According to an International Monetary Fund assessment conducted in 2003 on Russia's adherence to the Objectives and Principles of Securities Regulation as promulgated by the International Organization of Securities Commission (IOSCO), there is a comprehensive regulatory and licensing regime governing securities market operations in Russia. At the same time, the Russian securities markets and its supporting clearing and settlement infrastructure were extremely fragmented and there was a need for further strengthening of the regulatory framework. As of 2003, a number of legislative initiatives were underway to address various issues. Since March 2004, the functions of the previous supervisory body, the Federal Commission for the Securities Market (FCSM), have been taken over by a new securities authority, the Federal Service for Financial Markets (FSFM). According to the findings of the European Bank for Reconstruction and Development Securities Market Legislation Assessment in 2004, the Russian Federation's existing securities market legislation (i.e. "law on the books", not how the relevant legislation is being implemented) when assessed against relevant international standards was rated among "medium compliance" countries. The assessment was updated in 2005 and the results confirmed the medium compliance rating. The Central Bank of Russia has acknowledged that the elements of the stock market regulation system that ensure the protection of investors, issuers' access to the market, and the prevention of insider deals are underdeveloped.

General Overview

In the International Monetary Fund's (IMF) Financial System Stability Assessment conducted in 2003 on Russia's adherence to the Objectives and Principles of Securities Regulation as promulgated by the International Organization of Securities Commission (IOSCO), the assessment team reports that there is a comprehensive regulatory and licensing regime governing securities market operations in Russia. Nevertheless, Russia's securities markets and supporting clearing and settlement infrastructure were extremely fragmented and there was a need for further strengthening of the regulatory framework. (IMF 2003, p. 48)

According to the findings of the European Bank for Reconstruction and Development's (EBRD) Securities Market Legislation Assessment in 2004, the Russian Federation is a country whose existing securities market legislation (i.e. "law on the books", not how the relevant legislation is being implemented) when assessed against relevant international standards was rated among "medium compliance" countries. The assessment was updated in 2005 and the results confirmed the medium compliance rating. The few changes noted in the legislation mostly relates to the licensing of Market Intermediaries where the powers, including sanctioning of the FSFM have been strengthened. (EBRD 2006a, p. 6)

In its 2005 Financial Stability Review, the Central Bank of Russia (CBR) acknowledges that the elements of the stock market regulation system that ensure the protection of investors, issuers' access to the market, especially for initial public offerings, and the prevention of insider deals are underdeveloped. As there is no legislative definition of a transaction with financial derivatives, there is no legal protection. (CBR 2006, p. 22)

The IMF assessment team points out that, as of 2003, the Russian capital markets remained small and underdeveloped. Successful implementation of reforms to accounting standards and issuer transparency and disclosure was essential to promote investor confidence in equity and corporate debt markets. Further rationalization of market would reduce costs and promote efficiency. The Federal Commission for the Securities Market (FCSM) required additional resources to fulfill its mandate and was impeded by unresolved jurisdictional issues concerning regulation of securities activities of banks, derivatives regulation, and regulation of related-party transactions and takeover bids. (IMF 2003, pp. 8-9)

As of 2003, a number of legislative initiatives were underway to address various issues, and there were some signs of consolidation and rationalization of capital market. In addition, since March 2004, the functions of the previous supervisory body [FCSM] have been taken over by a new securities authority, the Federal Service for Financial Markets (FSFM). (IMF 2003, p. 47; IFLR 2005)

The principal legislation governing the Russian securities market includes the Civil Code, enacted in December 1994 and amended in 2003; Federal Law 39-FZ on the Securities Market, enacted in April 1996 and amended most recently in March 2005; Federal Law 46-FZ Law on the Protection of Rights and Lawful Interests of Investors on the Securities Market, enacted in March 1999 and last amended in December 2004; Federal Law 208-FZ on Joint Stock Companies, enacted December 26, 1996 and amended in 2005; and the Federal Law on Investment Funds. These laws are supplemented by several presidential and government decrees and regulations of the FCSM. (EBRD 2006a, p. 6; IMF 2003, p. 51)

Amendments to the Law 'On Joint Stock Companies' in December 2005 have brought about significant improvements in the area of corporate law. The amendments target purchasers of large shareholdings, requiring them to put offers out to tender, and introduce "squeeze out rules", (i.e. a dominant shareholder holding more than 95 % of an open joint stock company's voting shares as a result of a public offer can force the minority shareholders to sell their shares). Recent regulations made some of the provisions of the Corporate Governance Code mandatory, which should raise investors' confidence in the management of Russian companies. The supervision of capital markets has been delegated to a new market regulator, the Federal Service for Financial Markets (FSFM), which should help amend the flaws noted in the supervision of the market. Generally, the securities market framework requires further changes to improve settlement and prudential requirements for market participants. (EBRD 2006a, p. 1)

In 2002, the Securities Law was amended. The changes entered into force on January 4, 2003. Amendments included definitions of corporate bonds, mutual funds, options, futures and forwards which provide a sounder legal basis for these markets. Companies offering public shares were required to disclosure more information during the placement process as well as in the quarterly reports. In addition, the responsibilities of financial consultants helping companies with their stock offerings were clearly defined, and they were held liable for correctness and accuracy of the data presented by companies to their shareholders. Also, for the first time ever, the amendments define "price manipulation," giving the FCSM authority to investigate and punish violators of this practice. (U.S. DoC 2003)

