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New law on protection of investor rights

In an attempt to bolster legal protection for investors, Russia has adopted the new Law on Protection of the Rights and Interests of Investors on the Securities Market (Law No. 46-FZ, dated March 5 1999). The law enacts a series of technical measures addressing a variety of issues that have plagued investors. These include:

A rule that newly-issued shares may not be sold or transferred until they are fully paid for, and the report concerning their issuance has been registered with the Federal Securities Market Commission (the Securities Commission). (Article 5.2.)

A requirement that closed subscriptions of shares (eg, private placements) should be approved by at least two-thirds of shareholders. (Article 5.4.) However, the new rule will not become effective until a corresponding change is made in the Law on Stock Companies. Certain exceptions also apply. This step was adopted in response to several well-publicized, massive dilutions (previously requiring only board approval) conducted by large Russian oil companies.

Persons responsible for signing a securities prospectus, including auditors and appraisers, may be held jointly and severally liable for damages to investors as a result of incorrect or misleading information in the prospectus (Article 5.5).

Substantial fines may be imposed for violation of various securities rules, including disclosure requirements (see discussion below) (Article 12).

The authority of the Securities Commission to initiate and participate in securities lawsuits is clarified and expanded. (Article 14).

Disclosure Rules.
Perhaps spurred by the new Law, Russian companies are increasingly complying with securities disclosure requirements. Basic disclosure rules first appeared in the 1996 Law on the Securities Market (Law No. 39-FZ, dated April 22 1996, Article 30) and have been supplemented by more detailed regulations adopted last year. The disclosure requirements may apply to both open and closed stock companies, under certain circumstances (generally, whenever the company has registered a prospectus in connection with the issuance of securities).

In particular, the regulations require public disclosure in connection with new issuances (Commission Resolution No. 9, dated April 20 1998), quarterly reporting (Commission Resolution No. 31 dated August 11 1998), and other "significant events" (including all decisions of shareholders, designated decisions of the board of directors, changes in management, substantial changes in shareholdings, affiliate transactions, and changes in asset values or profits/losses by more than 10%) (Commission Resolution No. 32, dated August 12 1998.) Issuers are required to report significant events within five business days, by notice to the Securities Commission. The reports are publicly available and published in the Supplement to the Commission Bulletin (which makes interesting reading).

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