transparency, among others.
CBR has adopted the practice of coordinated onsite inspections of financial groups (including those, which are not institutionalized as financial groups). This tool allows CBR to identify risks taken by the groups (individual participants of the groups). Coordinated inspections allow CBR to uncover procedures used to mask the risks taken by the group, and thereby improve the transparency of financial activities and improve market discipline.

75. Concerning the description of the switch to the risk-based principles, is important to consider the points made below.

76. In 2014–15, the Chief Inspection carried out onsite inspections of professional securities market participants initiated by the Securities Market and Commodity Market Department implementing risk-based supervision. There were mainly inspections of relatively small professional securities market participants about which there was substantial negative information on their financial statement or activities.

77. During most of these onsite inspections, violations were discovered, including of the requirements of the legislation, as well as the absence of assets or their significant overvaluation, typically associated with the use of “structured” operations to comply with capital structure requirements, and with the investment of funds in financial instruments of dubious quality, and with an increased risk of deliberate substitution of high-quality and liquid assets.

78. The Chief Inspection, during onsite inspections of the activities of professional securities market participants, in particular evaluates the quality of internal control and risk-management systems for compliance. In most of the inspected professional securities market participants, no systems had been organized for internal control and RM, and corporate governance was not compliant with international principles. These facts were considered to be violations of the requirements of the legislation. The assessment of the quality and the level of implementation of declared procedures of internal control systems, RM, and corporate governance in these professional securities market participants had no chance to be carried out due to total absence of the subject for assessment. Approaches to implementation of this practice are constantly improving. Examples of best practices were reported to Chief Inspection employees during training sessions.

79. The report of the mission does not accurately mention that a final report of violations, together with an agreed rectification program, is handed to the regulated entity on the departure of the inspection team. The final report must not include an agreed rectification program. Moreover, monitoring of the elimination of violations found during the onsite inspections is not within the competence of the Chief Inspection.

Principle 16

80. Principle 16 states that there should be full, timely, and accurate disclosure of financial results, risk and other information that is material to investors’ decisions. This principle was assessed as “not implemented” even though Russian legislation provides for all major requirements for prospectus, financial statements, and disclosure of material facts. This information was provided during the assessment and is mentioned in the report. The legislative provisions are set in Federal Law No. 39-FZ “On the securities market” (Article 24(4), Article 30, 30(2), 30.1), and in the federal law “On joint stock companies” (Chapter 13). Detailed disclosure requirements for securities issuers are set out in the Regulation of the Bank of Russia dated December 30, 2014, № 454-P. These requirements are set in line with IOSCO International Disclosure Standards for Cross-Border Offerings and Initial Listings by Foreign Issuers, International Disclosure Principles for Cross-Border Offerings and Listings of Debt Securities by Foreign Issuers, Principles for Periodic Disclosure by Listed Entities and Principles for Ongoing Disclosure and Material Development Reporting by Listed Entities, and are enforced by CBR.

81. As for the main shortcomings in the implementation of the Principle 16 mentioned in the report, the following points should be considered:

Advertisements during the securities offering

82. Current Russian legislation provides for the necessary legal mechanisms to ban offering advertisements before a prospectus is published. There is also a requirement in the Securities Law that prohibits unfair and inaccurate advertisements as well as advertisements missing any material information concerning the offering. CBR will take into account the recommendation to require prior approval of securities advertisements by CBR, which is currently missing.

Material facts disclosures

83. The Report does not take into account that Russian legislation requires companies to disclose any material fact potentially able to influence the price of the security issued by such company. Specifically, Article 30(13) of the Securities Law defines the material fact as any event which may cause a substantial change in securities’ price. As provided for in Article 30 (4), such material events are to be disclosed. Moreover, the CBR has the power to require the issuer to make such disclosure in case of failure through a CBR order.

84. The list of events in Article 30 (14) of the Securities Law covers most possible situations in which meaningful disclosure is necessary for investors, while the general obligation to disclose any material fact that could affect the value of securities set out in Article 30 (4)(13)(14) covers all the rest. Many of the examples of events cited in the report as not covered by the list are actually covered (that is, signing of a major new contract, the loss of a major contract, significant change in the line of business, a decision to acquire or sell significant assets), while others are not applicable in the Russian tradition—such as profit warnings—as many companies consider only an approved financial statement as a valid document due to disclosure.

Absence of explicit derogation from disclosure obligations and safeguards giving CBR the power to require advance notice of any decision to delay or abstain from disclosures of material facts

85. We find the assessors’ statement that there is explicit derogation from the disclosure obligations for state and commercial secrets to be arguable as there are general provisions that all essential information is to be disclosed, and if the information is not disclosed, then the issuer must provide the reason for doing so. When state and commercial secrets shall not be disclosed in accordance with the corresponding laws, and when the issuer refrains from such disclosure of state or commercial secrets, the issuer must nonetheless disclose that this information was not disclosed because it constitutes a state or commercial secret. The recommendation to provide CBR with the power to require advance notice of any decision to delay or abstain from disclosures will be considered.

86. Overall, CBR does not agree with the “not implemented” assessment for this Principle. CBR believes that major safeguards requiring full disclosure that enables investors to take informed investment decisions are implemented in the Russian legislation. There are certain shortcomings in the disclosure regime. However, in CBR’s opinion, they are not of a gross nature and do not justify downgrading the previous FSAP assessment, which was “partially implemented,” especially considering that there were no changes in the legislation that weakened the disclosure regime.

Principle 17

87. CBR does not agree with the downgrade from “broadly implemented” to “partly implemented” for Principle 17 (“Holders of securities in a company should be treated in a fair and equitable manner”). Russian legislation in fact provides for all major safeguards aimed at implementation of the principle, according to which holders of securities in a company should be treated in a fair and equitable manner. Although the Joint Stock Company Law provisions relating to takeovers cover actions of the buyer acting with its affiliated persons rather than shareholders acting in concert, the affiliated persons include a rather wide spectrum including individuals, and the affiliated person’s lists are obligatory for disclosure, thus ensuring that this provision of the law is really working in practice. CBR takes into account the recommendation on this principle and is working on corresponding amendments to the legislation.

Principle 22

88. The following should be noted in assigning a grade to Principle 22 (“Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision”). With the aim of applying the newly adopted CRA Law, the CBR has issued Regulation № 521-P dated January 17, 2015 “On the Procedure of CBR Maintaining CRAs Register, Foreign CRAs’ Branches and Offices, on the Requirements for Procedure and Form of CRAs Notifications Submission.” In accordance with the new Regulation, business companies can apply to be registered as credit rating agencies. Furthermore, on February 29, 2016, one business company has already applied to be registered under Regulation No 521-P as a credit rating agency (CRA).

89. Furthermore, regarding the requirements on the relevance of work experience, Section 4 of Article 7 of Federal Law 222-FZ lays down requirements for the relevance of work experience in position as a senior manager at a CRA or its structural units or any analytical agency or research center, or a financial organization or its structural unit operating in the financial market, or have experience of work with CBR or a federal executive body acting as a regulator of the financial market in a position not lower than a structural unit head for at least one year in case of higher education degree in Economics, Law, Mathematics (technical), and at least two years in the event of a different higher education degree.

Principle 29

90. In reference to the assessors’ comment regarding the absence of a regulation on investment advisors, it is important to mention that the draft law amending the Securities Law on investment advisors’ activity was already submitted to the State Duma. Provisions of the new law establish a financial consulting implementation framework, including the requirements for investment advisors and self-regulatory organizations of investment advisors, and govern interactions between the investment advisor and clients. They also set out requirements on clients’ investment profiles, and determine the rights and duties of a financial advisor.

Principle 31

91. Principle 31 (“Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters”) was downgraded from “partly implemented” to “not implemented” owing to findings of a lack of regulation in the following respects.

Conflicts of interest

92. CBR Regulation № 3234 contains specific requirements on brokers to control the risks inherent in direct (or indirect) client access to the exchange; and there is a mandatory system of pre-order validation for every client which allows a broker to set limits to prevent a client from placing orders exceeding those limits. This comment is in response to the statement that there are no provisions relating to the controls necessary to prevent a client with direct access to an exchange from placing an order that exceeds specified limits.

Internal controls

93. According to passage 1.1 of Article 10 of the Securities Law, professional intermediaries operating in the securities market have to organize and exercise compliance and internal audit. In order to organize and exercise compliance, professional intermediaries operating in the securities market are obliged to appoint a compliance officer or to form a separate division within their organization (compliance service).

94. Professional intermediaries operating in the securities market are required to organize a RM system with respect to their professional activity in the securities market and operations with own funds. The RM system has to be commensurate with the nature of the operations of the professional intermediary operating in the securities market and include a risk monitoring system that provides timely information to the Board.

95. Requirements aimed at regulation of compliance, internal audit, and the organization of RM systems of professional intermediaries operating in the securities market are currently under development.

Protection of clients’ rights

96. The Article 3 of the Securities Law imposes obligations on brokerage firms to act with due care and diligence in the interests of a client and to place the interests of the client above their own.

Detailed Assessment

97. The purpose of the assessment is primarily to ascertain whether the legal and regulatory securities markets requirements of the country and the operations of the securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. The assessment is to be a means of identifying potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary and used as a basis for establishing priorities for improvements to the current regulatory scheme.

98. The assessment of the country’s observance of each individual principle is made by assigning to it one of the following assessment categories: fully implemented, broadly implemented, partly implemented, not implemented, and not applicable. The IOSCO assessment methodology provides a set of assessment criteria to be met in respect of each principle to achieve the designated benchmarks. The methodology recognizes that the means of implementation may vary depending on the domestic context, structure, and stage of development of the country’s capital market and acknowledges that regulatory authorities may implement the principles in many different ways.

Table 8.

Detailed Assessment of Implementation of the IOSCO Principles

Table 8.

Detailed Assessment of Implementation of the IOSCO Principles

Principles for the Regulator

Principle 1

The responsibilities of the Regulator should be clear and objectively stated.

Description

In September 2013 a process was begun by Presidential decree in which the powers and functions of the Federal Service for Financial Markets (FSFM) were transferred to CBR. This was a three stage process that was completed in the course of 2015. Most of the 1,300 employees of the FSFM became employees of the central bank. The FSFM had been tasked with regulating financial markets, supervising exchanges, and overseeing credit and commodity markets. The FSFM was also responsible for pension funds as well as ensuring legislative compliance regarding insider trading and market manipulation. CBR is referred to colloquially as the “mega” regulator. The law which achieved the transfer is Federal Law No. 251-FZ of 7/23/2013 On Amendments to Certain Russian Federation Legislative Acts in Connection with the Transfer to the Russian Federation Central Bank of Powers of Regulation, Oversight and Supervision in the Area of Financial Markets.

CBR’s responsibilities, powers, and authority are set out in a large number of legislative acts that in most cases have been amended repeatedly since first being passed by the Duma. These include:

Federal Law No. 39-FZ of April 22, 1996, On the Securities Market;
Federal Law No. 86-FZ of July 10, 2002, On the Russian Federation Central Bank (CBR);
Federal Law No. 208-FZ of December 26, 1995, On Joint Stock Companies;
Federal Law No. 75-FZ of May 7, 1998, On Nongovernmental Pension Funds;
Federal Law No. 156-FZ of November 29, 2001, On Investment Funds;
Federal Law No. 46-FZ of March 5, 1999, On Protection of the Rights and Legitimate Interests of Investors in the Securities Market;
Federal Law No. 224-FZ of July 27, 2010, On Combating the Wrongful Use of Insider Information and Market Manipulation;
Federal Law No. 325-FZ of November 21, 2011, On Organized Trading;
Federal Law No. 7-FZ of February 7, 2011, On Clearing and Clearing Activity; and
Federal Law No. 414-FZ of December 7, 2011, On the Central Depository.

Generally, each law includes provisions that set out the powers of CBR. For example, Article 51.6 of the Securities Market Law states:

Professional activity in the securities market carried out without a license shall be illegal. In respect of the persons who carry out their activity without licenses CBR shall:

adopt measures to stop the unlicensed activity;
insert data on the official Internet site thereof of the facts of license-free activities of a securities market participant;
inform in writing the persons concerned about the need to obtain a license, and also fix the time for this;
send the materials of inspection of the facts of the unlicensed activity to a court of law for the enforcement of measures of administrative responsibility against the officials of the brokerage company;
file a claim with a court of arbitration on the recovery for the benefit of the state of incomes received as a result of unlicensed activity in the stock market; and
file a claim with a court of arbitration on the forcible liquidation of the brokerage company if it has failed to obtain a license within the fixed period of time.

As for licensed persons, Article 44(4), for example, states that, if a professional participant within one year repeatedly violate the securities legislation of the Russian Federation and/or court enforcement action, CBR shall take a decision to suspend or annul its securities market license. For single offenses the law requires that other administrative measures must be used first.

The Central Bank Act (Article 3) sets out the purposes of CBR as follows (relevant excerpts):

To develop the financial market of the Russian Federation; and
to ensure stability of the financial market of the Russian Federation.

The Central Bank Act (Article 4) sets out the functions that CBR shall fulfil (relevant excerpts): it shall elaborate and pursue in collaboration with the Government of the Russian Federation the policy of developing and ensuring the stable functioning of the financial market of the Russian Federation and:

it shall set the rules to effect settlements in the Russian Federation;
it shall exercise supervision over the activities of credit institutions and banking groups;
it shall exercise regulation, control and supervision over the activities of non-credit financial institutions in compliance with federal laws;
it shall register equity securities issues, securities prospectuses and reports on the results of the issuance of equity securities;
it shall exercise control and supervision over the observance by issuers of the requirements of Russian Federation legislation on joint-stock companies and securities;
it shall exercise regulation, control and supervision in the area of corporate relations in joint-stock companies;
it shall approve sectoral accounting standards for credit institutions, CBR and non-credit financial institutions;
it shall exercise control over the observance of the requirements of Russian Federation legislation on countering the illegal use of insider information and market manipulation;
it shall protect the rights and legitimate interests of shareholders and investors on financial markets.

In fulfilling its functions stipulated by federal laws, CBR is obliged to elaborate and pursue a policy for preventing, detecting and managing conflicts of interests.

To carry out its functions as set out in Article 7 of the Central Bank Law, CBR issues legal acts in the form of regulations, instructions and directions on issues within its responsibilities. Compliance with such acts is obligatory for all federal governing bodies, governing bodies of the constituent entities of the Russian Federation and local authorities, and all legal and physical persons. The rules for drafting such normative acts are set by CBR independently.

All regulations, instructions and directions that concern or regulate third parties’ rights are subject to registration by the MoJ. Such regulations, instructions and directions have equal legal force. The main difference is their internal structure. According to Regulation No. 519 dated September 15, 1997 “On the order of drafting and entrance into force of CBR legal acts” approved by the Order of CBR No. 02-395 dated September 15, 1997:

An act should be adopted in the form of a direction if it sets out separate rules on matters related to CBR competence.
An act should be adopted in the form of a regulation if it sets systemically connected rules on matters related to CBR competence.
An act should be adopted in the form of an instruction if it sets rules of application of norms of federal laws and other legal acts on matters related to CBR competence.

Amendments to all these three types of legal instruments are adopted in the form of direction.

In addition, the Bank issues internal acts that regulate the actions of its employees (departments, sub-divisions) and obligatory only for its employees. Such acts may also be adopted in the form of regulations, instructions and directions.

Finally, CBR can issue non-regulatory instruments that regulate internal organizational and administrative issues. According to Instruction of CBR No. 159-I dated December 24, 2014 “On document support of management in the central office of CBR” such acts may be issued in the form of orders, information letters, methodological clarifications, decrees and others.

As discussed in Market Structure, Section D “Preconditions,” there is a hierarchy of laws in Russia confirmed by the Constitutional Court. The general principles are that general laws (such as the Securities Market Law) are over-ridden by special laws, such as the Insider Trading and Market Manipulation Law where they overlap or conflict; and newer laws override older laws.

CBR’s powers to interpret its authority are constrained by the federal laws it enforces. These are not subject to expansion or modification except by further amendment to the laws.

In addition, CBR considers that its ability to interpret its authority is further constrained as a result of the enhanced transparency under which it operates as a result of the public consultation it engages in on new and amended regulatory matters in which it explains the purpose behind each regulatory initiative. Also, CBR has no power to exempt legal or natural persons from a law’s provisions.

Since regulation of securities market and their participants in carried out solely by CBR, no issues arise with respect to regulatory differences and gaps arising from multiple regulators. CBR does however operate under multiple laws and so must work to address matters of regulatory arbitrage and issues that arise from its obligation to regulate multi-functional groups on a consolidated basis. The Committees of Banking and Securities Supervision consisting of department heads, meets twice weekly to develop a unified approach. Where necessary they set up working groups to examine matters more closely. Recent initiatives have included securitization and internal audit.

Under Central Bank Law, Article 21, to fulfil its functions CBR participates in developing the economic policy of the Russian Federation Government. The CBR Chairman or one of his deputies takes part in meetings with the Russian Federation Government and may also participate in State Duma sessions discussing draft laws on issues relating to economic, financial, credit, and banking policies. In addition, the CBR cooperates with state authorities and local governments in cases prescribed by law.

For example, the Board of Directors of the CBR in cooperation with the Government of the Russian Federation is required to develop draft guidelines for the development of the financial markets and submit them for consideration to the National Finance Council, the President of the Russian Federation, the Government of the Russian Federation, and the State Duma (Central Bank Law Article 18). Within the framework of cooperation with the ministries, departments of the CBR are developing guidelines, regulations and agreements on inter-agency cooperation.

Assessment

Broadly Implemented

Comments

Although at the level of the federal Laws the powers and authority of the CBR are set out comprehensively and with reasonable clarity, the evolution of the regulatory framework whereby the federal laws have been repeatedly revised while at the same time the FSFM and, more recently, the CBR, have issued numerous directions, regulations, and instructions, has led to the creation of overlapping legal obligations, often with differences which would be minor if not for the legally binding nature of all such obligations. Many FSFM acts are still in force. In some cases, variations result in one group of market participants being subject to obligations to which other are not, for no obvious reason. See for example the description section of Principle 9 on SROs and differentiated disclosure obligations identified in Principle 11.

It must be doubted that even with substantial and highly skilled compliance departments, most licensed firms (or their SROs) are able to stay fully compliant on a consistent basis. Investors too face substantial difficulties in understanding what their rights are in their relationship with market participants or through ownership of a particular financial product.

The draft Guidelines for the Development and Stability of the Financial Market of the Russian Federation for the Period of 2016–18 has, as one of its goals “creating conditions for the growth of the financial industry.” It has identified as critical to the achievement of that goal “enhancing financial market regulation, inter alia through proportional regulation and optimization of the regulatory burden on financial market participants.” It would be consistent with that goal for the CBR, perhaps in conjunction with the MoF and industry representatives, to set up a program with the objective of achieving a substantial simplification of the regulatory framework while retaining and, enhancing those elements of regulation, supervision and enforcement which are necessary to achieve the other goals set out in the draft guidelines, namely “improving the living standards for the Russian population through the use of financial market instruments”; and “facilitating economic growth through granting the competitive access of Russian economic agents to debt and equity financing.”

Principle 2

The Regulator should be operationally independent and accountable in the exercise of its functions and powers

Description

Independence

The political independence of the CBR is set out in the Central Bank Law. Article 1 states that the status, purposes, functions and powers of the CBR are stipulated by the Constitution of the Russian Federation, this federal law and other federal laws. It goes on to state that the CBR shall fulfill the functions and exercise the powers stipulated by the Constitution of the Russian Federation and this federal law independently from other federal bodies of state power, the bodies of state power of the constituent entities of the Russian Federation and local self-government bodies.

Article 2 states that the authorized capital and other property of the CBR shall be in federal ownership. In pursuance of its purposes and in accordance with the procedure established by this federal law, the CBR shall exercise its powers to own, use, and manage its property, including the gold and currency (international) reserves of the CBR. This property may not be confiscated or encumbered with obligations without CBR consent unless the federal law stipulates otherwise. The state shall not be liable for the obligations of the CBR and the CBR shall not be liable for the obligations of the state unless they have assumed such obligations or unless federal laws stipulate otherwise. The CBR shall cover its expenses with its own revenues.