The FSFM is the federal executive body, which controls and supervises activity in the financial markets, including the activity of exchanges, and issues the relevant regulations. The key objectives of FSFM are to maintain stability in the financial markets, make the markets more efficient and attractive to investors, increase market transparency and reduce investment risks. It achieves these objectives by regulating the activities of financial market participants and by setting out the conditions for securities issuance and trading. (FSFM website)

The FSFM was established in accordance with Decree No. 314 "On the System and Structure of Federal Executive Branch Agencies," dated March 9, 2004. It took on the controlling and supervising functions of the former FCSM, as well as the responsibility of the former Ministry of Labor and Social Development to control and supervise the financial markets. It also inherited the responsibility to control the activity of exchanges from the former Ministry of Antitrust Policy, and the responsibility to control and supervise pension reforms from the Ministry of Finance. (FSFM website)

The main functions, powers and organization of the FSFM's activity are set out in the Russian Government Decree No. 206 "On the Federal Service for Financial Markets," dated April 9, 2004, and in the statute on the Federal Financial Markets Service of June 30, 2004, approved by the Russian Governmental Decree No. 317, dated June 30, 2004. (FSFM website)

According to the CBR's 2005 Financial Stability Review, share price volatility decreased in the period under review (the average monthly variation ration of the MICEX daily index was 0.028 in 2005 against 0.035 in 2004). The volatility of the MICEX index was lower or the same as in the developing and emerging markets, but it was higher than the volatility of the leading foreign stock market indices. (CBR 2006, p. 31)

The Moscow Interbank Currency Exchange (MICEX) is the largest financial exchange operating in the Russian Federation. Trading in non-government securities was launched in March 1997. Later that year, following the example of the MICEX, regional currency and stock exchanges in Samara, Rostov-on-Don, St. Petersburg, Nizhniy Novgorod and Yekaterinburg also launched trading in bonds and stocks. The financial crisis of 1998 had a disastrous effect on the Russian stock market and the MICEX Summary Stock Index (the MICEX SSI) dropped to its historically lowest level of 20.92 units. Since then the market has continued to grow and at the end of 2004, the MICEX Index1 reached 552.22 points with 413 securities of 267 issuers traded in the MICEX. (EBRD 2006a, p. 6)

Growth in stock trade volumes was not accompanied by an expansion of the list of high-liquidity papers. As before, the lion's share of operations was conducted with highly liquid stocks of several issuers and in the final analysis this determined the low liquidity risk on these instruments. At the same time, the very fact that the investment portfolio contained a limited number of instruments made the aggregate result of stock investments increasingly dependent on the price dynamics of individual instruments. In the structure of secondary stock trade on MICEX, including negotiation deals, eight issuers accounted for 95% of aggregated turnover (97% in 2004), in which the Unified Energy Systems accounted for 37% (49% in 2004). In the Russian Trading System Stock Exchange (RTS), 10 issuers accounted for 87% of aggregate turnover (89% in 2004), in which the Unified Energy Systems and LUKoil accounted for 50% (47% in 2004). Energy and oil sector companies accounted for 75% of the aggregate secondary stock trade turnover on MICEX (83% in 2004) and 70% in the RTS (73% in 2004). Most of the second- and third-tier shares on the organized market remained barely liquid and their price dynamics were highly volatile. (CBR 2006, pp. 31-32)

The Federal Service for Financial Markets is an Ordinary Member of the International Organization of Securities Commissions. (IOSCO website)

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

EN

In the 2003 International Monetary Fund Financial System Stability Assessment, the authors state that the role, responsibilities, and objectives and most aspects of the institutional framework of the Federal Commission for the Securities Market (FCSM) are clearly defined and described in the law, presidential decree, and regulations and orders issued by the FCSM. A need exists, however, to provide greater clarity regarding the formal mechanisms of the FCSM's accountability, and some steps have been taken to enhance its public accountability. Since the FCSM has some overlapping responsibilities with the Central Bank of Russia, there is also a need for a clear, publicly announced demarcation of roles and responsibilities between the two institutions. (IMF 2003, p. 68)

Subsequently, the Federal Service for Financial Markets (FSFM) was established in accordance with Decree No. 314 "On the System and Structure of Federal Executive Branch Agencies," dated March 9, 2004. It took on the controlling and supervising functions of the former Federal Commission for the Securities Market, as well as the responsibility of the former Ministry of Labor and Social Development to control and supervise the financial markets. It also inherited the responsibility to control the activity of exchanges from the former Ministry of Antitrust Policy, and the responsibility to control and supervise pension reforms from the Ministry of Finance. (FSFM website)

The main functions, powers and organization of the FSFM's activity are set out in the Russian Government Decree No. 206 "On the Federal Financial Markets Service," dated April 9, 2004, and in the statute on the Federal Financial Markets Service of June 30, 2004, approved by the Russian Governmental Decree No. 317, dated June 30, 2004. (FSFM website)

