## _cr16304

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---

### Key developments and context
- Central Bank of the Russian Federation (CBR) completed a two-year process absorbing the previous standalone regulator and 1,300 staff.
- CBR assumed supervisory functions across disparate markets and a developmental role for nonbank financial markets emphasizing proportionate regulation and optimization of regulatory burden.
- IOSCO Principles assessment conducted February 3–16, 2016 by Richard Pratt and Richard Britton (2010 Principles; Methodology adopted 2011 and updated 2013). Principle 38 was not assessed.

### Executive summary — overall assessment
- CBR needs significant work to approach good international practice; many IOSCO Principles show departures from requirements.
- Causes of noncompliance observed:
  - Absence of specific requirements in the legal framework.
  - Insufficient implementation in practice.
  - Complex, highly detailed, overlapping, and in some cases inconsistent legislative provisions that lack overarching duties required by IOSCO.
- Positive elements: daily supervisory work and policy development show strengths, but substantial further work required for full compliance.

### Priority regulatory issues and client-facing concerns
- Conflicts of interest identification and proactive management: current approach largely reactive; Key Question 1 (ongoing identification/evaluation of conflicts) rated Not Implemented.
- Management standards in professional market participants need improvement; internal controls regulation lacks obligations to:
  - conduct a risk assessment;
  - prepare risk-based policies and procedures;
  - develop management information systems for monitoring effectiveness;
  - train staff on risk appetite; and
  - re-evaluate policies at least annually.
- Creation of legal gateways enabling supervisors to provide guidance on CBR reasonable expectations (components of RM and internal control systems, fair treatment of clients).
- Client profiling and suitability:
  - Current limited criteria fail to ensure unsophisticated retail clients are advised on and sold products meeting personal needs.
  - No general statutory obligation to obtain comprehensive client information; investment manager profiling requirements (Investment Management Regulation 482) apply only to investment managers.
- Disclosure and investor information:
  - Need improvements in prospectus and continuing disclosure regimes; only just over 1 percent of disclosures invoke the “any other matter” catch-all.
  - Need easy-to-understand disclosure documentation for unit investment funds retaining sufficient accurate information for retail investors.
  - Retail investor base small; improved disclosure and investor protection could increase participation.

### Enforcement, resourcing, and supervisory practice
- CBR oversight covers 19,000 nonbank licensees across the financial sector.
- Inspection resources: 250 inspectors.
  - 2014: 97 scheduled/routine inspections and 499 unscheduled inspections (investigations into complaints or allegations) for the nonbank regulated financial sector.
  - Inspectors dedicated to asset-side and offsite supervision; no dedicated capital markets specialists in inspection team at time of assessment.
- 2015 enforcement snapshot (professional securities firms):
  - 91 companies had licenses cancelled.
  - 118 persons had qualification certificates cancelled (banned for three years).
  - 96 administrative penalties imposed (other counts in report cite 228 or 96; both figures appear in source sections).
- Trend: number of intermediaries fell to 826 by beginning of 2016, a reduction of 18.7 percent over the year.
- Conclusion: CBR will need additional resources and greater use of supervisory tools other than inspections to conduct a fully effective enforcement regime.

### Market structure — intermediaries, concentration, and AUM
- Intermediaries licensed by CBR include brokers, dealers, investment managers, custodians, and registrars; investment advisers not separately licensed.
- As of January 21, 2016, totals reported:
  - Broker: 624
  - Dealer: 641
  - Investment Manager: 533
  - Depository: 498
- NAUFOR data: 59.7 percent of licensees held licenses as brokers, dealers and investment managers; of these, 65 percent also had licenses as depositories.
- Exchange trading concentration (2014):
  - 536 organizations traded on exchanges; top ten firms accounted for 63.9 percent of trading volume.
  - CBR most active trader in non-government securities at 21.4 percent share.
- Collective investment schemes (unit investment funds) — end-2014 and 3Q2015:
  - 1,584 unit investment funds at end-2014; 1,542 as of 3Q2015 (decline of 2.3 percent from 2013).
  - Assets under management (AUM) decreased by 3.1 percent to RUB 569 billion (470 as of 3Q 2015).
  - AUM of open and interval funds decreased by 24 percent to RUB 92.6 billion.
  - AUM represented 0.13 percent of GDP.
  - Closed-end funds comprised 72 percent of total unit investment funds.
  - End-2014: AUM of the ten largest management companies made up 84.1 percent of the market of open and interval funds.
  - Top asset managers (AUM in millions of rubles, Share in percent, Number of Funds):
    - Sberbank Asset Management CJSC — AUM 20,074.0 — Share 21.9 — Number of Funds 19
    - Raiffeisen Capital LLC — AUM 16,304.1 — Share 17.8 — Number of Funds 18
    - URALSIB LLC — AUM 8,933.9 — Share 9.8 — Number of Funds 19
    - Alfa-Capital LLC — AUM 7,706.6 — Share 8.4 — Number of Funds 17
    - Trust Investment Company, LLC — AUM 6,918.7 — Share 7.6 — Number of Funds 3