Governance

The Board of Directors is comprised of the CBR Chairman (Governor) and 14 Board members (first deputy governors and deputy governors) all of whom work in the CBR on a full-time basis.

In addition, Article 21 of the Central Bank Law states that the Minister of Finance of the Russian Federation and the Minister of Economic Development of the Russian Federation or their representatives shall participate in the Board of Directors’ meetings with the right of a “consultative vote.” Decisions are taken by a majority of the Board of Directors. The consultative votes of the ministers are not counted but their views are recorded in the minutes.

Article 19 states that members of the Board of Directors cannot be deputies of the State Duma, members of the Federation Council, deputies of the legislative (representative) bodies of the constituent entities of the Russian Federation, deputies of the bodies of local self-government, civil servants or members of the Russian Federation Government.

A member of the Board of Directors cannot be a member of any political party or hold any position in a public, political, or religious organization.

The functions of the Board of Directors are set out in Article 18 of the Central Bank Law and cannot be extended. The functions are extensive and cover typical central bank issues such as monetary policy and also matters concerning the annual financial statement of the CBR and certain budgetary matter for which approval is required from the National Financial Board (NFB). It also has a specific responsibility for deciding whether or not a request for confidential information from a foreign regulatory body should be provided, or whether the request should be declined on grounds that the information requested constitutes a state secret (Article 51.1 of the Central Bank Law).

It also works with the Government of the Russian federation in drafting guidelines for the development of the financial markets and to ensure their implementation.

It also approves compulsory standards for credit institutions and banking groups, and also for non-credit financial institutions and approves sectoral accounting standards for credit institutions and non-credit financial organizations.

The Board does not have a direct role in approving specific supervisory decisions in financial markets such as the approval of new products nor any role in supervision such as the granting or revocation of licenses, the imposition of administrative sanctions or the referral of criminal offenses to the investigating authorities. All these functions of the CBR are reserved for the executive where the senior decision making bodies are the Committees on Banking and Securities Market Supervision.

There are mechanisms that seek to ensure that commercial interests cannot influence the operational activities of the CBR. A member of the Board of Directors is subject to the restrictions imposed by Article 90 of the Central Bank Law which says (in part): CBR employees holding positions included in a list approved by the Board of Directors shall not be allowed:

to hold more than one job or work under a contract agreement (except for teaching, research, and creative work);
to hold jobs in credit and other institutions; and
to acquire securities, shares (stakes in the authorized capital of organizations), which may yield income, in cases when this may result in a conflict of interest, except for cases established by federal law.

Furthermore, under Article 8 the CBR is prevented from taking commercial interests in credit institutions or other commercial or non-commercial organizations unless the law specifically permits. An exception applies to holdings by the CBR of the capital of the Savings Bank of the Russian Federation (Sberbank). The same prohibition applies in the cases of other commercial and non-commercial organizations unless they are providing support to the activities of the CBR and its institutions, organization, and employees.

Consultation with the Government of the Russian Federation is established in Article 21 of the Central Bank Law whereby the parties shall inform each other on matters of national importance, coordinate their policies, and hold regular joint consultations.

Funding

In terms of funding its operations, the CBR covers its expenses from its own revenues as required by Article 2 of the Central Bank Law. According to the 2014 annual report, in that year the CBR had income of RUB 590,860 million, expenses of RUB 407,532 million, and a profit of RUB 183,508 million. The profit was up from RUB 129,261 million in 2013. 90 percent of the profit goes to the state budget but the rest remains in reserves. Under the Law, that percentage can be changed by the government as it so wishes.

Legal protection

There are no special protections from legal liability for the Board or staff of the CBR in relation to an act done or omitted in good faith in performance of any function, or in exercise or purported exercise of any power. In practice the CBR believes that an action against individual staff members are unlikely as decisions are taken on a collegial basis.

Article 5 of the Central Bank Law states that the CBR shall be accountable to the State Duma of the Federal Assembly of the Russian Federation. The powers of the State Duma include the power to appoint and dismiss the CBR Chairman at the proposal of the Russian Federation President. It is also empowered to appoint and dismiss members of the CBR Board of Directors at the proposal of the CBR Chairman with the agreement of the Russian Federation President.

However, Article 14 states that the chairman shall be appointed by the State Duma for a term of five years by a majority of votes of the total number of State Duma deputies.

The chairman may only be dismissed in the following cases:

when his term expires (no person may hold the post of chairman for more than three consecutive terms);
if he is unable to fulfill his duties for health reasons confirmed by a government medical commission;
if he submits a letter of resignation;
if he has committed an indictable crime established by a court ruling that has come into force;
if he has violated any federal law regulating the activities of the CBR; and
if he violated any terms of the Federal Law No. 273-FZ of December 25, 2008, “On Countering Corruption” and the Federal Law “On Control Over Conformity Between Expenses of Government Officials and Other Persons, and their Income.”

Under Article 15 of the Central Bank Law the Directors can be dismissed by the State Duma:

upon the expiry of their five-year term;
at the proposal of the CBR Chairman before the expiry of their term; and
at the proposal of the CBR Chairman in the event of a failure to take measures in compliance with the last bullet above.

Accountability

Accountability of the CBR is through the State Duma under Article 5 of the Central Bank Law. The State Duma:

considers annual reports of the CBR and adopts decisions on them;
takes a decision on an inspection by the Audit Chamber of the Russian Federation of the financial and economic activities of the CBR and its units and divisions. Such a decision may only be taken on the basis of a proposal of the National Financial Council; and
conducts parliamentary hearings on the activities of the CBR with the participation of its representatives.

The CBR must provide information to the State Duma and the Russian Federation President in accordance with the procedure established by federal laws. The amount of information disclosed to the State Duma depends on the circumstances and the nature of the information.

There are some restrictions on disclosures and these apply to disclosures to the State Duma as well.

The published annual report and financial statements set out in detail the operations of the CBR in the course of the reporting year and its use of resources. The 2014 statements were audited by PWC and Financial and Accounting Consultants LLC. Data covered by the law on state secrets was assessed by the Audit Chamber of the Russian Federation and its opinion passed to the auditors as noted in their report.

Sanctions, appeals, and disclosure

The CBR publishes its decisions to impose administrative sanctions in certain cases, notably those involving insider dealing or market manipulation as required under Article 15 of the Federal Law of July 27, 2010 No. 224-FZ “On combating unauthorized use of insider information and market manipulation.”

Numerous provisions of the laws require the CBR to give written reasons for its material decisions.

In matters arising from the issue of and trading in equity securities, the CBR is required to provide within 30 days reasoned replies to requests from legal and natural persons on matters within the competence of the CBR (Article 44.1. of the Securities Market Law).

Having made a decision to revoke the license for professional activity in the securities market the CBR is obliged to specify the grounds for its annulment (Article 39.1 of the Securities Market Law).

Decision-making regarding sanctioning is a group responsibility within the CBR, which limits the possibility of abuse of process. Under the law a license can be revoked for repeated violations (see Principle 1) and only after other less severe administrative sanctions have been applied. The CBR has an internal appeals procedure for administrative sanctions short of license revocation, although it appears to be rarely used. An appeal is heard by a deputy governor from a different department from the one seeking to impose the sanction. A decision to revoke a license can be appealed only to the court. The court could tell the CBR to reconsider and explain why the decision to refuse may be illegal but it has never happened.

Legal or natural persons who believe they will be adversely affected by a decision of the CBR in the exercise of its administrative authority may present their position prior to the CBR taking a decision. See for example CBR Instruction No. 156-I of September 1, 2014, “On Organization of the Inspection Activities of the Russian Federation Central Bank (CBR) With Respect to Non-Lending Financial Institutions and Self-Regulatory Organizations of Non-Lending Financial Institutions.”

In the case of a fine, the party has 10 days to appeal and is not required to pay until the appeals process is exhausted. For a license revocation, the decision is enforced from the day the decision is taken.

Examples

Under Article 60.1, Clause 16, Federal Law No. 156-FZ of November 29, 2001, On Investment Funds, an applicant for a license is entitled to appeal against the refusal of the CBR to grant the license or its omission to act.

Under Article 26.13 of Federal Law No. 325-FZ of November 21, 2011, “On Organized Trading” an applicant for a license to operate a trading system may appeal, against a refusal of CBR to issue the license or its failure to make a decision.

Under the Securities Market Law No. 39-FZ Article 21 a decision on the refusal to register the issue of securities and the issue of a prospectus may be appealed against in a court of law or a court of arbitration.

Under Securities Market Law Article 51.8 a professional stock market participant or an issuer of securities has the right to appeal to an arbitration court over the actions of CBR aimed at stopping breaches of the legislation of the Russian Federation.

Under Securities Market Law Article 51.8 natural persons whose qualification certificates concerning professional activities in the securities market have been withdrawn have the right to appeal against the decision of CBR to an arbitration court.

Assessment

Partly Implemented

Comments

The reasons for the rating arises the lack of legal protection for staff when performing regulatory functions such as carrying out investigations into possible breaches of the law and normative acts of CBR made under the law. It is generally accepted that reckless or negligent behavior should not be immune from civil action by the party or parties affected, although even here the expectation is that the employer regulator will finance a defense if it believes the allegation has little or no merit. Immunity is however considered essential for effective performance of regulatory responsibilities where decisions have been made on the basis of due diligence and in good faith.

The right of the Ministers of Finance and Economic Development to attend Board meetings with a right to participate in discussions and express opinions to be recorded in the minutes is a matter of some concern. Although the functions of the Board exclude direct involvement in supervisory decisions, the Board is ultimately responsible for all actions by CBR. This direct political influence on matters decided at the Board is difficult to reconcile with the IOSCO requirement that the regulator should be able to operate on a day-to-day basis without external political interference and can also be criticized for lack of transparency in the relationship between the Ministries and the Board as the meeting minutes are not published.

Principle 3

The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

Description

CBR’s powers, as set out in the laws listed in Principle 1, which include licensing, supervision, inspection, enforcement, and sanctioning of all professional market participants, and the drafting of associated regulations are sufficient for the implementation of its responsibilities. Although professional market participants pay fees for licensing and other requirements, these fees are set in the tax code and cannot be amended by CBR. In any case these fees go directly to the state budget and not to CBR. CBR’s income is derived from other central bank sources such as interest income and trading in securities, foreign exchange, and gold.

The retained profit of CBR appears sufficient to enable CBR to meet its responsibilities as a securities market regulator as well as its responsibilities as a central bank and supervisor of banks, insurance companies, and non-state pension funds.

The budget process works on the basis of a bottom up approach with the preparation of departmental budget estimates and request for funding that are ultimately considered by CBR’s internal budget commission that prepares a draft budget for consideration and approval by the Board. The budget is then referred to the NFB, the approval of which is necessary for the following items:

Staff salaries;
Life insurance and medical insurance for staff;
Administrative expenses; and
Capital expenses.

The NFB is a “collegiate body of CBR” (Article 12, Central Bank Law) but has a broader membership. Its twelve members are the governor; two from the upper chamber (Federation Council), three from the lower chamber (State Duma), three from government and three from the president’s administration. The chairman is appointed by majority vote of the council members and other decisions follow the same practice (with a quorum of seven).

CBR cannot exceed the amount for staff and the other three areas for which NFB approval is required. Otherwise it can alter the expenditure within the limits set by the NFB. During the last 12 years, the NFB has never revised the budget, as CBR pays its expenses out of its own revenues. This is despite recent difficulties in the Federal budget. The departments of CBR responsible for financial market supervision receive equitable treatment in the allocation of funds.

Staffing

CBR is viewed as an attractive employer as regards pay and social status. Staff turnover is low, at 5 percent. The introduction in 2014 of changes to the work pay and incentive system for staff and the transition to a new bonus policy, based mainly on assessment of employees’ own work and that of CBR divisions, was part of a process to enhance the bank’s ability to assess the performance of its employees. The performance assessment results are considered not only when determining the size of employee bonuses but also when transferring employees to other positions, and sending them to training courses. The focus is on effectively motivating younger staff members.

An important area of Human Resources policy is training, retraining and professional development of executives and experts. In 2014, 4,300 training events were held in the framework of the corporate system for the additional professional training of CBR personnel. This includes 33,880 employees who have completed the training, as well as 92 training events for 1,825 executives and experts working in the supervision function, of which 51 employees completed professional retraining programs of over 500 academic hours. 104 CBR employees completed the FSI Connect online learning program developed by the Financial Stability Institute of the Bank for International Settlements for experts working as supervisors in the financial sector. Since the program was launched in 2012, 437 employees have undergone this training.

Governance practices

CBR structure includes the central office, 81 regional branches, as well as seven main branches with 72 divisions and two divisions—in Crimea and Sebastopol. This is a new structure created over the past two years. Regional units coordinate their activities with headquarters. If a systemic issue arises, the issue is presented to senior management.

The headquarters has 39 structural units responsible for different areas of activity. The organization is divided into what are termed structural units (which may be departments, services or divisions but some with other names such as inspections). The central structural units are in charge of policy. Implementation is the responsibility of the territorial units. The central structural units oversee the work of the territorial units. The preparation of material on decision-making is the responsibility of the territorial unit. The broader implications of such decisions are covered by consultation with central structural units. This is especially so when a local securities firm is part of a national group.

There is an Internal Audit Department of 100–120 people. This is headed by a controller who reports to the chief auditor who reports directly to the governor. The Legal Department also reports to the governor.

There is much work on the development of new regulations. In February 2016 there were at least 18 work streams focused on regulatory and legislative amendments intended to enhance the effectiveness of CBR’s supervisor of financial markets and professional market participants. The cost of regulation is a critical factor in decision-making.

As described in Principle 1, CBR’s powers to interpret its authority are constrained by the federal laws it enforces. The drafting of regulations, directions, etc. is governed by Regulation No. 519 dated September 15, 1997 “On the order of drafting and entrance into force of CBR legal acts.” This is a public domain regulation and so the process is transparent. The regulation requires that a structural unit that is interested in preparing a draft act will consult other structural units. If a consensus is reached it is placed on CBR website for public discussion. Once any comments have been considered it is put to the Committees on Banking and Securities Market Supervision and then to the governor for signature. The act is then sent to the MoJ for registration. The final form act is then published on CBR website and comes into force ten days later. CBR can vary the timings the timing of the entry into force of different provisions within it.

Investor education

Financial literacy is a main focus of CBR and a priority for the next three years. In the draft Guidelines for the Development and Stability of the Financial Market of the Russian Federation for the Period of 2016–18 a Key Goal is improving the living standards of the Russian population through the use of financial market instruments. The area of development identified as being critical in realizing this goal is ensuring financial services consumers’ protection and financial inclusion, and raising the level of financial literacy among the Russian population. Measures identified and being taken forward to raise the standard of financial literacy include:

Introduction of obligatory financial literacy classes in general education institutes;
Creation of a specialized CBR webpage devote to numerous issues in the field of financial literacy in an easily understandable way;
Defining optimal financial literacy promotion channels for different household groups and the most suitable financial products considering individual characteristics as well as consumer expectations; and
Creation of financial literacy level evaluation toolkit.

Assessment

Broadly Implemented

Comments

Although CBR has control of its operational budget once that has been agreed, the overall size of the budget is established by a decision of the NFB of which CBR member (the governor) has one vote among 12. Since staff salaries and administrative expenses constitute the major part of the banks expenses, there is potential for the Presidential administration, federal government, and the legislature to exercise definitive influence over the resources the bank has for regulation and supervision.

Within the constraints imposed by the complexity of the legal and regulatory system, and as described verbally, CBR appears to have policies and governance practices to perform its functions and exercise its powers effectively.

The work of CBR in the field of investor education is well regarded by an independent body which itself sponsors financial literacy initiatives and defends consumer rights.

Principle 4

The regulator should adopt clear and consistent regulatory processes.

Description

CBR is subject to the Constitution of the Russian Federation (Article 75), the Central Bank Law and other legislative acts of the Russian Federation such as the Administrative Code, which covers enforcement matters, and Article 172.1 of the Criminal Code of the Russian Federation with regard to the falsifying financial documents such as accounts and statements of financial position. Under Article 761 of the Central Bank Law CBR cannot interfere in the operational activities of non-credit financial institutions, except for the cases stipulated by federal laws, which are strictly defined. Compliance with its legal obligations requires CBR to operate under reasonable rules and regulations. As noted in Principle 1, its powers to act on a discretionary basis are very limited.

Within the constraints imposed by the complexity of the legal and regulatory system CBR seeks to ensure that its policies and procedures are predictable, comprehensible, and transparent. In CBR’s view, this objective is served by development of CBR’s first document on development of the financial market, Basic Guidelines for the Development and Operational Stability of the Russian Federation Financial Market in 2016–18. That document specifies strategic guidelines for the development and operational stability of the financial market of the Russian Federation at the cross-sectional level—for all sectors of the financial market. CBR’s development of this document once every three years is required by the Central Bank Law and involves extensive discussions with the main stakeholders to establish the priority medium-term objectives including optimization of the regulatory burden on participants in the financial market and the use of proportional regulation, including the development of a selective approach to the regulation and surveillance of financial institutions depending on the sector’s level of development and taking into account its specific features and financial operations and risks.

Public consultation

CBR places on its website for public inspection, drafts of newsletters, directives, orders, and other documents containing approaches to the regulation of the securities market, including the key issues of interpretation, changes and reasons for changes in rules or policies. In addition, the above documents are published in an official publication of the Bank—“Bulletin of CBR.” It also sets up working groups involving representatives of the business community for public discussion of the draft provisions, etc. Although the powers of CBR to interpret the law are limited, it also publishes commentaries on how it has acted previously in response to certain defined situations or events.

Regulatory costs

An example of public consultation is the approach adopted by CBR with regard to the cost of compliance. In accordance with the order of CBR of December 27, 2014 No. ML-3716 “On the order of the regulatory impact assessment of draft normative acts of CBR.” CBR regulations are evaluated for the presence or absence of provisions introducing excessive duties, prohibitions and restrictions, entailing unreasonable costs for the persons who would be subject to the regulation. Regulatory Impact Assessment includes the following steps: placing the draft for public discussion on the official website of CBR; analysis and evaluation of the proposals and comments on the project; and adoption of conclusions.

Procedural fairness

As part of its activities CBR employs principles of legality and fairness, allowing supervised institutions in case of minor violations to eliminate the violations without major sanctions (for example, minor delays in the filing of required documentation).

As described in Principle 2, decision making regards sanctioning is a group responsibility within CBR. Legal or natural persons who believe they will be adversely affected by a decision of CBR in the exercise of its administrative authority, may present their position prior to CBR taking a decision. Under the law a license can be revoked for repeated violations (see Principle 1) and only after other less severe administrative sanctions have been applied. CBR has an internal appeals procedure for administrative sanctions short of license revocation, although it appears to be rarely used. An appeal is heard by a deputy governor from a different department from the one seeking to impose the sanction. A decision to revoke a license can be appealed only to the court. The court could tell CBR to reconsider with an explanation as to why the decision to refuse may be illegal but it has never happened.

CBR is required to give written reasons for its decisions. As described in Principle 2, under the Central Bank Law (Article 7), all CBR normative acts may be appealed against in court in accordance with established procedures.

The general criteria for granting, denying, or revoking a license are found in:

Instruction of CBR from September 13, 2015 No. 168 “On the procedure for licensing by CBR of professional activity in the securities market and the order of keeping the register of professional participants of the securities market”;
Instruction of CBR from June 29, 2015 No. 166 “On the procedure for licensing joint-stock investment funds, management companies and specialized depositaries, the order of keeping the register of licenses of joint-stock investment funds, management companies register of licenses and register of licenses specialized depositaries, the procedure for notifying CBR to change Information on officials of joint-stock investment fund MC and a specialized depositary.”

These instructions are published in the “Bulletin of CBR” as well as being posted on the official website of CBR.

Reports on investigations are not made public while an investigation is ongoing but may be made public once a decision has been made to impose administrative sanctions. CBR has a policy of disclosing decisions made on cases involving insider dealing and market manipulation on its website shortly after a case has been concluded.