The FSFM is responsible for: (1) regulation of securities issuance and trading, including state registration of security issues and reports on the results of security issues; register security prospectuses; (2) control and supervision of the activities of issuers, professional market participants and their Self-Regulatory Organizations; joint-stock investment funds; management companies for joint-stock investment funds, unit investment funds, non-government pension funds and their Self-Regulatory Organizations; special depositaries for joint-stock investment funds, unit investment funds and non-government pension funds; managers of mortgage coverage; special depositaries for mortgage covers; non-government pension funds; the Russian Federation Pension Fund; the State management company; and commodity exchanges; (3) proposals to the Federal Government to improve existing laws and develop draft laws and other regulations; (4) promotion of public understanding of the laws and their practical application; (5) supervision that companies adhere to information disclosure obligations in accordance with Russian legislation; (6) organization of analysis of issues relating to the development of the financial markets. (FSFM website)

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

As per the International Monetary Fund (IMF) assessment in 2003, the Federal Commission for the Securities Market (FCSM) operated as an independent organization and had a broad range of authority over markets, market participants and issuers, though independence could be strengthened with a clearer separation from government in carrying out its day-to-day operations. (IMF 2003, p. 52)

On March 9, 2004, the President signed Decree No. 314 "On the System and Structure of the Federal Executive Authorities." The FCSM was abolished and the Federal Service for Financial Markets (FSFM) took over the functions of the FCSM, certain functions of the Ministry of Finance, the Antimonopoly Ministry and some others. According to the Decree, each federal service has overall responsibility for supervisory and control functions in the relevant sphere of activity. Federal services may issue individual acts within their competence, but are not empowered to issue regulations, unless directly authorized to do so by the President. (White & Case 2004)

The Russian Government has control of the FSFM, and is responsible for appointing its Head and Deputy Heads. (FSFM website)

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

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

In a 2004 report issued by the International Finance Corporation and the U.S. Department of Commerce, the authors state that the Federal Commission for Securities Markets (FCSM) had significant powers over companies, registrars, and other participants of the securities market. (IFC and U.S. DoC 2004, Part 5, p. 76)

On March 9, 2004 the President signed Decree No. 314 "On the System and Structure of the Federal Executive Authorities." The FCSM was abolished and the Federal Service for Financial Markets (FSFM) took over the functions of the FCSM, certain functions of the Ministry of Finance, the Antimonopoly Ministry and some others. According to the Decree, each federal service has overall responsibility for supervisory and control functions in the relevant sphere of activity. Federal services may issue individual acts within their competence, but are not empowered to issue regulations, unless directly authorized to do so by the President. (White & Case 2004)

According to the International Monetary Fund's assessment in 2003, staffing and resource levels were insufficient to carry out the full mandate of the regulator and this was a particular problem with respect to attracting skilled and experienced staff. In addition, a number of gaps in regulation remained, including a lack of authority over derivatives products and markets, takeover bids and related party transactions. (IMF 2003, p. 52)

However, the Russian authorities asserted that the responsibility for regulation of derivatives was clearly outlined in legislation and that the FCSM was actively regulating trading in these products. The authorities also pointed out that the FCSM did have some authority over related party transactions and take over bids under its general authority to bring legal action against an issuer that is in violation of any law. (IMF 2003, p. 56)

Furthermore, the Central Bank of Russia notes in its 2005 Financial Stability Review that the FSFM continued to consolidate its financial market regulation powers in 2005. In the middle of August it was assigned credit bureaux regulatory powers such as supervision, licensing, control and keeping the register. The FSFM also received some powers of the Commodity Exchange Commission, such as licensing exchange trade management and regulating the activities of professional market participants conducting operations with commodity derivatives. (CBR 2006, p. 22)

4. The regulator should adopt clear and consistent regulatory processes.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

According to International Monetary Fund's assessment in 2003, information on regulatory processes at securities market was generally available to the public. Russian law required that the resolutions and regulations of the Federal Commission for the Securities Markets (FCSM) [subsequently the Federal Service for Financial Markets (FSFM)] be published. In addition, the FCSM published in its monthly Bulletin information on the termination of licenses, administrative penalties, and court decisions against professional securities market makers and their self-regulatory organizations. A periodic report on how overall policy objectives were being pursued and a review of developments and operations in the securities market were provided in the Annual Report (although this is published infrequently). (IMF 2003, p. 68)

Effective use was made of the FCSM website which was available in both Russian and English. Officials made frequent public appearances to discuss securities market developments and FCSM initiatives. In order to establish a clearer and well-defined relationship with the ministries and departments, the FCSM concluded a number of agreements with relevant agencies. These agreements constituted an important step toward enhancing transparency and accountability. (IMF 2003, p. 68)

Though the FCSM was active in consulting industry and provided a great deal of information to the public, it had to improve its attention to transparency, for example, with regular annual public reports. (IMF 2003, p. 52)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Markets (FSFM). (IFLR 2005)

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

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

In the International Monetary Fund's (IMF) assessment in 2003, the assessment team states that the Federal Commission for the Securities Markets (FCSM) had insufficient levels of staffing and there was a particular problem with respect to attracting skilled and experienced staff. In addition, during the 2003 assessment, the IMF recommended that Russian authorities develop confidentiality rules for regulator. (IMF 2003, p. 52)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Market (the FSFM). (IFLR 2005)

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

The International Monetary Fund assessment team conducting the 2003 Financial System Stability Assessment notes that the Russian system makes Self-Regulatory Organizations (SROs) perform various regulatory functions. The supervision of the SROs could be strengthened in order to bring about strong enforcement of market regulation (both issuer and market intermediary activity). (IMF 2003, p. 53)

There are five SROs in the Russian Capital Markets. The National League of Management Companies (NLU) is composed of professional securities market participants who manage investment funds and unit investment funds. The National Stock Market Association (NFA) works in the areas of broker and dealer management of securities as well as depositary activities. The Professional Association of Registrars, Transfer Agents and Depositories (PARTAD) has been a self-regulatory organization of registrars and depositaries since 1997 and a self-regulatory organization of clearing organizations since 2002. The Professional Institute of Placement and Circulation of Equity Instruments (PROFI) is composed of professional securities market participants who conduct broker or dealer activity in the securities market, provide financial consulting services or participate in the placement or circulation of securities. The National Association of Stock Market Participants (NAUFOR) is composed of professional securities market participants. (FSFM website)

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

II

There is insufficient publicly available information as to Russia's compliance with this principle.