### Moscow Exchange Group (MEG) and market metrics (2010–14, 2014 specifics)
- MEG operates equities, bonds, derivatives, FX, money markets, precious metals, National Settlement Depository, and National Clearing Centre; formed December 2011 by MICEX and RTS merger.
- Shareholder stakes (as of November 2014):
  - CBR: 11.75 percent
  - Sberbank: 9.9 percent
  - Vnesheconombank: 8.4 percent
  - EBRD: 6.1 percent
  - Shengdong Investment Corporation: 5.6 percent
- Market behaviour and liquidity (2014):
  - Turnover ratio of domestic share market: 36.0 percent.
  - Domestic share market liquidity decreased by 2.6 times compared with the maximum in 2009.
- Equity market capitalization (in billions of rubles; 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
- Number of listed companies on MEG:
  - 2011: Share Issuers 320; Share Issues in Quotation Lists 119
  - 2012: Share Issuers 275; Share Issues 118
  - 2013: Share Issuers 273; Share Issues 110
  - 2014: Share Issuers 254; Share Issues 106
  - Note: 30,360 open joint-stock companies exist; less than one percent are represented on the stock exchange.
- Bond and repo market (2014 highlights):
  - New corporate bond issues totaled RUB 1.8 trillion, +6.6 percent vs prior year; 68 percent OTC.
  - Exchange transactions in corporate bonds: RUB 4.3 trillion, 30 percent lower than in 2013.
  - Government bond issues traded on exchanges grew 26 percent to RUB 4.7 trillion, 6.6 percent of GDP.
  - Exchange repo transactions: RUB 183 trillion, 10 percent lower than in 2013; share of direct repos with CBR reached 55 percent at year-end.
- Derivatives (2014):
  - Value of trading in futures contracts for securities and stock indices: RUB 28,929 billion, -8.2 percent versus 2013.
  - Proportion futures/options: 87 percent futures, 13 percent options.
- ETFs:
  - Trading in investment units on MEG: RUB 177.3 billion, +28.6 percent vs 2013.
  - ETF aggregate transactions grew seven times to RUB 3.5 billion; ETFs ~2 percent of investment units trading value.

### Legal and regulatory framework — key systemic issues
- Legislative instability and inconsistency:
  - Securities Law amended five times in 2015; new/amended laws do not always repeal previous provisions, creating overlap/inconsistency (example: SRO law effective January 2016 without repealing SRO-related articles in Securities Law and Investment Funds Laws).
  - Provisions on same subject spread across many instruments (issuers’ obligations appear in various laws and Civil Code).
  - Varying drafting level across laws creates inconsistent confidentiality duties and licensing powers.
  - Detailed, micromanaging instruments exist (e.g., legally binding instructions on quarterly report distribution) that can inhibit innovation and distract firms from principle-based compliance.
- Consequences:
  - Increased compliance costs to track changes and overlaps.
  - Some legally binding provisions cannot be complied with (e.g., basic SRO standards absent while law makes them mandatory).
  - Detailed rules may miss essential system requirements (risk assessment, management information systems, conflicts management).
- CBR principles for resolving inconsistencies: later law overrides former law; more specific law overrides general law; courts favor interpretations that restrict liberty least.