In addition to the procedural processes set out above, in order to secure the uniform application of laws by which CBR supervises non-credit financial institutions CBR developed regulations governing the sequence of actions during inspections. These include the CBR Instruction of April 24, 2014 No. 151 “On the procedure of inspections of non-credit financial institutions and self-regulatory organizations of non-credit financial institutions by authorized representatives of the CBR” and CBR instruction of September 1, 2014 No. 156-I “On the organization of the inspection activities of the CBR, in respect of non-credit financial institutions and self-regulatory organizations of non-credit financial institutions.”

Within CBR, consistency of decision making is achieved via the Financial Supervision Committee that considers cases. This is chaired by a first deputy governor and membership includes a deputy governor, heads and deputy heads of structural units. Decision making is by majority. Cases decided by the territorial units are also considered to ensure consistency. The individual decision makers explain the reasons for the decision. Such reviews of decisions are then circulated so that all can learn from them. Internal Audit provides a further check.

Assessment

Fully Implemented

Comments

Among industry participants there was a mix of opinions on the commitment of CBR to “real” consultation. There was a clear majority of the view that CBR is serious in seeking views of market participants and the pubic and that engaging with CBR by responding to public consultations or participation in CBR workshops is worthwhile and can secure improvements in proposed regulatory approaches. Similarly, while industry participants did not criticize CBR for exercising its powers inconsistently, there were a few comments on the rigor of its supervisory approach compared to its predecessor. CBR will need to ensure that it continues to enjoy support for its consultation process if it is to secure willing rather than grudging support for its development of more effective regulation, particularly among the nonbank licensees for whom the more intrusive central bank style of regulation has caused some unease.

Principle 5

The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

Description

Requirements for employees of CBR are, to a large extent, set out in Chapter 14 of the Central Bank Law.

Article 90(3) of the Central Bank Law, sets out the prohibition on buying securities. This is imposed on “employees holding positions included in a list approved by the Board of Directors;” those securities are “ones which may yield income” or where purchase “may result in a conflict of interests,” and does not apply to “cases established by federal laws.” There are no specific constraints on an employee’s close family members dealing when the employee may not, although Article 11.1 of the Federal Law of December 25, 2008 No. 273-FZ “On Corruption Counteraction” sets out the basic principle according to which CBR employees must eliminate any possibility of the conflict of interest and notify their superiors immediately of any personal interest in their service duties which includes the possible obtaining the benefits by the employee’s close family members (Article 10, item 2). See below. Staff are also subject to the Insider Dealing Law (see Principle 36) and CBR has issued Ordinance of October 31, 2011 No. 2723-U “On Insider Information of CBR.” This Ordinance stated the list of such information.

The requirements to prevent conflicts of interest, are contained in Article 90, the restrictions on ownership of securities in paragraph 8 of Article 90; the requirements on disclosure of financial position (information about income, expenses, assets, and liabilities as regards real property) in Article 90.1.

In-house conflicts of interest

CBR is an active trader on several MOEX markets: for ex, repo and government and corporate bond trading as is Sberbank, in which CBR owes 51 percent. In accordance with Article 51.6 of the Central Bank Law, in order to prevent, identify, and manage conflicts of interest when exercising functions under federal laws, CBR’s responsibilities in respect of decision making on monetary policy, supervision and regulation on the financial market are assigned to different deputy governors of CBR. CBR believes that this organizational structure avoids in-house conflicts of interests.

A number of measures were taken in 2014 in order to eliminate CBR and Sberbank influence on the decisions of MOEX. Before 2014 CBR owned 22.47 percent of the Exchange’s shares, and Sberbank owned 9.9 percent. Thus, before 2014 CBR in affiliation with PJSC Sberbank owned a blocking shareholding of the Exchange. This allowed them to block crucial decisions of the shareholders’ General Meeting of the Exchange and to exercise the right to include relevant number of members to the Exchange’s Supervisory Board. In 2014 the stake of CBR in the Exchange was cut from 22.47 percent to 11.73 percent. Thus, CBR no longer owns a blocking shareholding of the Exchange either individually or jointly with Sberbank.

Special measures were also taken to reduce of the number of CBR’s representatives on the Exchange’s Supervisory Board. Currently only 2 of 15 members of the Supervisory Board) are CBR representatives. One is the Chief Auditor of the CBR whose independence within CBR is established by the CBR Regulation of June 4, 2012 No 376-P “On Internal Audit at the Central Bank. The other representative is the Dean of Free Art and Science Faculty of St. Petersburg Statutory University. Thus, in the view of CBR it has no impact on important corporate decisions made by MOEX shareholders’ at the General Meeting or its Supervisory Board.

The CBR trading and trading supervision functions are carried out by different departments.

Some products are specifically designed and supported by MOEX to trade with CBR only (Repo with CBR). In other cases, CBR uses the MOEX trading platforms (FX trading, FX swap, securities trading) used by all participants.

Restrictions on the use by employees of CBR of proprietary information, including the use of confidential information, as well as personal data are set out in Article 92 of the law on CBR, as well as, in detail, in Position of CBR from July 8, 2015 No. 484-p “On commissions for compliance with the official conduct of employees of CBR and the settlement of conflict of interest; Instruction of CBR from July 10, 2014 No. 3414-u” On the procedure for the adoption of the employees of CBR of measures on the prevention and resolution of conflict of interest.”

Members of the Board of Directors are also subject to the restrictions imposed by Article 90.

In addition to Article 90 employees are subject to requirements set out in a number of laws and other legal acts by CBR and the federal government, as listed below:

The restriction on avoidance of conflict of interests and the detailed procedure thereon is stipulated in the following main acts:

Federal Law on Anti-Corruption No. 273-FZ of December 25, 2008 (e.g., Articles 9–11, 11.1, 13.2);
Instruction of the CBR No. 3414-U of October 7, 2014 “On procedure for Taking by Bank Employees of Actions on Avoidance and Regulation of the Conflict of Interests”;
Instruction of the CBR No. 3336-U of July 22,2014 “on procedure for Notification of the Employee Representative on Facts of Application for the Purposes of Corruption, Registration of Such Notifications and Verification of the Data Contained Therein”;
Regulation of the CBR Federation No. 438-P No. October 23, 2014 “On procedure for Notification on Gift Presentation Due to Official Position or Discharge of Duty, Handoff and Valuation of the Gift, Sale (Buy-Back) of the Gift and Transfer of Funds and Credit of Funds Received as a Result of its Sale”;
Regulation of the CBR No. 484-P of August 7, 2015 “On Compliance with Requirements to the Official Conduct of the Employees and Regulation of the Conflict of Interest”;
Order of the CBR No. OD-914 of November 18, 2013, pursuant to which the Commission on Compliance with Requirements on Official Conduct of the CBR Employees and Regulation of the Conflict of Interest of the HQ of the Bank of Russia has been formed;
In addition, on the website of CBR there is the separate section on anti-corruption (that includes issues on the conflict of interests as well) where there are other documents on the subject.

The restrictions on acquiring and disposing of securities by Bank of Russia employees are also set out in: Part 7 Article 11, Article 12.3 of the Federal Law on Anti-Corruption No. 273-FZ of December 25, 2008.

The requirement to disclose the financial position by CBR employees is established in the following acts:

Regulation for Procedure on Inspections of the Accuracy and Certification of the Data on Income, Property, and Property-Related Obligations Submitted to CBR, Compliance by the CBR Employees with Requirement to the Official Conduct and Procedure for Control over Expenses, approved by CBR on August 20, 2013 No. 405-P;
Order of CBR No. 3651-U of May 25, 2015 “On List of Positions that Requires Disclosure of the Data on Income, Expenses, Property and Property-Related Obligations” approved by CBR on May 26, 2015;
Order of CBR of April 8, 2013 No. 2991-y “On List of Positions of CBR that Persons Applied for and Occupied by the Employees of CBR that have to provide Data on Income, Expenses, Property and Property-Related Obligations as well as on Income, Expenses, Property and Property-Related Obligations of their Spouses and Minor Children”;
Regulation on Procedure on Provision of the Data on Income, Expenses, Property and Property-Related Obligations to the Bank of Russia, approved by the Bank of Russia on May 21, 2013 No. 399-P;
Instruction of the Bank of Russia of July 16, 2013 No. 3027-U “On procedure for Placement of Data on Income, Expenses, Property and Property-Related Obligations by the Russian Mass Media for the Purposes of Publication;” and
Regulation for Commissions on Compliance with Requirements on the Official Business and Regulation of the Conflict of Interests, approved by CBR on August 7, 2015 No. 484-P.

The obligation on employees to have regard to procedural fairness standards in performance of their duties is covered in other requirements and operational procedures of CBR as described in Principles 3 and 4.

Dealing with fragmented obligations and responsibilities

This fragmentation of obligations and responsibilities is a function of the operation of the Russian legal system. CBR cannot put it all into one document without risking accusations from the public prosecutor of committing a serious legal violation by placing all the legal norms in a document that is not a legal act.

CBR has to work within this constraint and seeks to ensure that its staff understand their responsibilities. All new applicants are given information on what the expectations are. The individual officer has to sign document that they understand their obligations. There is a process for inducting new employees that ensures that they get the legislative requirements. It is for employees to familiarize themselves with their obligations.

On an ongoing basis, each staff member has a set of staff instructions. This describes their powers and duties, one of which is to follow the legal framework. New laws are sent to all departments. The head of department is obliged to ensure that all employees familiarize themselves with these new laws. To facilitate employee understanding the CBR website contains the legal texts, and includes explanatory notes and diagrammatic representations of the requirements and how to comply.

Operational and disciplinary processes

The operational conduct of CBR in these matters is governed by:

Federal Law No. 59-FZ of May 2, 2006 “On procedure of consideration of application of individuals”;
Regulation for Commissions on Compliance with Requirements to the Official Business and Regulation of the Conflict of Interests, approved by CBR on August 7, 2015 No. 484-P; and
Regulation for Procedure on Inspections of the Accuracy and Certification of the Data on Income, Property and Property-Related Obligations Submitted to CBR, Compliance by the Bank of Russia Employees to the Official Conduct and Procedure for Control over Expenses, approved by the Bank of Russian on August 20, 2013 No. 405-P.

In accordance with Article 88 of the Central Bank Law, CBR has set up a disciplinary system for employees as in CBR from July 22, 2014 # 3336-u “On the procedure for notifying the employee’s representative about the facts concerning the commission of corruption offenses, the registration of such notification and verification of information contained in them.” Under Article 90/1 nonperformance of the obligation stipulated in the article and failure to take measures for prevention or settlement of conflict of interest, to which he/she is a party, by a CBR employee holding a position included in the list approved by the board of directors is a violation of law punishable by termination of employment. As a part of its regular work CBR Human Resources and Personnel Management Department conducts inspections of CBR’s employees’ compliance with the requirements of the Russian Federation legislation and provisions of CBR Internal Code of Conduct in the course of exercising their functional responsibilities. In accordance with the information obtained, from the beginning of 2013 to early 2016, at CBR’s headquarters 38 people were held disciplinary liable, 19 of which were subject to disciplinary action notices, and the rest were given reprimands.

Depending on the facts of the case other federal laws may be relevant such as Article 13 of the Federal Law on December 25, 2008 No. 273-FZ on combating corruption. Russian citizens, foreign nationals, and stateless persons for committing a corruption offenses incur criminal, administrative, civil, and disciplinary liability in accordance with the legislation of the Russian Federation. Sanctions include banning a person from occupying certain positions in State and municipal service.

Definition of conflict of interest

The law contains a definition of a conflict of interest as it applies to a state or municipal employee.

Article 10. Conflict of interest in state and municipal service:

In this federal law, the conflict of interest in state or municipal service is understood to mean any situation where personal interest (whether direct or indirect) of a state or municipal servant influences or can influence proper discharge by him/her of his/her official responsibilities and where a contradiction may arise between personal interests of the servant and rights and lawful interests of citizens, organizations, society or the state which can be to the detriment of rights and lawful interests of citizens, organizations, society or the state.
Personal interest of a state or municipal servant, which influences or can influence proper discharge by him/her of his/her official responsibilities, is understood to mean a possibility for the servant to gain, during the discharge of his/her official responsibilities, income in the form of money, values, other property or services involving property and other property rights for him/herself or for third parties.

Assessment

Broadly Implemented

Comments

The references to restrictions applying only to “CBR employees holding a position included in the list approved by the board of directors” is not comprehensive as required by the principle which refers to “staff.” Staff below middle manager level (e.g., below deputy head of division) are not included. Instead, staff members not included on the “list” are required to meet more general obligations such as in section 5.3 of the Regulation of CBR of July 25, 2003 N 235-P “Regulation on employees of Bank of Russia” which sets out that “if the holding of securities by the employee of Bank of Russia may lead to possible conflict of interest the employee is obliged to transfer securities he possessed to the fiducial management.” There does not appear to be a good reason for this two tier approach.

Reliance on the term “third parties” in Article 10(2) of the anti-corruption law referred to above could usefully be clarified by CBR to put beyond doubt that the constraints on staff apply equally to family members.

Although reliance on a multitude of laws, regulations, instructions ordinances, etc., provides for the possibility of gaps and ambiguities CBR appears to have made substantial efforts to enable staff to understand their duties and responsibilities and the penalties for breach, etc. There is significant scope for providing greater clarity and minimizing the risk of inappropriate behavior thereby going undetected and unpunished.

Principle 6

The regulator should have or contribute to a process to monitor, mitigate, and manage systemic risk, appropriate to its mandate.

Description

CBR has a statutory obligation to monitor, mitigate and, where appropriate, manage systemic risk. Article 45 of the Central Bank Law requires the CBR to elaborate and pursue in collaboration with the government a policy of developing and ensuring the stable functioning of the financial markets of the Russian Federation. In order to do so it is required to monitor the state of the Russian financial markets, including for the purpose of detecting situations endangering the financial stability of the Russian Federation. Furthermore, to prevent the emergence of situations endangering that financial stability, CBR is required to develop measures aimed at reducing threats to that stability.

The primary public document in which the CBR’s work in this area is made accessible to the public is the twice yearly FSR. The first updated edition covered 2014 Q4 2015 Q1. As of February 2016 the second edition, covering 2015 Q2 and Q3 was in the process of being translated into English.

In the first updated review CBR discussed the December 2014 increased volatility in the stock exchange and FX markets and the stabilizing measures that CBR had taken in response. It also discussed the problem that professional securities markets participants had at that time in raising liquidity and the response of the NCC. It noted that CBR was tightening supervision over professional participants while also developing a mechanism to provide liquidity directly to brokers in crisis situations through repo transactions with central counterparties. This mechanism was intended to limit the spread of liquidity problems of professional participants during market shocks.

Technical work on financial stability is carried out by the CBR’s FSD. It uses a dashboard for monitoring and assessing financial stability, including indicators of the state of financial markets and the banking sector. Thresholds are set for each indicator (in the yellow and red zones) at which CBR may take measures to mitigate systemic risk. Also under development is a list of risk factors for NFEs which including the performance of cross-sectoral issues (e.g., the size of investments in the stock market, performance etc.). The dashboard is updated at least monthly and submitted to FSC com members. In addition, CBR regularly studies international experience in terms of methods of risk analysis, financial stability and their possible use in the Russian Federation.

Over a longer term time horizon, CBR is required to submit to the President and the State Duma once every three years draft guidelines for developing and ensuring the stable functioning of the financial markets of the Russian Federation. The State Duma considers the draft guidelines during a parliamentary hearing and sends its recommendations to CBR.

CBR is the sole regulator of the financial market and supervisor of credit and non-credit financial institutions. However, in 2013 in order to coordinate the actions of state bodies and CBR, an inter-ministerial advisory body was established, the National Council on Financial Stability (NCFS), in which information is shared between agencies. The NCFS consists of representatives of the Presidential Administration, the Russian Federation Government, CBR, MoF, MED, and the State Deposit Insurance Agency. The NCFS meets at least quarterly and can commission work streams on topics on which it needs further information. The Secretariat of the Council consists of representatives of CBR, the MoF, and the government.

In November 2014, CBR established a high-level internal FSC Com, chaired by the governor, to formalize and further strengthen macroprudential policy decision making. The FSC Com’s responsibilities include:

(1) assessment and analysis of systemic risks and the stability of the financial system;
(2) assessment and analysis of the financial sustainability of systemically important financial market infrastructures (FMI);
(3) assessment and analysis of the financial soundness of the largest non-financial institutions, their financial risks and the impact of these risks on the banking system and financial markets; and
(4) review of the draft FSR.

Total assets for all types of institutions recognized as shadow banking entities by the Financial Stability Board—FSB (NFIs and collective investment funds) amounted to US$126 billion in 2014 in Russia that was 6 percent of total assets of the Russian financial sector, showing an increase in ruble terms though in dollar terms a decrease due to the significant ruble depreciation. Banks are still playing the key role in the financial sector, while alternative tools for savings such as money market funds are underdeveloped. Both private and corporate sectors continue to employ conservative investment strategies to manage their savings. Liquidity and maturity transformation risks are considered as the main risks of shadow banking entities in the Russia Federation.

Assessment

Fully Implemented

Comments

The FSR addresses systemic issues in all segments of the financial markets, including securities markets when they arise and these issues are given appropriate focus and analysis. Within CBR, nonbanking sector departments staff appear to be fully engaged in the work on systemic risk. FSC Com has a clear focus on NFEs and systemically important financial market infrastructure.

The NCC, the clearing house and central counterparty (CCP) of the overwhelming majority of the transactions in the financial market and a member of the Moscow Exchange Group, has been declared a systemically important financial institution (SIFI) as has the National Settlement Depository (CSD) which is also a member of the Moscow Exchange Group.

Principle 7

The Regulator should have or contribute to a process to review the perimeter of regulation regularly.

Description

In evaluating the risks associated with the activities of financial institutions, as well as certain financial instruments, CBR analyzes the current regulatory standards, seeks to identify compliance risks and, if necessary, takes action to amend the legislation.

Following the CBR’s assumption of the role and functions of the single integrated financial markets regulator in 2013 it initiated a Task Force under the Russian Federation President’s Council for Development of the Russian Federation’s Financial Market. The Task Force prepared an initial list of 233 proposals submitted by the professional community for improving financial market regulation, which were ranked according to their assessed priority. Subsequently the Task Force’s annual meetings have become a forum for the CBR’s discussion with the professional community of priorities for the coming year, which increases the transparency and predictability of the regulator’s actions and promotes effective cooperation with financial market participants. In addition, under CBR, in order to develop recommendations for setting strategy and policy regarding the development and regulation of the various segments of the financial markets, expert councils have been established consisting of representatives of the various specific communities and experts from the respective market segments. In particular, there are the following councils:

Expert Council on Securitization of Financial Assets;
Expert Council on the Debt Securities Market;
Expert Council on Rating Agencies;
Expert Council on Internal Audit Regulation and Methodology, Internal Control and Management of Risks Posed to the Bank of Russia by Financial Institutions;
Expert Council on Insurance;
Expert Council on Collective Investment;
Expert Council on Microfinance and Credit Cooperatives; and
Expert Council on Financial Literacy in the Operations of Non-Lending Financial Institutions.

Out of this initial and ongoing work, which includes evaluating the risks associated with the activities of financial institutions, as well as certain financial instruments, perimeter issues emerge which CBR analyzes in terms of its investor protection and market stability remit, and its current regulatory standards. This includes analyzing risks associated with the activities of unregulated financial products, markets and market participants. It seeks to identify compliance risks and, if necessary, takes action to amend its regulation and, if necessary, to amend the relevant federal law.

In this regard areas on which the financial markets departments have focused include the securitization market as regards the quality of the underlying assets, a possible market in agricultural infrastructure bonds, enhancement to derivatives markets instruments and regulation to reduce risk for retail investors. Identified areas of concern and examination, and possible new regulation are NFEs offering quasi-banking products and retail foreign exchange dealers. The microfinance sector, for which CBR is also responsible, also has some areas of concern.

CBR also works on a cooperative basis with law enforcement authorities to counter Ponzi schemes. It has developed an analytical process which seeks to distinguish Ponzi schemes from legitimate financial products.