The Russian system makes Self-Regulatory Organizations (SROs) perform various regulatory functions. According to the International Monetary Fund's (IMF) assessment in 2003, the supervision of the SROs could be strengthened in order to bring about strong enforcement of market regulation (both issuer and market intermediary activity). Oversight of the SROs required improvement, including an inspection and reporting plan. The supervision approach appeared to be formalistic and duplicative. It was also unclear that the Federal Commission for the Securities Markets (FCSM) had sufficient authority to supervise the Moscow Interbank Currency Exchange with was controlled and operated by the central bank. (IMF 2003, p. 53)

Since March 2004, the functions of the Federal Commission for the Securities Market (FCSM) have been taken over by a new securities authority, the Federal Service for the Financial Market (the FSFM). (IFLR 2005)

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

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

According to the International Monetary Fund's (IMF) assessment in 2003, the Federal Commission for the Securities Market (FCSM) generally had sufficient authority to carry out inspections, investigations, surveillance activities although additional power to investigate market abuse practices was required. However, there were relatively few inspections and those that took place focused on formal requirements rather than quality of information gathering. The number of investigations appeared to be low. The lack of trade reporting in the over-the-counter market (the greater part of the market) impaired effective surveillance of the equity market. (IMF 2003, p. 53)

On March 9, 2004, the President signed Decree No. 314 "On the System and Structure of the Federal Executive Authorities." The FCSM was abolished and the Federal Service for Financial Markets (FSFM) took over the functions of the FCSM, certain functions of the Ministry of Finance, the Antimonopoly Ministry and some others. According to the Decree, each federal service has overall responsibility for supervisory and control functions in the relevant sphere of activity. (White & Case 2004)

9. The regulator should have comprehensive enforcement powers.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

According to the International Monetary Fund's (IMF) assessment in 2003, the Federal Commission for the Securities Market (FCSM) [subsequently the Federal Service for Financial Markets (FSFM)] generally had sufficient authority to carry out enforcement activities although additional power to levy penalties on investment fund management companies and to revoke investment management company licenses, take prompt corrective action against failing intermediaries and sanction market abuse practices was required. In addition, a substantial increase in the amount of fine that can be imposed would improve the FCSM's effectiveness. The practice of enforcing compliance with existing regulations was weak and the number of enforcement actions appeared to be low. Resolving the issue of insufficient funding of the FCSM would have a positive impact effect on the quality of enforcement as well. Enforcement by exchanges was also lacking - there appeared to be a lack of willingness to take action against members and issuers and there were few investigations initiated at the exchanges. (IMF 2003, p. 53)

During the 2003 assessment, the IMF stated that: (1) additional resources for enforcement were required; (2) market abuse laws including criminalization of insider trading and market manipulation rules were required; (3) clear authority over derivatives and take over bid activity should be granted to the FCSM; (4) the FCSM staff required legal protection for actions in good faith; (5) the FCSM should be granted the authority to compel regulated entities to take actions; (6) fine and penalty levels should be increased; (7) self-regulated organizations enforcement activities should be increased and closely monitored by the FCSM through inspections and monitoring. (IMF 2003, p. 55)

On March 9, 2004 the President signed Decree No. 314 "On the System and Structure of the Federal Executive Authorities." The FCSM was abolished and the FSFM took over its functions. According to the Decree, each federal service has overall responsibility for supervisory and control functions in the relevant sphere of activity. (White & Case 2004)

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

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

According to the International Monetary Fund's (IMF) assessment in 2003, the Federal Commission for the Securities Markets (FCSM) [subsequently the Federal Service for Financial Markets (FSFM)] generally had sufficient authority to carry out inspections, investigations, surveillance and enforcement activities although additional power to levy penalties on investment fund management companies and to revoke investment management company licenses, take prompt corrective action against failing intermediaries and investigate and sanction market abuse practices is required. In addition, a substantial increase in the amount of fine that can be imposed would improve the FCSM's effectiveness. The practice of enforcing compliance with existing regulations was weak - there were relatively few inspections and those that took place focused on formal requirements rather than quality of information gathering. The number of investigations and enforcement actions appeared to be low. Resolving the issue of insufficient funding of the FCSM would have a positive impact effect on the quality of enforcement as well. Enforcement by exchanges was also lacking - there appeared to be a lack of willingness to take action against members and issuers and there were few investigations initiated at the exchanges. (IMF 2003, p. 53)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Markets. (IFLR 2005)

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

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

As per International Monetary Fund's assessment in 2003, the legislative framework allowed for information sharing with both foreign and domestic counterparts and a number of information sharing arrangements had been entered into between the Federal Commission for the Securities Market (FCSM) [subsequently the Federal Service for Financial Markets (FSFM)] and foreign securities regulators. There appeared to be limitations on the ability of the FCSM to share confidential information regarding client identity and client transactions, even within the framework of a Memorandum of Understanding (MOU). (IMF 2003, p. 53)

