Administrative liability in the Russian Federation for violations of corporate and capital markets legislation | Practical Law

Administrative liability in the Russian Federation for violations of corporate and capital markets legislation | Practical Law

Administrative liability in the Russian Federation for violations of corporate and capital markets legislation

Administrative liability in the Russian Federation for violations of corporate and capital markets legislation

by Igor Ostapets, Simon H.P. Morgan and Dmitry Lapshin, White & Case LLP
Published on 04 Aug 2009 • Russian Federation
This Special Update provides a brief overview of amendments introduced to the Administrative Offences Code and the Securities Market Law by Federal Law No. 9-FZ, dated 9 February 2009 (Law).
The Law was signed by the President on 9 February 2009 and entered into force on 13 April 2009. It does not only strengthen administrative liability for violating certain provisions of the Joint Stock Companies Law, Limited Liability Companies Law and also Securities Market and Investment Funds legislation, but also amends a number of provisions of the Securities Market Law and adds new types of offences to the Administrative Offences Code. The Law seeks to protect the rights of investors and to prevent fraud and abusive practices by managers of Russian companies.

Offences subject to administrative liability

The Law specifies in more detail the criteria of offences that are subject to administrative liability. It additionally strengthens the administrative liability that may be imposed for violating the statutory requirements with respect to, in particular:
  • The procedure for issuing securities.
  • The transfer of rights to securities.
  • Information disclosure.
  • The use of insider information.
  • Maintaining the register of securities' owners.
The Law also introduces new types of offences which incur administrative liability, including:
  • Breach of the terms and procedure for document storage, set out by the Joint Stock Companies Law, Limited Liability Companies Law and Securities Market and Investment Funds legislation.
  • Violation of statutory requirements for the activities of professional participants on the securities' market.
  • Price manipulation on the securities market.

Price manipulation on the securities market

The Law strengthens administrative liability for price manipulation, as well as amending the Securities Market Law to specify in more detail the criteria of this offence. In particular, the Law defines price manipulation as acts committed by one or more persons that entail the increase, decrease and/or support of securities' prices, supply and/or demand, or trading volume. Such acts include the distribution of false information, trading with considerable deviation from the normal/regular trade price and other specific securities trade operations.
However, the above actions (apart from the distribution of false information) are not considered price manipulation, if performed, in particular:
  • In the interests of the securities issuer and aimed at supporting the securities' prices with respect to:
    • a public offer of securities if there is a risk of decrease of the securities' prices;
    • the redemption or acquisition of shares in cases where required by federal laws; or
  • By federal, local or municipal authorities when implementing the official state monetary policy or managing the state and municipal debt.
The penalties for price manipulation include:
  • Suspension or revocation of the professional participant's licence (as a result of the FSFM inspection).
  • In case of professional participants of the securities market, administrative fines and/or disqualification (see Penalties).

Offences related to preparing and holding general shareholders' meetings

The Law introduces to the Administrative Offences Code a new series of administrative offences related to the violation of statutory requirements with respect to the procedure for calling, preparing and holding general meetings of shareholders of joint stock companies, participants of limited liability companies and stockholders of closed joint stock investment funds.
It covers a number of offences, from unlawful refusal to call the meeting and violation of the term and procedure for notification, to violation of quorum requirements and the procedure for documenting the meeting.

Penalties

Administrative fines are levied for all types of the violations listed above.
The Law substantially increases the amounts of administrative fines. In particular, the maximum amount of administrative fine that may be imposed on:
A legal entity is RUB1,000,000 (about US$30,000) (previously RUB50,000).
An officer is RUB 50,000 (about US$1,500) (previously RUB5,000).
In addition to administrative fines, officers may be subject to disqualification for up to two years. However, the disqualification may be imposed only for certain types of offences, including, in particular, the use of insider information and non-disclosure of information on the securities' market.

Persons subject to administrative liability

The Law extends the list of persons that may be subject to administrative liability for the above offences. It now includes members of the boards of directors, liquidation committees, audit commissions, counting boards, and so on, who are not generally considered company officers.
Members of these company bodies who voted against resolutions adopted in violation of the statutory requirements (in case of offences related to preparing and holding general meetings of shareholders/participants) will not be liable though.
Individuals may also be subject to administrative liability, even when they are not company officers.