Sources of information are professional markets participants, banks, SROs, Territorial Units, and complaints against NFEs and other entities. CBR also monitors foreign regulators websites for new instruments that may be raising concerns in other jurisdictions.

Assessment

Broadly Implemented

Comments

There may be scope for further formalizing the process of perimeter review to ensure that issues are not overlooked when they first emerge. This might include appointing a senior manager and staff with specific responsibility and appropriate reporting lines for the topic. One source of information is the Territorial Units of the Bank. In furthering its work on Ponzi schemes the bank might wish to consider, if it has not done so already, providing specialized training for these units to enable them better to recognize Ponzi schemes and other outright fraudulent practices. Typically, these are established in isolated and/or rural communities where the level of financial literacy is low and the opinions of respected community leaders who join these schemes early, either knowingly or in ignorance of the true facts, such as the priest, the doctor, etc., carry great weight. Some sophisticated schemes in some jurisdictions have been known to set up formal offices in small towns and have adopted all the trappings of a legitimate financial services firm.

Principle 8

The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.

Description

Central Bank Law (Article 4.1 states that CBR shall be obliged to elaborate and pursue a policy for preventing, detecting and managing conflicts of interests.

Some provisions are in place. The Securities Markets Law (Article 3.2) states that if a conflict of interest between a broker and his client (of which the client had not been notified before the broker received the relevant order) has caused damage to the client, the broker shall be obliged to compensate for the losses. The client is required to go to court to get compensation and if successful CBR has also levied an administrative fine on the broker concerned. CBR is currently considering introducing a power whereby, when it determines that a client has lost money as a result of a broker’s conflict of interest, it will by order instruct the broker on how to remedy the fault.

There is no equivalent provision in the Investment Funds Law, although Article 2.2 states that CBR shall establish requirements aimed at preventing conflicts of interest of management companies and specialized custodians.

There are no provisions to deal with the issue of balancing the interests of one client (or group of clients) against the interests of another client or group of clients such as arise in the investment banking area or in handling of client orders by a broker.

The CBR Regulation of August 3, 2015 No. 482-II “Regulation on the common requirements of the rules of the management of securities to order the disclosure of information control, as well as requirements aimed at the exclusion of conflict of interests in the regulated,” in Chapter 6 requires that the manager shall take measures to identify and monitor conflicts of interest, as well as the prevention of its effects; and that if the action taken by the manager to prevent conflict of interests have not led to a reduction in the risk of damage to the interests of the client, the client is obliged to notify the manager about the general nature and/or sources of conflicts of interest prior to the transactions which involved the management of the client’s property.

There are some specific prohibitions that have the effect of acting as constraint on actions that could otherwise result in an abuse of a conflict of interest. For example, under sub-paragraph 1(8) of Article 40 of the Investment Funds Law, the MC is not entitled to make transactions or give orders to make acquisitions of securities issued by its participants, its subsidiaries and affiliates, its specialized depositary, its external auditor, the person maintaining the register of holders of units of its UIFs or shares in the share capital of any of these persons.

Article 19 of the SRO Law requires an SRO to have rules that address conflicts of interest.

Article 8 of the Auditor Law prohibits an auditor from committing actions that cause a conflict (or threat of conflict) of interest.

Article 3(3) of the CRA law prohibits a CRA from conducting other activities that may create a conflict of interest and Article 3(9) creates a general obligation on CRAs to identify, manage, and disclose, or prevent conflicts of interest.

The treatment of misaligned incentives, is addressed in CBR Instruction No. 154-I of June 17, 2014 on remuneration policy. This seeks to balance excessive risk taking and interests of the firm and employee as regards banks and non-state pension funds. It may be extended to broker dealers but only as a recommendation.

There are some provisions on how disclosure should be made, but tempered with the phrase “depending on the resources of the intermediary.”

Regulation of the Federal Service for the Regulation of Securities (FSFR) as of November 15, 1998 No. 44 “Regulation on elimination of conflict of interests in the professional market participants’ activities” is still effective. It stipulates a general and broad definition of conflicts of interest.

Conflicts of interest and cases of misaligned incentives are generally identified from complaints by investors that their rights have been violated; that is after damage has been caused. At that point CBR is able to take action including, if necessary, obtaining the necessary regulatory amendments.

Assessment

Not Implemented.

Comments

IOSCO has observed in the Explanatory Note to this principle that the critical issue from an assessment perspective is the process by which the regulator monitors conflicts of interest in the market that may have an effect on investor protection, market fairness, efficiency, and transparency, or pose a systemic risk. CBR lacks a process for identifying and evaluating such matters on an ongoing basis as is required by Key Question 1. Hence the downgrade. The view of the assessor is that CBR is not sufficiently proactive in identifying and evaluating potential, as distinct from actual and current, conflicts of interest and misalignment of incentives. Currently its responses are primarily reactive. The responsibility for identifying and taking action regarding losses caused by the mis-management of a conflict of interest by a professional market participant is placed on the client who may be unaware that they have suffered loss.

The assessors have noted the difficulties under the Russian legal system in drafting provisions that impose on professional market participants an enforceable obligation to identify conflicts of interest and misaligned incentives, to take steps to avoid, eliminate (perhaps by declining to act in a transaction), disclose or otherwise manage them to and which enable CBR to provide non-exhaustive guidance on the situations and conduct which CBR believes constitute conflicts of interest or misaligned incentives. We however, strongly urge the authorities to seek a solution which would enable the Russian regulatory framework to move closer to international standards in this regard.

The instruction on remuneration is currently limited to banks and non-state pension funds, which seeks to secure a balance between the risk to which a firm is exposed by the business generated by certain employees, and the rewards those employees receive, should be kept under review and, if appropriate, extended on a mandatory basis to broker dealers and fund managers.

Principles for Self-Regulation

Principle 9

Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

Description

Introductory note on the relevant legislation

The main legislative provisions relating to SROs are set out in Law 223 of July 13, 2015 (the SRO Law), which came into effect on January 11, 2016, immediately before the mission. There are also provisions relating to SROs for securities market participants and exchanges in Articles 48–50 of the Securities Law and Articles 57–59 of Law 156 of November 29, 2001 on investment funds (the Investment Funds Law). The new SRO Law does not repeal the SRO provisions in the Securities Law or Investment Funds Law, although it covers all of the topics in those Articles (and more besides). The new SRO Law states that the provisions of Articles 50 (1) and 50(2) (which apply to SROs of forex dealers) of the Securities Law apply insofar as they do not contradict the new SRO Law. However, it makes no comment on the applicability of Articles 48 and 49 of the Securities Law or Articles 57–59 of the Investment Funds Law.

The new SRO Law makes membership of an SRO mandatory for a firm engaging in an activity for which an SRO is registered. The provisions in the old laws were that membership was voluntary. Both sets of provisions remain in force.

The provisions in the Securities Law and Investment Funds Law create license criteria for SROs and specify duties and obligations. Existing SROs have members who are professional securities firms and management companies. The license criteria and the list of SRO duties and obligations in the Securities Law differ from those in the Investment Fund Law (as set out in the description below). The general function of the SROs for professional securities firms and those for investment fund management companies are essentially the same. Some of the same organizations qualify as SROs under both. These SROs have to comply with the two different sets of requirements. There is no reason, relating to the functions of the SROs or the nature of the licensed activity, to justify these differences.

The Securities Law contains provisions that could only apply to an exchange, acting as an SRO (Article 50: reference to “an entity that organizes trade”). CBR has explained that an exchange cannot be an SRO because an exchange must be a joint stock company whereas an SRO must be a non-corporate association. Nevertheless, the SRO provisions, relevant to exchanges, remain in place, although redundant by definition according to CBR. This contradiction has been in place at least since the Organized Trading Law was enacted in 2011 and there have been many amendments to the Securities Law since that time (including amendments to the SRO provisions) but the opportunity was not taken to remove this contradiction.

CBR states that a bill to amend the existing provisions in the Securities Law and Investment Funds Law has now passed its first reading in the Duma. In the meantime, there is an overlap of provisions.

The primary purpose of the SRO in the Securities Law (Article 48) is stated to be the protection of investors. However, the primary purpose of the SROs in the new law as specified in Article 3 is to promote the interests of the SRO’s members as well as encouraging market development and efficiency. A full reading of the new SRO Law makes clear that, in fact, the intention is to create organizations that will become front line regulatory bodies whose job is to promote investor protection and fair markets. However, the new SRO Law changes the statutory definition of the purposes of SROs in precisely the opposite direction.

CBR states that the new SRO Law is in force but that at the time of the assessment, no SROs had yet registered under it. They continue to operate under the old laws. According to Article 33 of the new SRO Law, existing SROs that meet certain conditions will have a transitional period of two years to bring their arrangements into line with the new law.

The new SRO Law creates an obligation on professional securities firms to comply with basic standards of conduct that are adopted by SROs and approved by CBR. However, because the SROs have not yet registered, there are no basic standards. Moreover, even when the first SROs register under the new SRO Law, there will still be a period during which basic standards can be drafted, submitted for approval and implemented. The result is that there is an unambiguous obligation currently in place for professional securities firms to comply with basic standards but there are no basic standards in place with which they can comply. This position will resolve itself in due course. In the meantime, CBR confirmed that they would not take enforcement action for failure to comply with the non-existent basic standards.

In summary, therefore, from the moment that the first SRO registers under the new law:
The new SRO Law changes the statutory purpose of the SRO so that it becomes primarily concerned with the interests of its own members, rather than the protection of investors—a change that is in the opposite direction from that which is apparently intended by the new law taken as a whole;
Membership of the SROs will be both compulsory and voluntary for professional securities participants and management companies;
Professional securities firms will be obliged to comply with basic standards that will not, at that time, exist;
Provisions relating to SROs that could only be relevant to exchanges will continue to be redundant since no exchange could be an SRO; and
SROs who have members licensed under both the Securities and Investment Fund Laws will continue to be subject to two different sets of requirements as to license criteria and duties, as well as the new requirements of the new SRO Law.

Description

The SRO regime is in a state of transition. This description will briefly describe the previous arrangements, which are still in force. It will then describe the new regulatory requirements affecting SROs under Law 222 of July 2015 (the new SRO Law) and then the transitional arrangements.

The previous arrangements for SROs

According to the Securities Law and Investment Funds Law, there are voluntary professional associations that are known as SROs. They must be granted a permit by CBR (Article 50 of the Securities Law and Article 59 of the Investment Funds Law). Both laws include a procedure for gaining permits and a set of criteria (which differed in the two laws, although not in ways that related to the differences between professional securities funds and investment fund management companies). There are currently four SROs for professional securities firms and management companies of investment funds.

The purposes of the SROs for professional markets participants is defined in Article 48 of the Securities Law and is to promote standards of ethics and protect investors. Membership of the associations is voluntary under the Securities and Investment Funds Laws.

The Securities Law states that SROs should have compulsory rules governing trading and conduct (Articles 49 and 50). The Investment Funds Law requires SROs to have binding rules (Article 59(2)) on performance of professional activity and ethics standards. The details of the areas to be covered by the rules are defined in the Investment Funds Law but not in the Securities Law. Both laws require SROs to enforce their rules and discipline members as necessary.

The Securities Law SRO have to submit its rules (covering internal matters as well as standards and ethics for members) to CBR for approval (Article 50 of the Securities Law). There is no such requirement for SROs of management companies under the Investment Funds Law.

In practice the SROs set standards for professional ethics and conduct. For example, the National Association of Securities Markets Participants (NAUFAR) set standards on such matters as best execution, the creation of a client investor profile, the risks that should be disclosed to clients, the prevention of conflicts of interest, and RM. These standards were reviewed and approved by CBR. In some respects, the NAUFAR standards copy the CBR regulations, in others, they provide more detail. Although NAUFAR states that it sought to enforce its rules according to the law, the fact that membership is voluntary means that a securities firm that does not wish to abide by the compulsory rules can simply resign membership.

Ensuring compliance with the Securities and Investment Funds Laws is the responsibility of CBR. There has been no formal delegation of any regulatory responsibility to the SROs.

The SROs are given certain duties in the Securities Law and the Investment Funds Law, but these duties differ in some material respects. There is a prohibition on unjustified discrimination against SRO members in Article 50 of the Securities Law but not in the Investment Funds Law. The investment fund management companies’ SRO can file petitions on behalf of its members to encourage CBR to give them a license (Article 58 of the Investment Funds Law) but there is no such right in the Securities Law for SROs of professional securities firms. The investment fund management companies’ SRO must have rules for the expulsion of its members (Article 59(2)) but there is no such requirement on professional securities markets firms in the Securities Law, and, indeed, there is no statutory provision for applying sanctions.

The new SRO regime

The new SRO Law covers associations of brokers, dealers, investment funds, and management companies (as well as other nonbanking financial institutions) (Article 3(1)). This description will focus solely on the provisions relevant to professional securities markets participants and investment fund managers but the law has a much broader application.

The new SRO Law gives a more comprehensive regulatory role to the SROs. However, Article 3 of the new SRO Law defines the purposes of the SRO, which are to develop the financial market, contribute towards the efficient functioning of the market and stability, implement its own economic initiatives, and protect and represent the interests of the members. Although the SRO has the responsibility to apply basic standards, which are intended to force its members to act in a way that protects investors and encourage a fair market, these fundamental objectives of regulation are not included in the law’s description of the SRO’s fundamental purposes, which relate more to the interests of the members.

The new regime makes membership of an SRO compulsory (Article 8). Article 3 makes clear that there could be more than one SRO for every field of activity and each SRO could encompass members from more than one field of activity. However, every professional securities market participants and MC must be a member of one of the SROs (provided that at least one is registered for their field of activity). If a professional market participant leaves one SRO, they have 180 days to join another (Article 8(4)).

Each SRO would be expected to adopt internal standards and basic standards. Internal standards cover membership criteria, internal management elections, disciplinary processes, monitoring of compliance with standards and other administrative matters (Article 6). Basic standards cover RM, corporate governance, internal controls, investor protection, and market behavior (Article 5).

Internal standards are a matter for the SRO, and, provided that they do not breach the Law or regulations, are not subject to intervention by CBR. Basic standards are drawn up by a Standards Committee of the SRO (or SROs). They must be approved by CBR and, if approved, must be adopted by all SROs in any one field of activity. All professional securities market firms in the relevant field of activity must comply with the basic standards, regardless of whether or not they are members of an SRO or in the 180-day transition from one to another.

Under these new regimes, professional associations that meet the criteria and become registered as SROs will establish membership criteria that firms seeking membership will have to comply with to conduct securities activity in the relevant area. However, the firm has the option which SRO to join if there is more than one for its activities. The SRO will have binding rules and must have arrangements for enforcing those rules and disciplining those who breach them (Articles 5 and 6 of the new SRO Law).

There are criteria for professional associations to become SROs and these are established in Article 3 of the new SRO Law:

An SRO must have 26 percent of the participants in the relevant field as its members;

It must have internal rules that do not conflict with the law or regulations and basic standards that follow those approved by CBR (discussed further below);

It must have appropriate governance arrangements as specified in the new SRO Law (Articles 20–25).

CBR has responsibility for reviewing the applications and granting or denying SRO status (Article 3). SROs that are approved by CBR will be entered on to the CBR SRO register.

CBR will review whether or not the internal standards comply with the law and this will encompass an assessment of whether or not they will enable the SRO to meet its commitment to enforce the internal and basic standards. The SRO must be able to collect information from members, conduct onsite inspections of its members (although not more than one scheduled inspection a year) and otherwise monitor compliance (Article 14). There must be a procedure for applying sanctions. The SRO must submit a budget, which CBR will review (Article 3(7). There are no explicit criteria relating to the capacity of the SRO to fulfill its duties, although CBR state that they will review that as part of the application review process.

Article 4(4)(4) of the new SRO Law states that the standards of the SRO Law must not allow any unjustified privilege to any member of the SRO, including the founders. This is intended to have the result that they treat all similarly situated members similarly and prohibit any SRO member from gaining advantage as a result of their membership or position within the SRO. It is further intended that this provision will ensure a fair representation of members on the management board.

Article 29 obliges the SROs to provide information to CBR on request and to supply CBR with a list of scheduled onsite inspections each year. Article 29 contains further provisions about the sharing of information on violations of the basic standards. The SROs can refer members to CBR for sanction and CBR can inform the SROs about breaches that may require their action.

Article 30 provides for the participation of the SROs in working groups considering new regulations. Article 31 provides for the SROs to form a Council for making representations on matters of interest to their members. There are no agreements or MoUs between the SROs and CBR at present nor are any envisaged, on the basis that the law establishes the grounds for cooperation.

CBR has a supervisory role with respect to the SROs (Article 28). This allows CBR to collect information from the SROs. There is no explicit provision that overrides the SRO’s confidentiality duty to its members (Article 13) when CBR makes a demand for information under Article 28.

There is no explicit power of inspection in the new SRO Law. There is such an inspection power over SROs in the Securities Law (Article 44(6)). CBR initially stated that the exercise of such a power is implied by Article 28 of the SRO Law (although in all other laws, an inspection power is given explicitly). Subsequently, CBR stated that an explicit inspection power is included in a new bill.

CBR has the power to apply sanctions (including requiring the Head of the SRO be dismissed (Article 28) and to terminate the status of the SRO (Article 27). The powers of CBR to collect information from, inspect, sanction and otherwise take action against professional market firms and investment funds/management companies is in the Securities Law and Investment Funds Law and is not undermined by the new SRO Law.

The SROs are expected to protect the confidentiality of information collected from members (Article 13) although there are no other requirements regarding procedural fairness. Moreover, in the absence of any direct powers to intervene to change the rules that govern the SRO’s internal processes, CBR cannot take action to ensure procedural fairness unless the SRO breaks the law or regulation, in which case, CBR can apply sanctions.

Article 19 obliges the SRO to have measures designed to prevent conflicts of interest in its Charter.

No supervision has yet been conducted under the new SRO Law because, at the time of the mission, no SROs had applied to be registered.

The transition

Professional associations have until the end of March 2016 to apply to register as an SRO. Associations that have been in existence more than a year before the law comes into force have two years to bring themselves to full compliance with the new SRO Law, although they are exempt from the requirement to submit a budget and do not have to demonstrate that they have 26 percent of those engaged in the relevant activity as their members.

CBR must approve basic standards, no later than three months after the first SRO is registered.

In the meantime, CBR clearly cannot enforce the requirement that professional securities markets firms and investment funds/managers comply with basic standards, as there are no such standards yet in existence.

Moreover, the existing provisions relating to SROs for professional securities markets firms and investment funds/managers, remain in force. The SROs and their members will continue to be subject to the provisions in the Securities Law and Investment Funds Law as described above. CBR has said that it will not enforce the provisions that are inconsistent with the new law, just as it will not enforce the requirement to comply with basic standards, since they do not yet exist.