On March 9, 2004 the President signed Decree No. 314 "On the System and Structure of the Federal Executive Authorities." The Decree completely revised the structure of federal executive authorities in Russia: a number of ministries and committees were reorganized, some ministries and federal commissions were abolished and new authorities were established. (White & Case 2004)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Markets (FSFM). (IFLR 2005)

12. 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.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

According to the International Monetary Fund's (IMF) assessment in 2003, a number of information sharing arrangements had been entered into between the Federal Commission for the Securities Market (FCSM) [subsequently the Federal Service for Financial Markets (FSFM)] and foreign securities regulators. In order to establish a clearer and well-defined relationship with the ministries and departments, the FCSM had concluded a number of agreements with relevant agencies. These agreements constituted an important step toward enhancing transparency and accountability. (IMF 2003, p. 68)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Markets. (IFLR 2005)

13. 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.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

The assessment team conducting the International Monetary Fund's 2002 Financial System Stability Assessment note that the legislative framework allowed for information sharing with both foreign and domestic counterparts and a number of information sharing arrangements had been entered into between the Federal Commission for the Securities Markets (FCSM) [subsequently the Federal Service for Financial Markets (FSFM)] and foreign securities regulators. There appeared to be limitations on the ability of the FCSM to share confidential information regarding client identity and client transactions, even within the framework of a Memorandum of Understanding (MOU). (IMF 2003, p. 53)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Markets. (IFLR 2005)

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

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

According to a 2002 report issued by the Organization for Economic Cooperation and Development, there is a good legal and regulatory basis in Russia for obtaining basic information about a publicly listed company. Federal Law No.208-FZ on Joint Stock Companies of December 1995 [amended 2006] contains a list of documents that a joint-stock company is required to make available. Federal Law No.39-FZ on the Securities Market of April 1996 [amended 2006] and numerous regulations by the Ministry of Finance and the Federal Commission for Securities Markets (FCSM) [subsequently the Federal Service for Financial Markets (FSFM)] require additional disclosure. (OECD 2002, pp. 22, 73)

The general trend in securities regulation has been towards expansion disclosure obligations. In particular, there have been substantive changes to disclosure for publicly listed securities. Whereas adherence to the 2001 Corporate Governance Code was previously voluntary, it is now mandatory for many issuers, meaning mandatory disclosure by directors of their ownership of and trading in the issuer's securities. General disclosure rules have also been expanded for all issuers of securities (listed and unlisted), including in respect of all information that might have impact on the value of the securities. (IFLR 2005)

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

EN

In July 2006 the European Bank for Reconstruction and Development (EBRD) published its latest country strategy for the Russian Federation. The strategy paper referred to the 2004 results of the EBRD's Corporate Governance Sector Assessment, under which corporate governance related "laws on the books" were assessed. In this assessment, the Russian Federation was rated as having achieved "high compliance", when compared to the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. (EBRD 2006b, p. 50)

Federal Law No.208-FZ on Joint Stock Companies of December 1995 requires that within any class of shareholders all shareholders have the same voting rights. Federal Law No.39-FZ on the Securities Market of April 1996 requires that all investors have access to information about the voting rights attached to all classes of shares before they purchase. There are no laws in Russia which impose special restrictions on certain classes of shareholders of the company regarding the voting rights and/or procedures at a shareholders meetings. In addition, Securities Law requires the company to disclose company information which is likely to affect stock exchange prices. There are provisions which prevent or punish the trading of shares where the seller or purchase is using important information which has not been provided to the public. (EBRD 2004, p. 2)

Amendments to the Law 'On Joint Stock Companies' in December 2005 have brought about significant improvements in the area of corporate law. The amendments target purchasers of large shareholdings, requiring them to put offers out to tender, and introduce "squeeze out rules", (i.e. a dominant shareholder holding more than 95 % of an open joint stock company's voting shares as a result of a public offer can force the minority shareholders to sell their shares). Recent regulations made some of the provisions of the Corporate Governance Code mandatory, which should raise investors' confidence in the management of Russian companies. (EBRD 2006a, p. 1)

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

ID

All companies listed on the Russian Stock Exchange should submit quarterly financial reports (balance sheet, profit and loss statement and required disclosures) and additional information to the Federal Service for Financial Markets (FSFM) within 30 days after the close of the quarter. As of 2006, such companies were permitted to file their International Financial Reporting Standards (IFRSs) or US GAAP based financial statements in lieu of statutory accounts. In the future, however, they will need to make their existing IFRSs or US GAAP based financials available to the general public. (Ernst & Young 2006, p. 40)

In 1998, the Russian Government adopted a Program for the Reform of Russian accounting in accordance with IFRSs which were designated as the main instrument of the accounting reform. On July 1, 2004 the Ministry of Finance published the "Concept of Mid-Term Development of Accounting and Financial Reporting in Russian Federation." The aim of the Concept is to increase the quality of the reporting information and secure its availability for the users. According to the concept, in the period between 2004-2007 all public interest enterprises, except those which are listed on foreign exchanges and prepare financial statements in accordance with other internationally accepted accounting principles, will be required to use IFRSs in their consolidated accounts. Russian Accounting Standards (RASs) based on the IFRSs and the relevant enforcement infrastructure should be developed during this period. From 2008 to 2010, all public interest enterprises will be required to use IFRSs in the consolidated statements. The possibility of allowing certain enterprises to prepare individual financial statements using IFRSs instead of RASs will be considered. (Concept of Development 2004; PWC 2006, p. 20)