Assessment

Not Implemented

Comments

The new law contradicts provisions in existing laws but does not repeal or amend those pre-existing provision. The inconsistencies between the existing provisions in the Investment Funds Law and Securities Law, the conflict and inconsistencies between those provisions and those in the new SRO Law (all of which are currently in force), the transition period, during which existing SROs do not yet have to register under the new SRO Law and CBR has not yet adopted basic standards, (even though it is compulsory for professional securities firms and fund managers to comply with them) all add up to what can only be described as a highly confused picture. It is not appropriate to put licensees (or indeed anyone else) in the position that they are faced with mutually incompatible or inconsistent legally binding requirements. CBR has stated that Russian legislative principles with respect to legal precedence can deal with inconsistencies between laws and that they will not enforce mutually incompatible legal requirements.
However, this is not an appropriate response. It is not impossible to bring new legislative requirements into effect in a way that repeals former and inconsistent provisions and gives transitional arrangements that clarify the legal requirements that are in place at any time and ensures that they can be met. Relying on principles of legal precedence creates uncertainty about the legal provisions in place and forbearance by the regulator undermines respect for the regulatory regime and the rule of law. CBR have stated that legislation to remove the inconsistencies is before the Duma but this begs the question as to why such amending provisions were not included in the law amending the SRO regime in the first place.
The rating is given because:
The conflict means that CBR cannot enforce the old regime.
The new regime also cannot be enforced because of the absence of several key elements (SRO registration, the adoption of basic standards).
The description identifies a number of important gaps in the new law that will need to be filled to ensure that the SROs are subject to provisions to ensure effectiveness and that CBR has the full range of monitoring powers. In particular:
Although SROs are expected to impose basic standards of regulation, their primary purpose, as described in Article 2 of the SRO Law, is not investor protection, but the development of the market and the protection of their members’ interests. This is not appropriate. Their primary purpose should be to raise standards of professional conduct and to protect investors (as is still the primary purpose of SROs as defined in the Securities Law). CBR have rightly pointed out that the law requires SROs to adopt basic standards which will include requirements that protect investors. However, this misses the point that the primary purpose of SROs, as stated in the law, is not the protection of investors or the maintenance of high standards of professional behavior but is the protection of members interests and this is a significant mistake. All SROs have a tension between their role to protect their members’ interests and their duty to impose duties on and discipline members for failing to comply with, rules that protect investors. If the law itself gives primacy to their role as defenders of their members’ interests, then this is bound to affect the way the tension between the SRO roles is resolved in practice.
CBR does not have the power to make an assessment of the capacity of the SRO to fulfill its function.
The single provision prohibiting unfair privilege (and the obligation to put conflicts of interest provisions in the SRO Charter are important but are not sufficiently explicit to encompass the requirement to treat all SRO members equally, to avoid any unfair competitive advantage being taken as a result of the supervisory role, to avoid creating barriers to entry or to avoid inappropriate use of information obtained through the SRO work.
There are no provisions that oblige SROs to adopt standards of procedural fairness.
CBR does not have the explicit power to intervene to amend the internal rules of the SRO to ensure procedural fairness and to approve or deny approval to any changes to the SRO internal rules.
There is no record keeping requirement for SROs beyond the keeping of a register of members.
There is no explicit power in the new SRO Law for CBR to conduct onsite inspections of SROs.
There is no explicit provision that ensures the CBR power to collect information from the SRO overrides the SRO’s duty of confidentiality.
It is fair to point out that the expectation that there will be competing SROs in each field of activity will work to reduce the risk of membership criteria being a barrier to entry. On the other hand, competition creates another incentive to regulatory forbearance if the SRO considers that excessive zeal will prompt members to join a competitor SRO. In the view of the assessors, the requirement that an SRO must have members comprising 26 percent of the securities firms in the relevant field of activity, before it can be registered, will be a very significant barrier to any new SROs. Each member is legally obliged to be a member of an SRO, so a new SRO would have to persuade securities firms to join (and presumably pay fees) while still being members of an existing SRO—unless securities firms were prepared to resign from one SRO and take the risk of a new SRO being registered within 180 days of their resigning (this being the maximum period that can remain as non-members of a registered SRO.
CBR considers that the risk of SRO’s creating barriers to entry, or using the regulatory powers to gain competitive advantage will be mitigated by the provisions in place and supervision by CBR. The assessors agree that it is unlikely that SROs will create rules or membership criteria that are explicitly discriminatory or manifestly biased towards existing members. However, experience shows that SROs can and do find it difficult to address the conflict of interest in their status as a professional association of members and a regulatory authority. As noted above, this potential conflict is exacerbated by the primacy given to the SRO and their members’ interests in Article 2 of the law.
Recommendations to fill these gaps are set out below.
CBR has not yet finalized its view of the extent of the regulatory role to be given to SROs and stated that they will consider the effectiveness of SROs in operation under the new SRO Law before coming to a decision. In the meantime, CBR will continue to enforce its own regulations. Although CBR is resolved to avoid duplication, the fact is that the scope of the basic standards, as defined in the SRO Law, covers ground that is also addressed through a multitude of laws, CBR, regulations, directions and instructions. While CBR will no doubt ensure that the basic standards do not directly contradict the regulations already in place, professional securities markets firms and the investment fund management companies will be subject to two sets of requirements.
CBR should consider what supervisory tools it should use to oversee the work of SROs. In addition to offsite analysis, there is scope for regular meetings with the management of the SROs, more extensive reporting on the SRO activity, a combination of joint onsite inspections of firms and independent inspections to check on the effectiveness of the work done by SRO’s onsite inspectors and to determine the level of compliance of securities firms subject to SRO supervision. CBR should develop a program of supervision that deploys all of these tools and does not simply focus on finding violations that can then be the subject of sanction.

Recommendations

It is recommended that, as a high priority, the legal position is clarified as soon as possible with the conflicting provisions amended or repealed, new regulations adopted and SROs registered under the new SRO Law.
It is also recommended that the SRO Law be amended to include the following basic provisions:
That the primary purpose of SROs (Article 2) should not be the advancement of the interests of their own members but the implementation of high standards of professional behavior and investor protection;
That an explicit condition of registration of an SRO should be the ability to demonstrate to CBR that an SRO has the willingness and capacity to provide adequate standards of professional behavior and investor protection;
That an SRO should adopt provisions that prevent any member of the SRO, or any employee from abusing their position to gain unfair competitive advantage;
That the SRO’s internal rules should include provisions on procedural fairness that match those of CBR itself and a prohibition on the inappropriate use of information, for example for personal gain;
That the SRO’s internal rules should ensure that all similarly situated members and applicants should be treated equally;
That the membership criteria for the new SROs should not constitute a barrier to entry to the securities or fund management business;
That the SRO should be required to submit its internal rules to CBR for approval and that CBR should be able to approve, deny approval or insist on changes to the SRO’s internal rules, where necessary to ensure that they match appropriate standards of fairness, effectiveness and professionalism;
That the SRO should be required to keep records, for a minimum of five years, which demonstrate that it is complying with its charter and its statutory responsibilities and which record the operation of its functions;
That CBR has the power to conduct onsite inspections of SROs; and
That the power of CBR to collect information from SROs overrides any confidentiality duty imposed by the SRO Law or any other statute.
It is further recommended that:
CBR develop, with the SROs, standards for the supervision of members that uses all supervisory tools, including meetings with management, the issuance of guidance letters and public statements, periodic reports of information, including members risk assessments, corporate governance practices, client agreements, internal staff training, complaints received from clients and other matters, the use of questionnaires and different methods of onsite inspection;
The basic standards, as adopted by CBR should replace, rather than add to the existing regulatory regime, as soon as CBR consider that the SROs can safely be entrusted with the regulatory regime; and
CBR develop a program of supervision of SROs designed, particularly, to address the key risks of barriers to entry and the gaining of advantage that includes regular meetings with management, regular reviews of the operation of its internal and basic standards, in practice, seeks reports that monitor effectiveness, (for example of the SRO’s risk assessment so of its members, of the number of complaints, of the number of inspections and sanctions and the nature of the regulatory breaches that it finds) as well as onsite inspections of SROs and onsite inspections of the professional securities firms subject to SRO supervision.

Principles for Enforcement of Securities Regulation

Principle 10

The regulator should have comprehensive inspection, investigation and surveillance powers.

Description

CBR has the full range of inspection, investigation and surveillance powers needed by a securities regulator.

The Central Bank Law gives CBR the responsibility for supervision of a range of non-credit institutions (Article 76¹), including: professional securities firms, investment fund management companies, custodians, registrars (keepers of the investor registers for companies and other entities), investment funds, exchanges, clearing houses, central counterparties and credit rating agencies. Article 76⁵ specifically gives CBR the power to conduct onsite inspections. Article 44 of the Securities Law gives CBR supervisory powers over all professional securities firms (brokers, dealers, investment managers, custodians, and registrars (Articles 3–8). Article 44(6) specifically provides for an onsite inspection power over these firms. Moreover, Article 2 of the Investment Funds Law makes clear that the law covers investment funds that invest in any securities and other assets. Article 55(3) gives CBR an inspection power over investment funds, management companies and special depositories (custodians). There is also an onsite inspection power for CBR in Article 25(2) of Law 325 FZ of November 21, 2011 on Organized Trading (the Organized Trading law). An onsite inspection power over clearing houses is given in Article 25 of Law 7 of February 7 2011 (the Clearing Law).

Some of the provisions listed above make distinctions between scheduled and unscheduled inspections. Where this distinction is made, scheduled inspections cannot be made more than once a year and unscheduled inspections can only be made if certain conditions are met essentially that there is a complaint or other suspicion of a breach or, in some cases, the need to follow up the findings of an earlier inspection. Where there is a suspected breach, the visit by the supervisor would be regarded (in terms of the analysis of Principle 10) as an investigation rather than an inspection. These distinctions between scheduled and unscheduled inspections are made in respect of the inspection powers in the Investment Funds Law (Article 55(3)), the Clearing Law (Article 25(2)) and the Organized Trading Law (Article 25(2)). There is no such qualification in the inspection power in the Central Bank Law with respect to non-credit institutions (Article 76⁵). There is no such restriction in the inspection power over professional securities firms in the Securities Law (Article 44). CBR were unable to provide an explanation for the restriction nor for the differences between the different laws other than that they were drafted at different times. There remains scope for unscheduled inspections without notice in these laws, although they must be arranged for the purposes specified above.

The supervisory powers listed above also give CBR the power to obtain books and records and request data or information (Article 76⁶ of the Central Bank Law, Article 44(7) of the Securities Law, Article 55(13) of the Investment Funds Law, Article 25(5) of the Organized Trading Law) and Article 25(4 and 5) of the Clearing Law. These powers could apply to ad hoc enquiries or regular reports and apply to the full range of securities businesses.

The Organized Trading Law obliges the exchange to conduct supervision including surveillance of trading (Article 5). The inspection power given to CBR (Article 25) gives CBR unrestricted access to the exchange to oversee that surveillance. The power of CBR to get information from the exchange (Article 25) enables it to obtain information on trading and trading surveillance. In addition, paragraph 32 of Appendix 4 of Regulation 474 provides that a remote terminal should be supplied to CBR. As described in Principle 36, this facility, together with other information supplied to CBR, permits it to conduct surveillance. CBR continues to develop the effectiveness of the system. CBR can also seek information from the exchange about its own surveillance results.

Law 402 of December 6, 2011 on Accounting (the Accounting law) applies to a very wide range of entities including regulated businesses. This Law imposes a general requirement to keep accounting records that should include all facts of economic life (Articles 5 and 6 of the Accounting law). These records must be kept for five years (Article 29).

Although there is a general record keeping provision in Article 401 of Law 395 of December 2, 1990 on Banking (the Banking Law), and Article 9 of the Clearing Law, there is no equivalent general record keeping obligation in the Securities Law, the Investment Funds Law or the Organized Trading Law. CBR were unable to explain the reason for this different approach.

There are a range of specific record keeping requirements including the following:

Article 3(3) of the Securities Law obliges brokers to keep records of client monetary assets;
Article 5 obliges an investment manager to keep records of securities under management;
Article 7 obliges a depository to keep records of the rights to securities held in another depository and the funds deposited by depositors;
Article 28 observes that the nominal rights of ownership of shares should be kept by the registrar of the issuer (the registrar has records of the nominal owners and the intermediaries who hold securities on behalf of others but not the beneficial owners);
Article 13.1 of the Investment Funds Law requires investment managers to keep records of the funds of clients;
Article 15.2 requires an investment manager to keep records of the rights to securities making up the investment trust.
Article 28 requires an agent to be responsible for the recording of investment share acquisition, redemption, etc.
Article 39 requires a MC to keep records of operations in the property making up the assets of the investment fund.
Article 47 refers to a register of the shares in an investment trust.
Article 5(12) of the Organized Trading Law obliges the market operator to store information and documents associated with the performance of organized trading.
Article 18 of the Organized Trading Law obliges an exchange to keep records of all trades.
FSFR Decision No. 32 of December 11, 2001 (the Deals Recordkeeping Order) consists, in its entirety, of extremely detailed and comprehensive record keeping requirements relating to securities transactions and includes all relevant details, including the time, date, price, volume, client details (including the person acting on behalf of the client and the person handling the transaction), as well as the means of payment from and to client bank accounts. The Regulation also requires that such records be kept for five years (paragraph 13).

Article 7 of law 115 of August 7, 2001 on the AML law) imposes a requirement to obtain and keep records of client identity. There are certain exceptions to this rule—namely where transactions involve less than RUB 15,000 (US$200) (Article 7(1.1, 1.2 and 1.4). The client identity records would also need to be kept for five years after termination of the relationships (Article 7(4)).

Provided that the records on client identity are maintained, CBR can have access to them using the broad powers in Article 76⁶ of the Central Bank Law, Article 44(7) of the Securities Law Article 55(13) of the Investment Funds Law, Article 25(4) of the Organized Trading Law and Article 25(4) of the Clearing Law). Each of these applies broadly and would permit CBR to obtain any information including client identity. CBR is also the bank supervisor and has full access to bank records.

As noted in the description of Principle 9, the legislation regarding SROs is in a state of transition. At the time of the assessment, SROs had not registered under the new SRO Law. The issue of supervision of SROs to which regulatory authority might be delegated is not applicable as no such delegation had taken place at the time of the assessment.

Assessment

Fully Implemented

Comments

The absence of a general record keeping requirement for securities firms and exchanges could result in a downgrade of the rating. However, the combination of the general record keeping power in the Accounting Law and the extensive specific record keeping requirements in the various laws meets the criteria for this principle. In particular, the records kept are capable of tracing funds and securities into and out of bank and brokerage accounts.

Recommendation

Even though it can be shown that the record keeping requirements that are to be found in various regulations and other provisions meet the terms of this principle, it would still be appropriate for CBR to seek an amendment to the Securities Law, Investment Funds Law, Organized Trading Law, and Clearing Law that imposes a general requirement on all securities businesses to keep such records as would be necessary to demonstrate their operation of their business, to demonstrate compliance with the law and regulations, to document their relations with clients, and third parties and to keep such records for five years.

Principle 11

The regulator should have comprehensive enforcement powers.

Description

Regulated persons

The CBR’s powers to monitor compliance with laws and regulations by collecting information and conducting onsite inspections are described in Principle 10. These powers would also enable CBR to conduct investigations into breaches of the law and regulation by regulated securities firms.

There is no restriction on the information that can be obtained by CBR for its supervisory purposes either through inspections or obtaining information. Moreover, as noted in the description of Principle 10, there are record keeping requirements in the Deals Record Keeping Order (32) that oblige securities firms to keep records of transactions, including the time, date, price, volume, client details, the person acting on behalf of the client (and the person handling the transaction), as well as the means of payment from and to client bank accounts. The regulation also insists that such records are kept for five years. Since these records are available, CBR would be able to obtain this information.

The Central Bank Law and the Securities Law both give CBR powers to direct a regulated entity to correct breaches (e.g., Article 44(7) of the Securities Law and Article 74 of the Central Bank Law). Similar authority is given in the Investment Funds Law in respect of investment funds, management companies, custodians, and other regulated persons (Article 55(2)(13) of the Investment Funds Law. Article 25 of the Organized Trading Law includes a similar power to send a compulsory order (within its competence) to a person where this is necessary to prevent a violation. A similar power is given in the Clearing Law (Article 25).

Law 9 FZ of February 9, 2009 on Administrative Offenses in respect of companies and securities laws (The Administrative Offenses Law) describes administrative sanctions for certain offenses which may be committed by issuers and professional stock market participants, such as document maintenance (Article 13.25), improper issuance (Article 15.1), unlawful transactions (Article 15.18), disclosure failures (Article 15.19), improper use of official information (Article 15.21), failure to segregate client assets, keep records, and various other offenses, including “any other failure” (Article 15.29). These attract various fines and disqualifications. The sanctions on natural persons can be up to RUB 50,000 (US$750) and disqualification for up to two years and for legal persons, the fine can be up to RUB 1 million (US$14,000). The sanctions can be imposed for failure to comply with requests for information.

Unregulated persons

CBR has powers to collect information from issuers (Article 44(7) of the Securities Laws). This is not restricted and could include any information related to any matter within the jurisdiction of CBR. Under Article 25(4) of the Organized Trading Law, CBR may require any natural or legal person as well as the trading organizers) to give information in connection with organized trading.

CBR can also mount investigations into allegations of breaches of the laws on market abuse, when conducted by unregulated persons by virtue of Article 16(1) of the Law 224 of July 27, 2010 on Insider Dealing (the Insider Dealing Law). It can also refer any matter within the jurisdiction of CBR to the Public Prosecutor under Article 44(8) of the Securities Law. Front running is included within the definition of insider dealing (see Principle 36).

Other securities fraud would be covered by the fraud sections of the Criminal Code and would fall to be investigated by the law enforcement authorities.

In addition to the powers in the Insider Dealing Law, CBR state that they can also use the powers in Article 11 Law 46 FZ of March 5, 1999 (the Investor Protection Law). These powers would, according to CBR, enable them to obtain information from unregulated persons.

The investigative powers referred to above are not limited as to the nature of the information that can be obtained. Thus for regulated entities, in the case of investigations into insider dealing or market manipulation, CBR can obtain any information, including the records necessary to reconstruct transactions, client identity, price and volume, time and date, the names of the parties, beneficial owners, and so on. There is no restriction on obtaining bank records. For unregulated persons, the CBR’s powers are not restricted as to the nature of the information to be collected from issuers (on any matter) or, for market abuse) from any person. The public prosecutor’s powers are not restricted as to the nature of the information that can be obtained, provided that the information is available in the Russian Federation.

With respect to beneficial ownership, CBR has the power to obtain the beneficial ownership of any legal person. However, this can only be effective, where that information is located in the jurisdiction. Under Article 28 of the securities Law, the registrar or a company must hold records of the nominal owners of securities, including natural persons and intermediaries, trust managers and depositories. However, the clients of those intermediaries are confidential. Article 8.3 of the Securities Law give the registrar the power to require intermediaries to provide certain details about the ownership of securities, including those who are on a list of those who can exercise the rights of ownership. Where the nominal owner is a foreign entity, the obligation is only to provide data on the name of that foreign entity, even if it is a nominee.

Under the AML Law (Article 7), a regulated person is obliged to obtain beneficial ownership information and record it. The AML Law includes a general requirement to identify the beneficial owner (Article 7) and this is defined in Article 2 to include any person with a direct or indirect control of 25 percent of the shares of a legal entity or other possibility of controlling the legal entity. However, for a natural person, the law permits the institution to assume that a natural person is the beneficial owner unless there are reasons for supposing otherwise. Moreover, Article 7 also says that if “affordable” measures are taken and still do not identify the beneficial owner, the executive body of the legal entity can be assumed to be the beneficial owner. Such provisions are likely to result in cases where the beneficial owner is not identified—especially if the Russian legal entity is owned by a foreign legal entity.

Moreover, there is no specific requirement in the Deals Recordkeeping Order to keep a record of the beneficial owner of the securities.

Although there is no direct power to collect an oral statement, CBR can obtain information and explanations from non-regulated persons (Article 14(1) of the Insider Dealing Law. The powers in Article 76⁵ of the Central Bank Law are also broad enough to encompass the taking of oral explanations.

Under Article 185.3 of the Criminal Code of the Russian Federation market manipulation involving large losses to others or large profit or avoided loss (in excess of RUB 2.5 million (US$37,000)) is punishable with a fine in an amount from RUB 300,000 to RUB 500,000 (US$7,000) or one to three years’ salary or imprisonment for a term of up to four years with a fine in an amount of up to RUB 50,000 (or up to three months’ salary) with subsequent restrictions on professional activities for up to three years. In particularly serious cases involving a group of individuals or very large losses to others or very large profit or avoided loss, (in excess of RUB 10 million US$150 million), the fine may be from RUB 500,000 to RUB 1,000,000 (US$14,000) or two–five years’ salary or imprisonment for a term from two to seven years with a fine in an amount of up to RUB 100,000 (US$1,400), or up to two years’ salary with subsequent restrictions on professional activities for up to five years.

Under Article 185.6 of the Criminal Code the illegal use of inside information involving large losses to others or large profit or avoided loss (in excess of RUB 2.5 million (US$37,000)) is subject to similar criminal penalties and includes the offense of “tipping off” another person to make a transaction.

If an offense is not punishable under the criminal law administrative fines are lower. For legal entities, according to Articles 15.21 and 15.30 of the Administrative Offenses Code of the Russian Federation, the fine is the profit or avoided loss but no less than RUB 700,000 (US$10,000).

Penalties also apply to those who refuse to give information when required to do so by CBR (Article 19.7.3 of the Administrative Offenses Code of the Russian Federation.

There is a further power to seek court and judicial orders, in Article 44(8) of the Securities Law.

Article 21 of the Organized Trading law obliges the exchange to stop trading when required by law or regulation and if it receives an order from CBR. This applies to any securities. Article 25(2) of the Securities Law provides for the suspension of trading by CBR. This enables CBR to require the exchange to suspend trading of an issuer that has failed to comply with its obligations under exchange rules or the law. The suspension could apply to an individual security or to the entire market. The power can be exercised if the exchange itself has failed to abide by its obligations.

Article 7(7) of the Insider Dealing law expressly permits those who have suffered loss as a result of insider dealing or market manipulation to claim compensation. In other respects, there are no restrictions on the ability of private persons to take legal action against securities market participants if they choose to do so.

As noted above, CBR can pass matters to the public prosecutor. There are established arrangements for sharing information with the public prosecutor. Information exchange with the public prosecutor is permitted under the Presidential Decree 224 of March 3, 1998.

Interviews with the MoI demonstrate that relations between the ministry and CBR are good and that information can be and has been exchanged.

Assessment

Broadly Implemented

Comments

The rating is given, because of the provision that may result in beneficial ownership information not being available to CBR. The assessors have also taken account of the fact that there have been virtually no insider dealing prosecutions.

CBR have observed that they have sufficient powers to obtain information about beneficial ownership from regulated persons. This is understood and explained above. However, it misses the point that a power to obtain information cannot be effective if the information is not there. As noted above, the current AML Law allows regulated persons to make assumptions about beneficial ownership and this is bound to result in them not knowing the beneficial owners of certain clients—especially legal persons incorporated in foreign countries. The CBR’s further observation that they can get beneficial ownership information direct from foreign regulators is optimistic but experience shows that such information can by no means always be obtained in that way. Indeed, in their comments, CBR refers to the countries with whom it has bilateral MoUs and there are many countries with which is does not have such an agreement.

The powers available to CBR with respect to regulated persons are clearly extensive and are being used. It is clear that the use of the supervision powers with respect to the exchange have not been fully used in the past, they are being developed and CBR deserve the credit for having taken the initiative. It is enhancing its market surveillance technology and engaging with the exchanges on the best way of developing that surveillance. It has not yet been able to achieve successful criminal prosecutions for market offenses but the same is true of many countries with a lot more experience of enforcing market abuse offenses than the CBR. The fact is, however, that the powers and facilities to monitor the market and to detect and investigate market offenses are available and are beginning to be used.

With respect to unregulated persons, CBR has sufficient investigative powers over issuers and to any other person for any matter connected with organized trading and to market abuse. For any other matter within its jurisdiction, CBR has the power to refer an investigation to the public prosecutor.

CBR are clearly developing their knowledge of the market and their relations with law enforcement authorities so as to make their use of enforcement powers more extensive.

CBR have shown their willingness to use their powers to cancel licenses of regulated persons.

The financial administrative sanctions available to CBR are fairly modest but the ability to withdraw a qualification certificate and hence, ban a person from employment within the securities business for three years is a powerful penalty. This penalty has been imposed in practice. Similarly, criminal financial penalties are relatively modest but the maximum fine is related to the income of the offender and the scope for prison sentences mean that the sanctions appear to be potentially effective, proportionate, and dissuasive. At the time of the assessment, the more severe criminal penalties had not been imposed but the assessors have taken account of the fact that the law is relatively recently enacted.

The assessors would also comment on the use of the powers in the Investor Protection Law. The powers are given in Article 11 which reads as follows:

The rulings of the federal executive body in charge of securities markets [now the CBR] shall be mandatory for execution by commercial and noncommercial organizations and their officials, independent entrepreneurs, natural persons on the territory of the Russian Federation.
Directives of CBR shall be issued on matters envisaged by this federal law or other federal laws, in order to stop and prevent violations of the Russian Federation legislation on joint-stock companies and on securities market, as well as on matters within the competence of CBR.
Whenever a violation of rights and legitimate interests of Investors by a Professional Participant are revealed, or if activities of a Professional Participant jeopardize the rights and legitimate interests of Investors, CBR shall be entitled to prohibit or restrict individual operations carried out by the Professional Participant at securities market for the term of up to six months.

This is an extremely broad power which appears to allow CBR to instruct any person (legal or natural) to do anything within its competence and that they have to comply. CBR have stated that this power is qualified by the next paragraph in the article that refers to the need to stop violations of the Law on Joint Stock companies and securities markets laws. However, CBR have, in other contexts, stated that this qualification does not apply, since the law also refers to any matters within the CBR competence, regardless of whether or not it is intended to prevent violations of Russian laws on joint stock companies and the Securities market.

This latter, very broad interpretation of this law is necessary because these powers have been referred to in support of the CBR’s application to become a signatory to the IOSCO MMoU. In that context, CBR stated that this power would enable them to obtain information from unregulated persons. Since CBR already has powers to collect information from unregulated persons in the context of investigations into insider dealing and market manipulation (Article 14 of the Insider Dealing Law) the reference to the broad powers in the Investor Protection Law could only be relevant where CBR was being asked to obtain information from unregulated persons in respect of matters not connected to insider dealing and market manipulation and perhaps not connected with any offense under Russian law at all.

However, CBR have also stated that they could not use very broad powers in Article 11 in practice. In the description of Principle 30, it is noted that CBR consider that they could restrict the activities of professional securities firms using the specific power in the second paragraph of Article 11(2). However, they did not consider that it would be safe to attempt to use Article 11 powers to transfer client assets from one broker to another where the broker’s level of capital put its continued survival at risk. Such action would clearly be covered by the broad interpretation of the CBR’s powers, since it would be to protect investors and would be within the CBR’s general competence. Nevertheless, it was argued that, in the absence of a specific provision in the law (and given the general reluctance within the Russian judicial system to enforce broad and undefined powers of this kind), it would be unsafe to use the powers for such a purpose.

The assessors cannot come to a conclusion on the scope of this power, legally. They would note, however, that if Article 11 can be interpreted so broadly as to give CBR powers to collect information from unregulated persons in circumstances not otherwise envisaged in any of the laws (except perhaps implicitly and indirectly in Article 51¹ of the Central Bank Law) then they could also be used for the transfer of assets from one broker to another—since the latter is clearly covered by the need to protect investors, which is a matter well within the CBR’s competence. On the other hand, if CBR is right that the powers cannot be used to transfer assets, then it is hard to see how they could be used in the way suggested in the MMoU application.

Nevertheless, even if the powers cannot be used to collect information from unregulated persons, the other CBR powers in the Insider Dealing Law would appear to be sufficient for this purpose with respect to market abuse. The powers over issuers and users of organized markets provide further investigative powers over unregulated persons for CBR and, were these not sufficient, the powers of the public prosecutor are available as CBR can refer anything within its jurisdiction to the public prosecutor.

Recommendations

CBR is recommended to seek an amendment to the AML Law so that a person subject to the relevant obligations should:

Always ask a natural person if they are acting on their own behalf or on behalf of another; and
Refuse to act if they are unable to identify the beneficial owner of a legal entity.

CBR should consider reviewing the powers in Article 11 of the Investor Protection Law and seeking an amendment as appropriate so that they are capable of being used in the circumstances where CBR requires them.

Principle 12

The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

Description

The CBR’s supervision and enforcement program consists primarily of offsite supervision and onsite inspections. The offsite supervision is conducted by specialists in capital market activity. The inspection team carries out inspections of all activity regulated by CBR and this amounts to over 19,000 non-credit financial organizations in all financial sectors.

The offsite department analyses information from periodic reports (primarily financial data), complaints, reports of violations and other intelligence to determine a six-month inspection plan. They develop a set of objectives and tasks and discuss them with the onsite team.

The offsite team does not yet produce a comprehensive risk scoring of intermediaries that takes into account the adequacy of RM, internal controls and procedures (except for compliance with the limited and detailed provisions in the internal controls regulation) or any broader view of the quality of management and its compliance culture. However, as noted in Principles 24 and 31, there is a move towards a risk-based approach, particularly with respect to the development of a program aimed at identifying and removing from the business those intermediaries that carry out limited or no business.

CBR carries out onsite inspections. The inspection team, which has 250 staff to inspect over the 19,000 non-credit financial organizations for whose supervision CBR is responsible. The team does not have any dedicated capital markets specialists. The inspection team consists of staff in headquarters and in the regions (territorial units). This team was formed of:

employees of Federal Service of Financial Markets, which are financial markets specialists and which were transferred to CBR due to transference of the functions of supervision of nonbanking financial institutions to CBR; and employees, which have banks’ inspections experience.

CBR also hired staff from different financial market’s segments (including Big four audit firms).

CBR continues to hire staff from financial markets.

The onsite team conducts inspections according to a methodology that has been developed by the headquarters Policy Division.

Its prime focus is the identification of breaches of the regulations, although there are checks on other matters, such as the Board discussion of the compliance officer’s quarterly report (which itself is primarily about violations). According to the private sector interlocutors (but not the Inspectors themselves), the inspection team also has useful and general discussions on the overall RM system adopted by securities firms.

The inspection team conducts the inspections by reviewing internal documents and customer files—focusing on those customer files where there is some indication that the customer may be engaged in wrongdoing. The examples given by the inspection team, in discussion with the assessors, of good and bad RM practice related solely to cases where a firm had detected, or failed to detect, a suspicious transaction by a customer. The inspection team’s findings (including the list of violations discovered) are reviewed by the offsite team during the inspection and, if they reveal repeated or egregious violations, a special intermediate report may be prepared (which will include evidence for immediate supervisory measures. A final report of violations together with an agreed rectification program is handed to the regulated entity on the departure of the team. The onsite inspection team is responsible for following up to check that the plan has been implemented.

Inspections were both scheduled and unscheduled. CBR did not provide data on the number of inspections of securities firms until it made its final comments on this report. According to the Annual Report of CBR, most inspections are unscheduled—which means that they are generally made in response to a suspicion of a specific breach of the regulations or a complaint. As such, they are more in the nature of investigations into breaches, rather than routine inspections. In 2014, for example, 97 inspections were scheduled and 499 were unscheduled covering the nonbank regulated financial sector—some 19,000 entities.

Scheduled inspections are based on the offsite team’s knowledge of the number of complaints (from both clients and federal authorities) and breaches. The offsite team also takes into account their knowledge of the risks of the institutions and the quality of management.

There have been no inspections of exchanges.

The exchanges have automated systems that monitor market activity. The exchanges themselves monitor this information and report it to CBR. In addition, CBR has its own terminals that receive information from all nine exchanges. This information shows trading in real time and CBR can see the trading participants, including the clients of brokers. The investors are identified by codes, which allows CBR to identify the legal and natural persons who are trading. It is developing a system that can obtain and analyze information from all exchanges and identify any cross market activity. Although the system is not yet in place, CBR state that the extent of cross market activity is relatively small.

The purpose of this monitoring is to detect patterns of trading that might indicate market manipulation, insider dealing, and front running. In practice, the proven incidents of front running are relatively rare. Since 2013, there have been 70 alerts that have prompted an investigation. Of these 57 were suspected market manipulation and 13 were insider trading. Administrative penalties were imposed in 18 cases of market abuse. None of these cases have resulted in criminal penalties. The Insider Dealing Law was introduced in 2013 and the penalties were not fully available for two years after the law was enacted. CBR directed approximately 30 orders to prevent similar violations in future activity, cancelled more than 40 qualification certificates of individuals and more than 20 licenses of professional securities market participants.

CBR conducts inspections to determine if there are breaches of regulatory requirements. The sanctions imposed on professional market securities firms are as follows. In 2015, amongst professional securities firms, there were:

91 companies whose licenses were cancelled;

118 persons whose qualification certificates were cancelled (and who were thereby banned from working in the securities business for three years); and

96 administrative penalties imposed.

The focus on finding and punishing violations is also indicated by the balance between penalties and improvement notices. CBR states that in 2015 there were 96 administrative penalties imposed on professional securities firms but in only seven cases were there notices for improvement.

Article 10.1.1 of the Securities Law obliges securities firms to have internal controls and RM systems designed to avoid breaches of the regulations. In addition, FSFR Order 12-32 of May 24, 2012—the Internal Control Regulations—imposes some more detailed requirements on internal controls. However, this regulation does not include a general obligation to have adequate internal controls in place. Moreover, the detailed requirements are concerned largely with the appointment, duties and functions of a compliance officer. The report charges the compliance officer primarily with identifying compliance breaches, reporting them and dealing with them. There is no detailed requirement to have an adequate RM system or adequate policies and procedures designed to prevent breaches of the regulations.

CBR monitors the extent to which the compliance officer meets his or her obligation to identify, report on and deal with violations.

There are no provisions that enable CBR to take action against the management of securities firms for the breaches committed by staff. Article 69 of the Law on Joint Stock Companies gives responsibility to the executive body for the everyday running of the company. However, this does not give them legal responsibility for violations committed by subordinates. Article 44(10) of the Securities Law enables CBR to withdraw qualification certificates of senior officials. However, the law is quite specific that this can only be done if there are repeated violations by them (not by other staff). Moreover, the Internal Control Regulation makes the compliance officer responsible for violations, not the Chief Executive Officer (CEO) or management board.

Article 14 of the Organized Trading Law requires an exchange to set up an internal supervision program that conducts surveillance. CBR receives a daily report of all transactions on the exchange and can take steps to audit these transactions using the powers described in Principle 10 and 11.

The use of the enforcement powers

With respect to regulated persons, CBR can demonstrate that it monitors compliance with the law and regulations by regulated persons. In 2015–16, CBR has been engaged in a determined attempt to identify the professional securities firms that conducted little or no business in practice. Certain intermediaries have been placed on a watch list and have been subject to more intensive supervision, using offsite reporting, inspections and market intelligence. Some 18.7 percent have had their licenses cancelled (see Principle 29). For example, in 2015, there were 91 companies whose licenses were cancelled, 118 persons whose qualification certificates were cancelled (and who were thereby banned from working in the securities business for three years). There were 228 administrative penalties imposed.

CBR is developing its enforcement regime with respect to exchanges, described in Principles 12 and 34. There have been no onsite inspections of exchanges for some four years but such inspections are now beginning. Offsite supervision is conducted by means of quarterly reports primarily on financial information and extensive data on transactions. It is noted in Principle 37 that there is no active monitoring of short selling by the exchange. Nevertheless, CBR

undertakes its own analysis of market data and can therefore monitor the effectiveness of market surveillance by the exchanges. CBR is an active participant in the exchanges and can use its position as a member on various user committees to monitor the perceptions of other users to the effectiveness of the exchanges.

With respect to insider dealing and market manipulation, the authorities were unable to take action until the criminal offenses were fully in force along with the appropriate penalties. The Insider Dealing Law was first enacted in 2013 and the penalties not fully available for a further year. Prior to 2013, there were no criminal offenses for market abuse.

There has been one criminal investigation into market manipulation in the four years since the insider dealing law was enacted in 2011. There have been 70 investigations (13 on insider dealing and 57 on market manipulation). These have led to 18 cases involving administrative fines and no criminal sanctions. CBR directed approximately 30 orders to prevent similar violations in future activity, cancelled more than 40 qualification certificates of individuals and more than 20 licenses of professional securities market participants.

Assessment

Not implemented

Comments

The rating is given because:

The enforcement program is not found to be fully effective;

The planning of inspections is neither risk-based, nor routine and periodic, in that 97 scheduled inspections across the 19,000 nonbank institutions in 2014, cannot be described as routine or periodic;

There has been no onsite inspection of the exchange;

The supervision system for intermediaries as described by the CBR staff is primarily about finding and punishing violations, rather than looking at overall compliance and operations of the firms;

The incidence of improvement notices is relatively rare (as compared with administrative penalties);

the inspection resources are extremely limited, spread between the entire financial sector, and used primarily for investigating alleged regulatory breaches; and

the offsite regime is primarily concerned with the periodic financial information together with intelligence gleaned from complaints.

It is not possible to describe the enforcement program as fully effective. The number of onsite inspections of securities firms is limited, partly because of priority given by the inspection team to other financial businesses. The 250 staff have to conduct inspections of 19,000 nonbank financial institutions and in that context, 250 inspection staff represents an extremely limited resource. Moreover, most of the resources of the Inspection team are devoted to investigations into complaints or suspicions of breaches (499 of the inspections in 2014). Only 97 scheduled inspections of 19,000 nonbank regulated entities in the financial sector as a whole. (There was no information supplied to the assessors, during the assessment, on the number of inspections in the securities sector). CBR stated, when commenting on this report that 28 scheduled inspections (and 9 unscheduled inspections) were conducted of the securities market intermediaries in 2014 and 23 (plus 4 unscheduled) in 2015. The assessors were not able to reconcile these figures with those given in the Annual Report (28 scheduled inspections of 1,000 securities market intermediaries as compared with 97 for 19,000 nonbank financial regulated entities) both from the point of view of the total number of inspections and the ratio of scheduled and unscheduled inspections. The assessors have not been able to discuss these numbers because of their late submission but do not consider that they alter the overall assessment of this principle.

The evidence from the inspection team and the balance between scheduled and unscheduled inspections is that the focus is on finding and punishing violations rather than seeking to raise the level of RM. Even with respect to the relations with customers, the focus is on finding customers who may be engaged in fraudulent activity, rather than ensuring the intermediaries are properly protecting the customers’ interests through disclosure, ethical conduct or segregation of assets. The action taken on market abuse has not extended to misrepresentation of material information or other fraudulent activity. It is not clear that there CBR is responding adequately to market intelligence (except in the case of the drive to remove intermediaries who are not conducting much business.

However, to be fully effective, the supervisory regime must move away from the focus on finding violations that was described to the assessors by both offsite and onsite supervisors.

The focus in the internal controls regulation is on the appointment, duties and functions of the compliance officer. This is not sufficient. Many of the matters that are specified in the regulation amount to the micromanagement of matters that could safely be left to the discretion of the professional securities firm (such as the procedure to be adopted when the compliance officer is away and the number of copies of a quarterly report that should be submitted to the management). A regulation on internal controls should, on the other hand, have the following elements:

An obligation on the management to undertake an assessment of the risks of the business;

A requirement to implement policies and procedures designed to mitigate those risks and maintain compliance with legal and regulatory requirements;

A duty to appoint a compliance officer to monitor the effectiveness of the policies and procedures in mitigating risks and maintaining compliance;

The obligation to appoint an internal auditor to monitor compliance with internal policies and procedures;

A requirement that the management implement a management information system to provide information on compliance with internal controls and the effectiveness of policies and procedures;

An obligation to provide training to staff on internal controls;

A requirement that the management should review their risk assessment and the effectiveness of policies and procedures no less frequently than annually; and

A duty for the management to report any material breaches of regulations to CBR.

Moreover, it is not appropriate to place the full responsibility for ensuring compliance on the compliance officer. That responsibility should lie specifically and explicitly with the executive management of the professional securities firm. The role of the compliance officer is to support the management but the final responsibility for compliance must lie with the management. Moreover, CBR should be able to take action against the management for breaches of the regulations even where the management did not directly participate in the violation.

CBR should support the new requirements for RM and internal controls by giving clear guidance about what a good internal control system might look like (drawing on the key points above). This need not be a detailed rule, since different firms may well need to arrange their RM in different ways. However, CBR should make it clear in its regulation that firms should implement a RM system and should adapt its inspection methodology so that inspectors were able to give a reasoned judgement on the effectiveness of that system in reducing risk.