According to a report by PricewaterhouseCoopers, RASs regulate major aspects of accounting, as well as the presentation and disclosure of information (such as accounting policies, fixed assets, intangible assets, inventories, income and expenses, related parties, segment information, government grants and others). The new RASs have introduced fundamental accounting assumptions and requirements, such as going concern, consistency of accounting policies, accrual basis, prudence, substance over form, cost-effectiveness and others, thus bringing Russian practice closer to international practice. Although accounting procedures are gradually becoming more harmonized with IFRSs, there is still a long way to go. Some significant differences continue to exist and in some cases there are no specific RASs that cover certain areas. For example, there are no rules for accounting for the impairment of some assets. Nor is there a specific rule for business combinations. Moreover, some of the adopted standards are based on older versions of the corresponding IFRSs. The Russian versions of the adopted standards are not mere translations of the English language originals but in many cases abbreviated, simplified versions of the original English language IFRSs. There is a timing lag between the time a new international standard is issued and the time that new standard is translated into Russian and adopted as part of the Russian accounting rules. (Gethin 2006, p. 26; McGee and Preobragenskaya 2004, p. 9; PWC 2006, p. 20)

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

As per the International Monetary Fund's (IMF) assessment in 2003, the legislative framework for collective investment schemes is in place with amendments in the works. There are a small number of collective investment schemes in Russia; therefore it is difficult to judge the level of implementation of legal requirements. The IMF recommended that the Federal Commission for the Securities Markets (FCSM) be granted full authority over collective investment schemes including the authority to withdraw licenses from collective investment schemes. (IMF 2003, p. 54)

The Federal Service for Financial Markets (FSFM) was established in accordance with President's Decree No. 314 "On the System and Structure of Federal Executive Branch Agencies," dated March 9, 2004. It took on the controlling and supervising functions of the former FCSM. There are nine Directorates within the FFMS, one takes responsibility for regulation and control over collective investments. (FSFM website)

18. 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.

EN

According to the International Monetary Fund 2003 Financial System Stability Assessment, the legislative framework for collective investment schemes is in place with amendments in the works. (IMF 2003, p. 54)

The Federal Service for Financial Markets maintains that a major advantage of unit investment funds (collective investment schemes) is the principle of division of asset management and keeping. A management company cannot manage unit holders' funds involuntarily or without control. Assets of a unit investment fund are kept at a special organization - a specialized depositary, which must approve any deal involving funds of a unit investment fund, i.e. unit holders' funds. Such a control system is so secure that from the moment unit investment funds appeared in Russia there have been no cases of fraud against unit holders whatsoever. (FSFM website)

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

EN

According to the International Monetary Fund 2003 Financial System Stability Assessment, the legislative framework for collective investment schemes is in place with amendments in the works. (IMF 2003, p. 54)

The Federal Service for Financial Markets (FSFM) claims that unit investment funds are the most transparent entities on the Russian financial market. In accordance with legislative requirements they disclose information on the value of their assets and units daily, this information is published in Kommersant and Vedomosti and is also available on the Internet. Data on the contents and structure of unit investment funds' portfolios are made public every quarter of the year. Many management companies voluntarily place this information on their websites monthly or weekly. (FSFM website)

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

EN

According to the International Monetary Fund 2003 Financial System Stability Assessment, the legislative framework for collective investment schemes is in place with amendments in the works. (IMF 2003, p. 54)

The Federal Service for Financial Markets (FSFM) claims that unit investment funds are the most transparent entities on the Russian financial market. In accordance with legislative requirements they disclose information on the value of their assets and units daily, this information is published in Kommersant and Vedomosti and is also available on the Internet. Data on the contents and structure of unit investment funds' portfolios are made public every quarter of the year. Many management companies voluntarily place this information on their websites monthly or weekly. (FSFM website)

21. Regulation should provide for minimum entry standards for market intermediaries.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

Market intermediaries are subject to licensing and supervision. As per the International Monetary Fund assessment in 2003, although rules on licensing are largely in place, improvement should be made to minimum entry standards (especially the use of background checks and scrutiny of ownership structures). (IMF 2003, p. 54)

According to the findings of the European Bank for Reconstruction and Development's (EBRD) Securities Market Legislation Assessment in 2004, the Russian Federation is a country whose existing securities market legislation (i.e. "law on the books", not how the relevant legislation is being implemented) when assessed against relevant international standards was rated among "medium compliance" countries. The assessment was updated in 2005 and the results confirmed the medium compliance rating. The few changes noted in the legislation mostly relates to the licensing of Market Intermediaries where the powers, including sanctioning of the FSFM have been strengthened. (EBRD 2006a, p. 6)

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

Market intermediaries are subject to licensing and supervision. According to the International Monetary Fund (IMF) assessment in 2003, supervision required strengthening both at the self-regulatory organizations and the Federal Commission for the Securities Markets (FCSM) level; a clear plan of division of labor between the various regulatory bodies was required. (IMF 2003, p. 54)

The IMF recommended that Russian authorities establish the authority to review and approve ownership of market intermediaries and implement capital requirements more appropriately adjusted to risks. (IMF 2003, p. 56)

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

According to International Monetary Fund assessment in 2003, the Federal Commission for the Securities Markets (FCSM) did not have sufficient information or flexibility to act in case of market intermediary financial failing - this had to be remedied both with additional powers and a more robust financial reporting system. In addition, the IMF recommended that FCSM establish an early warning system and contingency plan and be empowered to freeze assets and appoint an administrator. (IMF 2003, p. 54)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Markets (FSFM). (IFLR 2005)

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

EN

All exchanges are subject to licensing and oversight. However, according to the International Monetary Fund (IMF) assessment in 2003, the practical ability of the Federal Commission for the Securities Markets (FCSM) to oversee the Moscow Interbank Currency Exchange (MICEX) was in doubt. The FCSM had an oversight program in place but it would appear that exchange's performance of regulatory responsibilities could be improved. The IMF recommended that Russian authorities implement a rigorous oversight program for exchanges including inspection and reporting requirements and explore incentives for greater transparency in conjunction with the exchanges. (IMF 2003, p. 54)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Markets (FSFM). (IFLR 2005)

The FSFM considered adoption of the special Law "On Exchanges and Exchange Activity" to be applied to stock, currency and futures mercantile exchanges. The law must specify the legal status of exchanges, set shareholder structure requirements and a corporate governance system to make exchanges transparent and attractive for investors. In view of its specific functions (not only to organize trading, but also to make it effective and clean, as well as to protect investors' interests), a stock exchange must receive certain regulatory or pseudo-regulatory powers in relation to traders and issuers. (FSFM website)

26. 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.

EN

The International Monetary Fund's 2003 assessment reports that all exchanges are subject to licensing and oversight. However, according to the assessment, the practical ability of the Federal Commission for the Securities Markets (FCSM) to oversee the Moscow Interbank Currency Exchange (MICEX) was in doubt. The FCSM had an oversight program in place but it would appear that exchange's performance of regulatory responsibilities could be improved. The IMF recommended that Russian authorities implement a rigorous oversight program for exchanges including inspection and reporting requirements and explore incentives for greater transparency in conjunction with the exchanges. (IMF 2003, p. 54)

Since March 2004, the functions of the FCSM have been taken over by a new securities authority, the Federal Service for Financial Markets (FSFM). (IFLR 2005)

In its 2005 Financial Stability Review, the Central Bank of Russia (CBR) acknowledges that the elements of the stock market regulation system that ensure the protection of investors, issuers' access to the market, especially for initial public offerings, and the prevention of insider deals are underdeveloped. As there is no legislative definition of a transaction with financial derivatives, there is no legal protection. (CBR 2006, p. 22)

The FSFM considers an adoption of the special Law "On Exchanges and Exchange Activity" to be applied to stock, currency and futures mercantile exchanges. The law must specify the legal status of exchanges, set shareholder structure requirements and a corporate governance system to make exchanges transparent and attractive for investors. In view of its specific functions (not only to organize trading, but also to make it effective and clean, as well as to protect investors' interests), a stock exchange must receive certain regulatory or pseudo-regulatory powers in relation to traders and issuers. The right of an exchange to regulate traders' operations must prevent price manipulation and insider trading, as well as guarantee credibility of the given trader, thus protecting the interests of its clients and counteragents. In an effort to make an exchange market liquid and price formation fair, traders and investors must always have equal access to exchange trading; professional participants must be obliged to inform an exchange about ex-pit transactions. (FSFM website)

In addition, the Russian government is now considering the breakthrough draft law "On Insider Information," which will establish efficient procedures and mechanisms to set securities prices and create fair and equal conditions for all investors and professional market participants. The draft law also introduces a definition of "insider information" and "insider." (FSFM website)

27. Regulation should promote transparency of trading.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

According to the International Monetary Fund assessment in 2003, transparency in capital markets was weak since the greatest portion of the equity market traded over the counter where there is no trade reporting requirement. Further there was no requirement that a trade in a listed security reported to the exchange or at a price quoted on an exchange - a situation which further compromised transparency and prevention of market abuse. (IMF 2003, p. 54)

The Federal Service for Financial Markets (FSFM) considers an adoption of the special Law "On Exchanges and Exchange Activity" to be applied to stock, currency and futures mercantile exchanges. The law must specify the corporate governance system to make exchanges transparent and attractive for investors. In view of its specific functions (not only to organize trading, but also to make it effective and clean, as well as to protect investors' interests), a stock exchange must receive certain regulatory or pseudo-regulatory powers in relation to traders and issuers. The right of an exchange to regulate traders' operations must prevent price manipulation and insider trading, as well as guarantee credibility of the given trader, thus protecting the interests of its clients and counteragents. The right of an exchange to regulate traders' operations must increase the quality of traded securities, guarantee timely information disclosure by issuers, and guarantee control over adherence to corporate governance principles. (FSFM website)

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

The Federal Service for Financial Markets (FSFM) acknowledges that there are no penalties for insider trading in Russia now, though every market participant can recall striking examples of such trading. The existing legislation does not define "insider" and "inside information." The law "On Securities Markets" contains a definition of "office information" and prohibits trading based on it. This notion, however, is limited and fines for using such information are insufficient. Moreover, the Federal Service for Financial Markets hardly has any powers to disclose such violations. This situation does not correlate with the world practices. For the Russian securities market to function effectively, the country needs to adopt laws regulating insider trading and price manipulation, to increase the confidence of domestic and foreign investors, and to secure fair competition. Drafting the law "On Inside Information and Market Manipulation" is a top priority on the FSFM's legislative agenda. (FSFM website)