Although the main supervisory tools are periodic reports and onsite inspections, CBR are, quite rightly, seeking to develop the use of other techniques such as management meetings to discuss risks and to identify and disseminate good practice. This is a helpful development. CBR may wish to develop a more comprehensive program that encompasses the following:

The issuance of guidance, public statements, interpretations of regulations and the implications of enforcement actions so as to ensure the firms understand the CBR’s expectations for good RM (rather than simple compliance with detailed rules;

Regular management meetings with regulated persons—particularly the more significant ones, at which the development of business and the implications for new risks could be discussed, along with discussion on specific compliance issues from these firms;

Regular meetings with representatives of key stakeholders—the regulated community, SROs, the issuers, investors and auditors—at which meetings, market developments and compliance trends can be discussed, along with proposals for amendments to regulation;

Surveys of the regulated community on specific regulatory matters related to key risks;

Requirements that regulated entities report regularly on matters that give a clear indication of their level of compliance, such as the adequacy of their risk assessments, the degree of risk scoring of customers, the development of different business lines, the number of complaints, the training of staff, the disciplinary measures taken against staff and other matters—such reports should not be confined to financial information;

The proper division of duties between CBR and the SROs (whose supervision must also be undertaken by CBR as noted in principle 9); and

The appropriate use of themed, targeted and full scope inspections.

CBR will need to co-ordinate the use of these tools with the SROs, now that front line regulatory responsibility is being passed to them.

Recommendations

CBR should devote sufficient resources to the Inspection team to enable it to conduct an inspection program that could be described as routine and periodic or risk-based.

CBR should conduct an inspection of the exchanges and do so in the future on a regular basis.

CBR should seek amendments to the Securities Law that place specific responsibility for ensuring compliance with regulatory obligations on the management of securities firms.

CBR should redraft the regulation on internal controls so as to focus on the essential elements of an internal control system rather than the detailed provisions for the appointment and functions of the compliance officer.

CBR should review its detailed regulations and remove such items as the number of copies a compliance officer should prepare of the report and other matters in this and other regulations that amount to micromanagement of professional securities firm.

CBR should adopt an approach to inspections and enforcement that focuses on the risks to the objectives of securities regulation, identifies the key measures to mitigate those risks and uses all supervisory tools to ensure compliance with those regulatory requirements.

CBR should develop the periodic reporting requirements so as to gain more information relevant to the adequacy of RM and compliance by securities firms.

The recommendations in Principle 9 about the development of a new approach to regulation now that SROs are becoming front line regulators, is also relevant here.

The assessors would recommend to the authorities to consider in more detail, the process of commencing an investigation of insider dealing and market manipulation offenses. It is clear that CBR must begin the process of investigation, because it has general responsibility for monitoring compliance and will have to make an early decision on whether administrative penalties are appropriate. On the other hand, for criminal cases, it is essential that the Law Enforcement authorities take the lead role, because they have the expertise in conducting investigations into criminal matters and preparing cases for the Investigations Committee and the prosecution authorities. In many jurisdictions, there is a risk that the early investigations by CBR will be done in a way that may not be compatible with the conduct of an investigation into criminal offenses. Although the law enforcement authorities can conduct further investigations and interviews, it is very possible that action by the regulatory authority will have tainted the evidence if the procedure was not appropriate for a criminal investigation. The authorities are aware of the problem but the assessors were not convinced that there was a full appreciation of the difficulties in arranging matters satisfactorily in practice and would recommend the authorities to develop their procedures to avoid the risks identified.

Principles for Cooperation in Regulation

Principle 13

The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

Description

Domestic information exchange

CBR has information exchange agreements with the following domestic authorities:

General Prosecutor’s Office of the Russian Federation;
Ministry of Internal Affairs of the Russian Federation;
Federal Service for Financial Monitoring;
Federal Tax Service; and
Federal Customs Service.

Presidential Decree 224 mandates exchange of information between domestic agencies in order to assist in the enforcement of legal requirements

Article 44(1) of the Securities Law imposes an obligation on CBR to protect the confidentiality of matters obtained through its supervisory program. Article 23 of the Organized Trading law has a comparable provision. Article 56 of the Investment Funds Law makes staff of CBR personally accountable for the disclosure of commercial secrets. The confidentiality provision in Article 44(1) of the Securities Law and Article 23 of the Organized Trading Law can be overridden by other federal laws including the Presidential Decree.

Article 56 of the Investment Funds Law includes no reference to the possibility of it being overridden by other legal provisions in other laws. In any case, according to the principles of legal precedence given to the assessors by CBR, provisions in primary legislation such as that in Article 56 of the Investment Funds Law cannot be overridden by a bilateral agreement or MoU.

Article 21 of the Central Bank Law empowers CBR to provide information to “advisory and coordinating bodies” established by law, except where prevented by federal law. Clearly, the provisions of Article 44(1) of the Securities Law and Article 56 of the Investment Funds Law are legal provisions that would limit the exchange of confidential information.

Cooperation with foreign authorities

Article 51¹ of the Central Bank Law states that information can be exchanged in compliance with the IOSCO MMoU, or an international treaty, or a bilateral treaty with a foreign regulator. The information may be confidential and may include bank secrets. There is no restriction on this power and it can therefore cover all matters of investigation and enforcement, matters concerned with licensing and approvals, surveillance, market conditions, client identification, details of regulated entities, and listed companies. There is no need for any approval from a government minister or attorney. There is no requirement that would prevent the information from being passed, even if there is no domestic interest, or if the issue concerned the investigation of an offense that would not contradict the laws of the Russian Federation. CBR obtains the information using the powers in Article 76⁵ of the Central Bank Law. As noted above in Principle 12, there are sanctions available for failure to respond to such a demand (RUB 30,000 (US$425) for individuals and RUB 700,000 (US$10,000) for legal entities).

It is clear that the provisions in Article 51¹ of the Central Bank Law would override those in Article 44(1) of the Securities Law and Article 23 of the Organized Trading Law, since the latter has an explicit exemption for disclosures required by law. However, there is no such exemption for the provision in Article 56 of the Investment Funds Law as it mandates the protection of commercial secrets with no exceptions. CBR has stated that the normal rules of legal precedence will give priority to the Central Bank Law because it is more specific but CBR has not explained why it is appropriate to provide an explicit exemption from confidentiality provisions in the Securities Law and the Organized Trading Law but not the confidentiality provision in the Investment Funds Law. The Disclosure provisions in Article 51¹ of the Central Bank Law were enacted by the same legal act that amended Article 56 of the Investment Funds Law and so it must be assumed that the Duma was aware that it was not providing an exemption to the Article 56 confidentiality provision even though it had done so for other confidentiality provisions.

Confidential information cannot be exchanged on an unsolicited basis because CBR can only provide information on the basis of a reasoned enquiry from a foreign financial market regulator (Article 51¹).

Information and records could be exchanged sufficient to identify the person or persons beneficially owning or controlling bank accounts related to securities and derivatives transactions and brokerage accounts as well as the necessary information to reconstruct a transaction, including bank records. This is clearly within the scope of Article 51¹ of the Central Bank Law. However, this would only be so, to the extent that such records were available in the Russian Federation. As noted above in Principle 11, there are gaps in the record keeping provisions and it is not necessarily required that professional securities firms would hold information on the persons beneficially owning and controlling securities or bank accounts relating to securities transactions.

Article 51¹ of the Central Bank Law states that information received from a foreign authority should be kept confidential and should only be disclosed with the approval of the source authority or a court of law. However, Article 51¹ also says that CBR shall be obliged to comply with disclosure requirements in Russian legislation. It does not say what those requirements are or what is to take precedence if these two paragraphs (which are consecutive) contradict each other.

Assessment

Partly Implemented

Comments

The rating is given because:

The confidentiality provision in the Investment Funds Law (Article 56) is not explicitly overridden in the other laws that enable CBR to exchange information. This is particularly significant given that Article 56 imposes a personal liability on CBR staff for unauthorized disclosure.
CBR cannot provide confidential information on an unsolicited basis.
There are limitations on the ability of CBR to provide information on those beneficially owning and controlling securities and bank accounts relating to securities transactions, because such information may not have been collected in Russia.

The assessors are aware that CBR has been accepted as a signatory to the IOSCO MMoU. However, the observations with respect to domestic cooperation and unsolicited assistance are not covered by the questionnaire for MMoU applicants.

CBR has helpfully explained the principles that govern the interpretation of law when two provisions are in conflict. As in virtually all countries, the Constitution has primacy and the later law is deemed to overrule the earlier. Like other Civil Law countries, the Civil Code has a special position and the more specific law will override the more general law. In the Russian Federation, the law will also be interpreted in a way that restricts the individual liberty the least. These principles would clearly not always produce the same result in a conflict and how they might be interpreted in the case of the conflict between Article 56 of the Investment Funds Law and Article 51¹ of the Central Bank Law cannot be judged by the assessors. CBR have argued that the confidentiality provision is more specific and therefore overrides the Central Bank Law which is more general. This, it is argued, makes any explicit override unnecessary. However, they have given no basis for supposing that one of these provisions should be regarded as more specific than the other and it is certainly not self-evident. Moreover, the argument is clearly undermined by the fact that in most other cases, the laws have included an explicit provision that confidentiality requirements can be overridden by law. The absence of such a provision in the case of Article 56 must be regarded as significant, especially as the last amendment to Article 56 was enacted in the same legal act that introduced the disclosure provisions in Article 51¹ by amending the Central Bank Law.

The matters identified above would result in a “Not Implemented” rating. However, for the most part, the provisions in the Securities Law, the Organized Trading Law, the investment Funds Law, the Clearing Law, and the Central Bank Law are such as to enable CBR to exchange information domestically and with foreign agencies. The limitations described above a partial at most.

Nevertheless, it is important that these matters be resolved.

Recommendations

CBR should seek an amendment to the Central Bank Law to enable it to provide confidential information to a foreign regulator on an unsolicited basis.

CBR should seek an amendment to the Investment Funds Law that provides an exception to the commercial secrets provision where disclosure is permitted by law.

The recommendations with regard to record keeping in the Enforcement Principles would also address the other issues raised above.

Principle 14

Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

Description

The legal power of CBR to share information with domestic agencies is given in Article 21 of the Central Bank Law and is demonstrated by the existence of agreements with:

Federal State Statistics Service;
Russian Federation Ministry of Internal Affairs;
Federal Financial Monitoring Service;
Federal Tax Service;
Deposit Insurance Agency State Corporation;
Russian Federation Prosecutor General;
Russian Federation Federal Security Service;
Russian Federation Federal Drug Control Service;
Federal Customs Service;
Russian Federation Investigative Committee; and
Federal Financial and Fiscal Supervision Service.

CBR is entering into legal agreements with:

the Federal Financial Monitoring Service;
the Federal Tax Service; and
the Russian Federation Ministry of Internal Affairs.

The ability of CBR to enter into legal agreements with foreign authorities is confirmed by Article 51¹ of the Central Bank Law. CBR is a signatory to the IOSCO MMoU and can therefore clearly enter into such agreements. It has also signed agreements with regulatory authorities in Cyprus, Lao, and Belarus.

In practice, CBR was able to respond to 26 of 30 requests for information from foreign authorities in 2015. Of the total 30 requests, 16 were received under the MMoU. The four that could not be completed were because of insufficient information to identify the person who was the subject of the enquiry. The requests were met within 1.5 to 2 months with the exception of two requests, which CBR had to request information (answers took about six months).

Article 51¹ of the Central Bank Law requires the protection of the confidentiality of information received.

Assessment

Fully Implemented

Principle 15

The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

Description

CBR has the power to exchange information (including confidential information) with foreign regulators where they are signatories to the MMoU or to a bilateral agreement or treaty (Article 51¹ of the Central Bank Law). The power to collect information (described in the enforcement principles) in the Central Bank Law, the Securities Law, the Investment Funds Law, the Organized Trading Law, and the Clearing Law would encompass all relevant categories of information except, as noted in the description of the Enforcement Principles.

The following points, noted in the descriptions of Enforcement and in Principle 13 could also affect the assistance to be given in practice:

Article 51¹ of the Central Bank Law conflicts with Article 56 of the Investment Funds Law where no exemptions are permitted to the prohibition on disclosure of commercial secrets; and
The provisions requiring the collection of beneficial ownership have limitations that mean that certain transactions may take place where the beneficial owner is not known.

The power to exchange information on the matters listed in this principle does not depend on there being any domestic interest. There is no need for the approval of a government minister or attorney (Article 51¹ of the Central Bank Law). The powers to exchange information, given in Article 51¹ of the Central Bank Law and the powers to collect information described above include documents and explanations (and thus includes oral statements) and there is a penalty for failing to provide information. There is no limitation on the information that can be collected and exchanged and it therefore will include the information necessary to reconstruct a transaction including bank records. Beneficial ownership information can be exchanged where it is located in the jurisdiction.

The description of the enforcement principles also shows that CBR is permitted to obtain court orders.

Article 44(7) of the Securities Law also empowers CBR to collect information from issuers that is relevant to this principle.

There is no limit in Article 51¹ of the Central Bank Law on the uses to which the information can be put by the recipient.

In practice, CBR was able to respond to 26 of 30 requests for information from foreign authorities in 2015. Of the total 30 requests, 16 were received under the MMoU. The four that could not be completed were because of insufficient information to identify the person who was the subject of the enquiry. The requests were met within 1.5 to 2 months.

Assessment

Fully Implemented

Comments

This rating is given on the basis that the absence of any exemption in Article 56 of the Investment Fund Law to allow disclosure when mandated by other laws has not, in practice, inhibited the ability of CBR to provide assistance to foreign regulatory authorities. Moreover, the rating assumes that the gaps in the legislation identified in the description have not inhibited the exchange information in practice.

Principles for Issuers

Principle 16

There should be full, timely and accurate disclosure of financial results, risk and other information that is material to investors’ decisions.

Description

The nature of companies in the Russian Federation is in transition. The legal provisions are complex and are contained in the Civil Code, Chapter IV, Law 208 of December 26, 1995 on Joint Stock Company Law and Law 39 of April 22, 1996 on Securities (the Securities Law). These were:

(1) closed joint stock companies that could not offer shares to the public; and
(2) open companies that could offer shares to the public.

Some open companies had made public offers of equities and, of these, some were listed on an exchange. These companies had issued a prospectus.

Some open and closed companies had issued bonds which were listed on an exchange. These companies had also issued a prospectus.

Companies that issue a prospectus are subject to additional disclosure requirements, including the requirement to issue quarterly as well as annual reports.

Changes to the Civil Code in 2014 have simplified the position, so that, in the future, there will only be public companies, whose shares are listed on an exchange, and private companies.

During the transition, existing companies will have to amend their charters to become either public or private companies and, if public, must be listed on an exchange. All new companies will either have to be private companies, or public companies listed on an exchange.

Existing public companies that have issued a prospectus prior to July 1, 2015, have five years to amend their constitution so that they are either private or listed. CBR estimates that in 2016, there are approximately 4,000 public companies that have issued a prospectus (but are not listed on an exchange) and a further 400 that have issued a prospectus and are listed on an exchange. Most of the 4,000 do not, in practice, have widely held shares. The large majority of these will probably cease to be public companies and will be private companies.

Companies that are currently public (including those who have issued prospectuses) and wish to become private companies can do so if certain conditions apply, particularly that 95 percent of shareholders in all categories agree (Article 7.2 of the Joint Stock Company Law). This threshold applies to shareholders not voting rights. Those who did not vote or voted against are entitled to have their shares repurchased at a price determined by the directors but no less that the average price over the previous six months, where this price is determined by organized trading. There is no provision for the price to be determined by companies whose securities are not traded on an organized exchange (Article 75 of the Joint Stock Company Law).

Companies that wish to become listed must meet the listing requirements of an exchange.

There is no provision for companies that fail, by the end of the transition period, to meet the conditions to become private, or meet the listing conditions of an exchange.

This description below will describe only the disclosure requirements that apply to companies that have issued a prospectus, which for the purposes of this description will be called public companies. For the purposes of Principle 18 (Accounting standards) the difference between the public/non-listed and the public/listed (which will continue to exist during the transition) will continue to be important because of the different requirements as regards IFRS. For Principle 16, the disclosure requirements that apply to all companies that issue a prospectus are described below.

Article 22(1) of the Securities Law states that all companies that offer securities to the public must publish a prospectus, except where:

They are placed with (any number of) qualified investors and no more than 500 existing shareholders, no more than 500 investors with pre-emptive rights and no more than 150 other (non-qualified) investors;
The offer is available only to a closed group of no more than 500 investors (excluding qualified investors);
The offer does not raise more than RUB 200 million (US$2.7 million), or in the case of a bond offer by a credit institution no more than RUB 4 billion (US$54 million); and
There is a minimum subscription of RUB 4 million (US$ 57,000) except for those with pre-emptive rights, provided there are no more than 500 such investors.

An offer solely to qualified investors does not result in a company being obliged to issue a prospectus. Qualified investors are defined in Article 51.2 of the Securities Law. They are financial institutions (banks, insurance, securities intermediaries, etc.), pension and other funds, certain public and international agencies, including CBR and the IMF, and some individuals defined in the Securities Law and regulations. Essentially, these are individuals with professional experience in the securities market, substantial trading experience or high net worth and the capacity to make large investments.

Article 22(2) of the Securities Law states that a prospectus must include three years audited accounts and the latest (unaudited) interim accounts for the last three, six or nine-month period (if such a period has passed since the publication of the last audited accounts). Moreover, Article 24.1 of the Securities Law obliges an issuer to publish an amended prospectus if the accounts are affected by a major event, between the registration of the prospectus and the placement of the securities.

Article 22 of the Securities law obliges an issuer to disclose:

Information about the issuer and the securities being offered;
Information about the issuer’s economic and business activities;
Accounting and financial data, including audited financial statements (as above);
Consolidated financial statements if the issuer is part of a group;
Details of the securities being offered; and
Details of any person providing security for a bond issue (in the case of a bond issue).

In addition, Article 22(3) also creates a general obligation to include in the prospectus all circumstances that may have a material impact on a decision to buy the securities.

Detailed requirements for the content of prospectuses are included in Annex to Regulation 454–P of December 30, 2104 on disclosure by issuers (The Disclosure Regulation). These include the full range of disclosures expected by IOSCO for a prospectus. Article 22 also requires a company to issue a supplementary prospectus if there are changes that may have a material impact on a decision to buy the securities.

The prospectus must be registered with CBR. CBR reviews the prospectus to ensure that it complies with the law and regulations and will only register it if it is in compliance. The requirements for its distribution are covered by the general provision in Article 30(1) that states that disclosure means making the document accessible to anyone without restrictions. Further detail is given in the Disclosure Regulations.

Article 92 of the Joint Stock Company Law obliges a company to publish an annual report, whose disclosures are covered in the Joint Stock Company Disclosure Regulations. This report must include information on the company’s position in the industry, the main lines of business, the directors’ report on activities, energy resources used and prospects. It must include details of dividends. There must be a list of the basic risk factors relating to the activities of the company. There should be information on large and related party transactions. The report should give information on the board of directors, including any changes. The report should show the shares and other securities held by the directors and any purchases and sales by them. There should be details of the CEO and other management officers. Information should be given on remuneration.

The annual report of a public listed company should show the degree of compliance with the Corporate Governance Code and more general details of corporate governance.

In addition, companies that issue a prospectus are obliged to issue quarterly as well as annual reports (Article 30(4) of the Securities Law.). Article 30(12) obliges an issuer to publish its audited annual consolidated financial statement no later than 120 days after the end of the accounting year and the interim financial statements, no later than 60 days after the end of the second quarter. All quarterly reports should include consolidated financial statements.

Article 4(1) of the Law 46-FZ of March 5, 1999 on investor protection (the Investor Protection Law) prohibits the publication of any advertisement to an unlimited number of people, unless it follows the legislative provisions for new issues (which would be the prospectus). This effectively prohibits any advertisement relating to public offers except for the prospectus itself. However, advertisements for public offers are allowed in practice once a prospectus has been published, despite the prohibition in the Investor Protection Law. The only relevant provisions regarding advertisements are Article 5 and Article 28 of Law 38-FZ of March 13, 2006 on advertising (the Advertising Law). These are general provisions that prohibit inaccurate or unfair advertisements, prohibit the omission of relevant material information, prohibit guarantees and require a risk warning to be included, along with the name of the person issuing the advertisement. There is no requirement that such advertisements should be approved in advance by CBR.

The disclosure requirements also cover the convening of a general shareholders’ meeting (Article 92(1) of the Joint Stock Company Law). In addition, Article 52(3) of the Joint Stock Company Law obliges companies, when giving a minimum 20-day notice of a general meeting to inform shareholders where they can obtain certain information, including the annual report, financial statements and audit report, information on candidates for election, and other information. The information, which must be made available at premises stated by the company and its website can be copied and sent to the shareholder at the shareholder’s expense if they wish. The information must be made available at least 20 days before the meeting (70 days for an emergency general meeting).

After the securities have been issued, companies must also disclose material facts. Article 30(14) and paragraph 12.7 of the Disclosure Regulation give a list of 50 examples of matters that should be regarded as material facts—and therefore must be disclosed. The list includes various corporate matters involving the rights attached to securities and various corporate actions including takeovers and offers. Litigation is included, as are errors or omissions in the company’s compliance with disclosure and other regulations. However, the list excludes many of the most common events that are likely to affect the price of a company’s securities such as a material change in prospects, a change in risks, a change in the economic circumstances of the country or region in which the issuer does most of its business, the signing of a major new contract, the loss of a major contract, a major physical or weather event that affects the continued operation of the company, a significant change in the line of business, a decision to acquire or sell significant assets or any other major event which is likely to affect the value of the company’s assets or its ability to continue to make profits.

Of these 50 items, the last is “any other fact which, in the issuer’s opinion significantly influences the value of securities.” This is consistent with Article 30(4) which states that any material event must be disclosed. Material events must be disclosed in quarterly reports as well as at any time, within one day for a news feed and two days for a website (paragraph 13.1 of the Disclosure Regulations).

This general obligation may also be provided by Article 30(4) of the Securities Law, which lists reports on material facts as one of the forms in which disclosures may be made.

However, in practice, both CBR and industry participants say that is very rare for any disclosures to be made under this heading. CBR state that, in 2015, of a total of 243,000 “material fact” disclosures, 2,814 were in the “any other event” category. CBR observed that in order to impose a sanction, it would be necessary to prove the event and that it did or could have affected the price of a security. In practice, this meant that it would be very difficult to impose sanctions against a company that failed to disclose something in this “any other event” category. The private sector confirmed that it was not regarded as a real obligation.

It is not hard to identify possible disclosures that are not identified in the 50 listed disclosures. For example, although companies are required to disclose prospects in prospectuses and quarterly reports, it is very rare, if not unknown, for any company to issue a profit warning. The requirement to disclose a significant deterioration in profit expectations is not included amongst the 50 items and yet it is clear that such a deterioration would affect the price of the securities. In practice, the inclusion of a provision to disclose “any other matter…” does not amount to a real obligation to disclose any material matter that could affect the decision to buy or sell the securities.

Article 92(1) of the Joint Stock Company Law and Article 30.1 of the Securities Law give the company the right to seek relief from the duty of disclosure from CBR. This provision is designed for public companies that have fewer than 500 shareholders and are not listed. CBR will give such a waiver only if the relevant criteria are satisfied, which include the agreement of 95 percent of shareholders (this applies to shareholders not voting rights, according to Article 92.1 of the Joint Stock Company Law), the absence of any significant trading in or widespread holding of securities.

Article 22.1(3) of the Securities Law and paragraphs 8.5–8.7 of the Disclosure Regulations state that those signing the prospectus (the board, chief accountant, appraiser and if required, financial consultant, and legal consultant) must confirm the reliability of the information. They, together with those who voted for the prospectus and the audit firm shall jointly and severally bear vicarious liability for damages as a result of unreliable or incomplete information. Articles 185 et seq of the Criminal Code create a criminal liability for failures to disclose information, although no criminal penalties have been imposed for failures in respect of a prospectus. Other violations of the disclosure provisions, however, have resulted in criminal penalties.

Prospectuses are submitted to CBR for review, and, if approved, registration. Article 21 of the Securities Law gives CBR the right to refuse to register securities if the documentation does not demonstrate compliance with the law. This would enable CBR to refuse to register a security unless it met the requirements. After the registration of a prospectus, Article 26 permits the suspension of an issue by CBR under certain circumstances that include the discovery that certain information is unreliable (Article 26(1)(2)). CBR say that this provision allows them to insist on changes to a prospectus and that they do, in practice, take such action from time to time, particularly when the prospectus fails to meet the statutory requirements. Article 26 also allows CBR to go to court to declare an issue invalid.

It is clear from paragraph 2.13 of the Disclosure Regulations that, although there is no explicit provision that exempts companies from making disclosures where there are state or trade secrets, it is accepted in practice that there are some unspecified exemptions from disclosure. This matter is left to the discretion of the issuer. If CBR considers that the omission of material information has not been done for good reason, they may impose an administrative penalty of between RUB 700,000 and RUB 1 million (US$10,000–US$14,000). There are otherwise no specific provisions implementing safeguards in such circumstances apart from the general provisions on insider dealing (Article 6 of the Insider Dealing Law). There are sanctions for breaching the Insider Dealing Law (see Principles 10–12).

CBR takes action to monitor the disclosure obligations of issuers. The Exchange confirmed that it does not, in practice separately monitor the disclosure obligations of companies, although CBR state that it has an obligation to do so. The table below gives an indication of the number of complaints prescriptive orders and sanctions. CBR states that typical violations relate to failure to file reports on time.

	2014	2015
Complaints	422	405
Prescriptions	924	1,683
Administrative sanctions	274	360

Public offers or listings from foreign issuers are not significant in th Russian Federation.

Assessment

Not Implemented

Comments

This rating is given because:

There is no effective ongoing general obligation to disclose any material fact that may affect a decision as to whether or not to buy or sell securities (apart from those items listed in Article 30(14) of the Securities Law and the Disclosure Regulations, which exclude critical disclosures such as changes in prospects or risks);
There are no proper provisions enabling a derogation from the disclosure provisions for state or commercial secrets and no safeguards to apply when such a decision to withhold information is made, even though it is clear that companies do withhold information on these grounds;
There is no specific power to require a company to make a disclosure (unless CBR discovers, after the event, that a disclosure has not been made);
There is no provision relating specifically to advertisements in relation to public issues, except for that in the Investor Protection Law, which appears to be ignored in that advertisements are published outside the prospectus, even though prohibited by the Investor Protection Law).
In each case, there are provisions in place but they are not sufficient, in formulation or implementation to meet the requirements of the principle.
There is a general requirement to disclose any material matter that might affect the price of securities. CBR say that it is difficult to enforce any failure to disclose a matter unless it is one of the 50 specific items listed in the law. These specific matters include routine events like general meetings which would not affect the price of securities but do not include significant events such as a material change in prospects or risks. Although such matters coulkd be covered by the general continuiung obligation, CBR state that onlty just over 1 percent of disclosures fall into this category and the industry say that it is ignored. Profit warnings, for example, are rare.
There is no explicit derogation from disclosure obligations for state and commercial secrets in the lawand so, strictly speaking, disclosure of such secrets is required. However, CBR state that this prohibition is not enforced and that in practice, such secrets are not disclosed. Indeed, the regulations envisage that such secrets will not be disclosed (despite the absence of any provision for a derogation in the primary law). There are no provisions to safeguard the investor or the market from the failure to disclose. Such safeguards should normally include giving CBR the power to require advance notice of any decision to delay disclosures of material facts for these reasons, and to give or deny approval to such a delay, depending on the nature of the information. CBR should also be able to insist on disclosure within a reasonable timetable and to take action (including suspension of trading) if it considers that this is necessary to protect the market.
CBR state that advertisements are prohibited before the prospectus and that after that advertisements are covered by the Advertising Law. However, in fact, the Investor Protection Law bans all advertisements other than the prospectus itself and does not permit advertisements relating to a public offer, even after a prospectus is published. CBR do not enforce this provision and instead allow advertisements to be published after the prospectus is published. The provisions of the Advertising Law are very general and do not contain the provisions necessary to ensure that advertisements published outside the prospectus are appropriate. It is not appropriate for CBR to allow such advertisements to be issued in a way that may be breaching the Investor Protection Law.
The disclosure requirements are distributed between the Joint Stock Company Law, the Securities Law, the Disclosure Regulations and the annexes to the Disclosure Regulations. Some of these provisions have only recently come into effect and some of them are subject to repeated amendment. In the case of some of the requirements, one law must be read in the light of another. In other cases, there is duplication of the same requirements (such as many of the items in the list of material facts). It is important for the proper regulation of the securities market that the legal and regulatory requirements should be clear. This degree of complication, duplication and overlap make it difficult for users of the capital market to establish what the law is and thereby increase costs.
The continuing existence of practices not directly permitted by law (such as the omission of material facts where they are state or commercial secrets and the publication of advertisements outside the prospectus) are particularly inappropriate since they undermine respect for the law.
It is commendable that CBR takes action to impose penalties on companies that fail to disclose information.
The proposals to simplify the current provisions regarding public and non-public companies is welcome. However, the current arrangements do not provide specifically for companies that are currently public and which fail to meet the conditions to become private or to gain a listing on an exchange. It will be necessary to make provision for this before the end of the transition period.

Recommendations

The Securities Law should include a provision that requires the disclosure of any material fact that would reasonably be expected to affect the price or a security and the decision to buy or sell that security both at issue and at any time thereafter. Such a provision should be the overriding disclosure provision in the Securities Law.
The 50 detailed matters for disclosure should be removed from the Securities Law and left in the Disclosure Regulations (which is the appropriate place for such detail) and reinforces the primacy of the overriding obligation to disclose all material facts.
The 50 detailed matters listed in the Disclosure Regulation should exclude routine events which would not affect the price of a security (such as the announcement of a general meeting) and include a material change in prospects, a significant change in risks, a change in the economic circumstances of the country or region in which the issuer does most of its business, a significant change in the trading environment, the signing of a major new contract, the loss of a major contract, a major physical or weather event that affects the continued operation of the company, a significant change in the line of business, a decision to acquire or sell significant assets or any other major event which is likely to affect the value of the company’s assets or its ability to continue to make profits.
The Securities Law should be amended to specify what derogations from disclosure might be acceptable, a procedure for providing approval and safeguards to be considered (such as suspension of trading) for dealing with the consequences for investors.
The Investor Protection Law and the Law on Advertising should deal more comprehensively with the advertisements so as to ensure that advertisements issued in connection with a public offer, should be issued only by the issuer or advisers acting under the issuer’s authority, should only contain information that is true and not misleading, should refer to the prospectus and should be subject to approval by CBR.
The law should give CBR specific powers to require issuers to make disclosures when material events have occurred (or CBR discovers that they may be about to occur) but the issuer has failed to meet its disclosure obligation.
CBR should consult the private sector with a view to simplifying the structure of the legal and regulatory framework for disclosure, so as to achieve a more easily understood (and hence enforceable) regime.

Principle 17

Holders of securities in a company should be treated in a fair and equitable manner.

Registration and voting

The first right of a shareholder is to have ownership of securities registered and given legal effect. This is provided for in Article 44 of the Law 208 of December 26, 1995 on Joint Stock Companies. The right to sell shares (without the permission of other shareholders) is given in Article 2(1).

Article 49(1) of the Joint Stock Company Law gives the shareholders the right to vote at general meetings. Article 59 provides that one share carries one vote. Article 52 states that the agenda shall be sent out in advance and makes clear that such meetings include the election of directors and requires voting on changes to the constitution of the company (which includes changes to corporate structure and the terms and conditions of securities). Moreover, Article 48(1) shows the formation of the executive, the type and face value of shares and corporate changes to the constitution as being matters to be determined at the general meeting of shareholders. Article 49 states that the decision to pay a dividend is taken by a general meeting of shareholders and Article 42 provides that a dividend, when payable must be paid equally to all shareholders of a particular class.

Article 52 of the Joint Stock Company Law prescribes a list of documents that should be provided to shareholders and this is expanded in Regulations (FFMS Regulation 12–6/pz of February 2, 2012—the General Meeting regulation). The information includes the reason for a company reorganization and information to comprehend the position of the company. The Corporate Governance Code also has provisions that encourage companies to create favorable conditions for shareholders’ participation in meetings. This would include the position of directors for and against proposals at the meetings. However, there is no general provision that obliges a company to provide shareholders with all the information they require to be able to make an informed opinion on the matters before them at a general or emergency meeting.

Article 53 gives holders of more than 2 percent of the voting shares the right to put items on an agenda (unless they are out of scope).

Article 52(1) of the Joint Stock Company Law also obliges companies to give 20 days’ notice of shareholder meetings. Article 52 also provides for a 70-day notice period for an extraordinary meeting where this considers the election of directors or corporate changes such as a merger.

There is no express provision for proxies but a shareholder may appoint a representative to act for them at a general meeting by granting a power of Attorney in accordance with the Civil Code or having a notary certify the appointment (Article 57(1) of the Joint Stock Company Law). Legislation which came into effect in 2014 allows shareholders with nominee accounts at the central depository to vote electronically at General Meetings, without being present. New legislation that comes into effect in July 2016 will give the right to vote to those who hold beneficial ownership of shares but hold them in the name of custodians or others.

Holding directors to account

Shareholders can hold directors to account at general meetings where there must be elections. The shareholders may also take directors to court if there is a violation of the Joint Stock Company Law (Article 68(6)). Under Article 53 of the Civil Code directors are obliged to act in good faith and, under Article 53.1 can be held liable for any losses as a result of a failure to act in good faith. Article 71(1) of the Joint Stock Company Law also imposes an obligation on directors to operate in the interests of the company and shall be liable to the company for any losses arising from their failure to do so (unless there are other grounds stated in other laws for liabilities to be imposed by others).

Minority shareholders

Minority shareholder can go to court if those holding 1 percent of the voting right consider that their interests have not been properly protected by the directors and that there has been a legal violation (Article 71 of the Joint Stock Company Law). CBR say that this right has been exercised in practice. There are provisions that permit shareholders of a particular category of share to demand redemption of their shares if there are changes to their terms and conditions against which they voted (Article 75(1) of the Joint Stock Company Law).

Insolvency

Article 21 of the Joint Stock Company Law provides for agreement by shareholders for voluntary liquidation. Article 23 of the Joint Stock Company Law deals with the distribution of property of a company under liquidation and this provides a set of priorities for distribution. This includes a priority for dividends credited but not paid and then the distribution of assets to holders of common stock, which must be undertaken according to the charter of the company (which will identify preferred and common stock). The law does not explicitly state that any remaining assets after completion of the liquidation shall be distributed in accordance with shareholdings (except in the case of dividends credited but not paid–Article 23).

The insolvency of companies is covered by the Law 127 of October 26, 2002 on Insolvency and contains the provisions necessary to deal with orderly bankruptcy. The law provides for the shareholders to be informed about a pending bankruptcy and to take action to avoid bankruptcy if possible (Article 30). An application for bankruptcy must be sent to the shareholders’ representative (Article 37). The law gives a representative of shareholders the right to attend but not vote at creditors’ committees (Article 12). The shareholders are to be informed of a meeting to consider financial rehabilitation (Articles 64 and 76) and subsequent meetings to consider aspects of the insolvency (for example, the institution of receivership, Article 68). The shareholders have the right to dispute the claims of creditors (Article 100). The shareholders have the right to seek compensation against the management of the company for the losses arising from bankruptcy (Article 10). Representatives of shareholders have the right to receive information from the receiver (Article 12).

Takeovers

The Joint Stock Company Law also makes provision for takeovers in Chapter XI and the relevant regulations.

Articles 84.1 and 84.2 of the Joint Stock Company Law deal with voluntary or mandatory offers. A person who intends to acquire (alone or in concert with affiliated persons) more than 30 percent of the shares may make a voluntary offer. A person who has already (alone or in concert with affiliated persons) acquired more than 30 percent, 50 percent or 75 percent is obliged to make an offer. The minimum price must be the weighted average of prices over the previous six months (unless the offeror has acquired securities at a higher price in the previous six months, in which case, the higher price will apply). The price offered must be uniform for all shareholders of a particular class.

The Joint Stock Company Law makes clear (for example in Article 84.2) that the requirements relating to a person acting in concert with others, only apply where the shareholder and the others with whom it is acting in concert are affiliated persons. Article 93 of the Joint Stock Company Law states that a person shall be deemed to be affiliated in accordance with the requirements of Russian legislation and gives two references:

Presidential Decree 1186 of October 7, 1992 (on investment funds); and
Order of the State Management Committee No 723 of April 5, 1994.

However, on enquiry, CBR states that neither of these references are relevant in this context and, in fact the relevant definition on affiliated persons is set by Article 4 of Law 948-I of March 22, 1991 on Competition and Law 135-FZ of 26 July 2006 on Competition Protection. Neither of these have been provided to the assessors but, according to CBR, they restrict the definition of an affiliated person of a legal entity to directors and entities in the same group or those with shareholdings of more than 20 percent, or in other cases, business entities with in which the same individual has more than 50 percent of the total voting power. The precise definitions appear somewhat complex but it is clear that the provisions relating to those acting in concert are restricted to an affiliated person (however defined) and would not include those acting in concert with individuals or entities who were not affiliated according to this provision.

The board must assess the bid and make a recommendation within 15 days that includes their assessment of the effect of the bid on the value of shares as well as an assessment of the plans of the person making the bid (Article 84.3). Article 84.1 stipulates that the offeror must give information on the bid to the company and the company must provide that information to the shareholders. The offeror also has the right to provide information on the bid to the shareholders. Articles 84.1 and 84.2 also sets out the timetable for considering a bid and provides for a minimum of 70 days and a maximum of 80, or 90 days (for mandatory and voluntary offers respectively) for the shareholders to consider the offer (Articles 84.1(2), 84.2(2)). All shareholders must receive details of the offer and the assessment (Article 84.1(1 and 2), 84.2(1 and 2) and Article 84.3). They must all be able to accept the offer if they wish and receive the offer in cash if they wish (Article 84.1(2) and 84.2(5)).

Once an offer has been made, any revised offer must be available to all securities holders (Article 84.2(4)). Article 84.7 includes the right of shareholders to demand the offeror acquires more than 95 percent of the shares. Article 84.8 includes the “squeeze out” provision that enables an offeror to acquire all remaining shares once the offeror has acquired more than 95 percent of the shares. In such cases, the remaining shareholders may also insist on their shares being bought at the offer price.

Disclosure of shareholdings

Article 30(14)(25) of the Securities Law requires disclosures to be made when a person (acting alone or in concert with affiliated persons) acquires 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent, 50 percent, 75 percent or 95 percent of the voting rights. The persons who acquire the shareholdings are obliged to inform the issuer accordi

Licenses Issued		Number
Broker		624
Dealer		641
Investment Manager		533
Depository		498

Licenses Issued		Number
Broker		624
Dealer		641
Investment Manager		533
Depository		498

Topics

Countries

Series

About

Resources

Abstract

Executive Summary

Introduction

Regulatory Structure

Market Structure

A. Market Intermediaries

B. Collective Investment Schemes

C. Markets

Investor profiles

Unit investment funds

Derivatives markets

D. Preconditions

The legal framework

Business laws

Legal profession

Credit bureaus

Main Findings

Principles relating to the regulator (Principles 1–8)

Self-regulatory organizations, enforcement, and cooperation (Principles 9–15)

Issuers (Principles 16–18)

Auditors, credit rating agencies and other evaluative services (Principles 19–23)

Principles for collective investment schemes (Principles 24–28)

Market intermediaries (Principles 29–32)

Principles for the secondary markets (Principles 33–37)

Summary Implementation of the IOSCO Principles

Recommended Action Plan and Authorities’ Response

A. Authorities’ Response to the Assessment

Introduction

Principle-by-Principle Response Principle 6

Principle 9

Principle 12

Principle 16

Advertisements during the securities offering

Material facts disclosures

Absence of explicit derogation from disclosure obligations and safeguards giving CBR the power to require advance notice of any decision to delay or abstain from disclosures of material facts

Principle 17

Principle 22

Principle 29

Principle 31

Conflicts of interest

Internal controls

Protection of clients’ rights

Detailed Assessment