As for price manipulation, it is partially regulated by the existing law "On Securities Markets." This regulation is inadequate, however. The definition is very limited, the powers of the FSFM on disclosing and proving cases of manipulation are insufficient, and liability for such violations is limited to suspending or canceling licenses of professional market participants. There are no administrative fines let alone the mention of criminal liability. (FSFM website)

In its 2005 Financial Stability Review, the Central Bank of Russia (CBR) also acknowledges that the elements of the stock market regulation system that ensure the protection of investors, issuers' access to the market, especially for initial public offerings, and the prevention of insider deals are underdeveloped. As there is no legislative definition of a transaction with financial derivatives, there is no legal protection. (CBR 2006, p. 22)

In 2003, the regulator initiated amendments to the Criminal Code to introduce criminal liabilities for price manipulation and insider trading. To further address securities fraud, the Decree "On the Adoption of Regulations for the Procedure to Inspect the Activities With Signs of Price Manipulation in the Securities Market" was enacted. In addition, Russian government is now considering the breakthrough draft law "On Insider Information," which will establish efficient procedures and mechanisms to set securities prices and create fair and equal conditions for all investors and professional market participants. (FSFM website)

The FSFM considers adoption of the special Law "On Exchanges and Exchange Activity" to be applied to stock, currency and futures mercantile exchanges. The law must specify the legal status of exchanges, set shareholder structure requirements and a corporate governance system to make exchanges transparent and attractive for investors. In view of its specific functions (not only to organize trading, but also to make it effective and clean, as well as to protect investors' interests), a stock exchange must receive certain regulatory or pseudo-regulatory powers in relation to traders and issuers. The right of an exchange to regulate traders' operations must prevent price manipulation and insider trading, as well as guarantee credibility of the given trader, thus protecting the interests of its clients and counteragents. The FSFM believes that the possibility of an exchange to respond immediately to violations committed by issuers or traders will strengthen the common system of stock market regulation. (FSFM website)

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

II

There is insufficient publicly available information regarding Russia's compliance with this principle.

As per the International Monetary Fund assessment in 2003, large exposure monitoring and risk management were weak as a result of a lack of coordination among entities with information regarding intermediary exposure, and by a lack of derivatives regulation. (IMF 2003, p. 54)

The Federal Service for Financial Markets (FSFM) considers adoption of the special Law "On Exchanges and Exchange Activity" to be applied to stock, currency and futures mercantile exchanges. The law must stipulate the requirements to the exchange trade infrastructure for capitalization and a system of risk sharing. These requirements will allow increasing the infrastructure's reliability as well as minimizing corresponding risks of investors and traders. It is necessary to increase requirements for capitalization of brokers and dealers, and also to establish prudential supervision over them. If these requirements are enforced, it will be possible to transfer from a less profitable clearing system with full preliminary depositing to a more effective system with partial preliminary depositing. (FSFM website)

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

ID

Russia's securities markets and supporting clearing and settlement infrastructure (including custody and registration) are extremely fragmented, with different pieces of the infrastructure being used by different sub-sets of market intermediaries for processing trades in particular stocks or groups of stocks. However, according to the International Monetary Fund assessment in 2003, the clearing and settlement system appeared to be adequate. (IMF 2003, p. 47)

According to the Federal Service for Financial Markets (FSFM), discussions have taken place for many years in Russia on the necessity of creating an institution that has been established in practically all developed stock markets - the Central Depositary. The establishment of this market institution will allow a variety of problems to be solved. First, it will guarantee better protection of ownership rights to securities in comparison with the current system, reduce a risk that investors' rights be violated in corporate conflicts and eliminate the problem of "double registers." Second, the Central Depositary's operation will allow settlements for transactions with securities to be both simplified and expedited. Third, through centralization of the DEPO accounts keeping and use of the advanced technology, the Central Depositary will be able to make client service less costly, which will reduce expenses for stock market participants. (FSFM website)

The Central Bank of the Russia maintains that the bank is continuing to upgrade its real-time gross settlement (RTGS) system for large payments. Specifically, it has completed the development of a proto-type RTGS on the basis of international best practice. The RTGS development committee has drafted a document containing a high-level description of the main elements of the system and its structure, setting requirements for the participants in the system and its functions, as well as establishing the procedure for effective payments. The main unresolved problem is improving the clearing and settlement infrastructure for securities operations, which is too fragmented. Most settlements on the exchange and over-the-counter markets are serviced by two securities depositories and a great number of custodians and registrars. The Bank of Russia, the FSFM and market participants will continue to organize a single national securities depository. The bank believes that the implementation of the Central Depository target program, which is to be drawn up by 2007, may make a major contribution to the stock market's development and stability. (CBR 2006, pp. 24, 22)

The FSFM considers adoption of the special Law "On Exchanges and Exchange Activity" to be applied to stock, currency and futures mercantile exchanges. The law must stipulate the requirements to the exchange trade infrastructure for capitalization and a system of risk sharing. These requirements will allow increasing the infrastructure's reliability as well as minimizing corresponding risks of investors and traders. (FSFM website)