### Summary of IOSCO principle implementation — selected grades and notable assessments
- Principle 1 (Responsibilities of the Regulator): BI
- Principle 2 (Independence and accountability): PI
- Principle 3 (Powers, resources, capacity): BI
- Principle 4 (Regulatory processes): FI
- Principle 5 (Staff standards): BI
- Principle 6 (Systemic risk): FI
- Principle 7 (Perimeter review): BI
- Principle 8 (Conflicts of interest): NI
- Principle 9 (SRO oversight): NI
- Principle 10 (Inspection, investigation, surveillance powers): FI
- Principle 11 (Enforcement powers): BI
- Principle 12 (Effective enforcement and compliance): NI
- Principle 13 (Authority to share information): PI
- Principle 14–15 (Information sharing & assistance): FI
- Principle 16 (Disclosure by issuers): NI
- Principle 17 (Fair treatment of securities holders): PI
- Principle 18 (Accounting standards): PI
- Principles 19–21 (Auditor oversight/independence/standards): FI/PI/FI
- Principle 22 (CRAs): NI
- Principle 23 (Other evaluative services): NI
- Principles 24–27 (Collective investment schemes): mixed PI/FI/NI/FI/FI; Principle 26 assessed Not Implemented; Principle 27 Fully Implemented
- Principle 28 (Hedge funds): BI / Broadly implemented
- Principles 29–31 (Market intermediaries entry/prudential/internal): PI/NI/NI
- Principle 32 (Failure procedures): NI
- Principle 33 (Authorization of trading systems/exchanges): FI
- Principle 34 (Ongoing supervision of exchanges): PI
- Principle 35 (Transparency of trading): FI
- Principle 36 (Detecting/deterring manipulation): BI
- Principle 37 (Large exposures and market disruption): PI
- Principle 38 (Securities settlement systems and CCPs): Not assessed

### Key quantitative observations (exact figures preserved)
- CBR oversight: 19,000 nonbank licensees.
- Inspection staff: 250 inspectors.
- 2014 inspections (nonbank regulated financial sector): 97 scheduled and 499 unscheduled inspections.
- Intermediaries total at start of 2016: 826 (reduction of 18.7 percent over the year).
- Unit investment funds end-2014: 1,584; 3Q2015: 1,542.
- AUM end-2014: RUB 569 billion (470 as of 3Q 2015); open/interval funds AUM: RUB 92.6 billion.
- AUM share of GDP: 0.13 percent.
- Just over 1 percent of disclosures are in the “any other matter” category (2015: 2,814 of 243,000 material fact disclosures).
- MEG equity capitalization 2014: 23,155.6 (billions of rubles); 517.3 (billions of U.S. dollars (Estimate)); Capitalization as percent of GDP: 32.6.
- Repo exchange transactions 2014: RUB 183 trillion.
- Suggested prudential reporting triggers (recommended): report deterioration of excess capital of 50 percent since last report; report to CBR if capital falls below 120 percent of the minimum.
- Suggested client account reconciliations (recommended): client money reconciled daily; client assets reconciled weekly for high-intensity trading clients, monthly for other clients, quarterly for clients not trading for three months.
- Retention of records recommended: five years.
- FSD threshold of concern in practice: single exposure which equals or exceeds 100 percent of an entity’s own funds (assessors recommend reducing possibly to 25 percent).

### Selected priority recommendations and action plan (preserving recommended actions verbatim/intent)
- Simplify and rationalize the regulatory framework consistent with draft Guidelines for 2016–18.
- Consider legal protections (immunity) for CBR staff performing regulatory functions; reconsider Ministers’ right to attend Board meetings.
- Review the budget-setting role of the National Financial Board to strengthen CBR operational independence.
- Codify staff professional standards into a comprehensive Code of Professional Ethics; reassess two-tier staff restrictions.
- Formalize perimeter review processes and assign senior responsibility; provide specialized training (e.g., detection of Ponzi schemes).
- Establish proactive processes to identify and manage conflicts of interest and misaligned incentives; review remit of remuneration instruction and consider mandatory extension to broker dealers and fund managers.
- Amend laws and SRO framework to ensure SROs’ primary purpose includes investor protection, require SRO internal rules approval by CBR, grant CBR oversight and inspection powers over SROs, and require SRO record-keeping for five years.
- Introduce an overriding record-keeping obligation in Securities Law, Investment Funds Law, and Organized Trading Law with five-year retention.
- Seek AML Law amendment to require identification of beneficial owners and to refuse to act when beneficial owner cannot be identified.
- Allocate sufficient resources for a risk-based, routine inspection program; commence regular onsite inspections of exchanges (first onsite MOEX inspection emphasized).
- Amend CBR Law to permit unsolicited sharing of confidential information with foreign regulators; reconcile Investment Funds Law confidentiality with disclosure needs.
- Amend Securities Law to impose effective obligation to disclose any material fact reasonably expected to affect security price; move the “50 detailed matters” into Disclosure Regulations and refine content to exclude routine items and include material changes in prospects, risks, major contracts, and similar items.
- Strengthen shareholder protections (Joint Stock Company Law) on acting in concert thresholds, general meeting information, and liquidation entitlements.
- Continue progressive IFRS implementation and require IFRS accounts be basis for prospectus and periodic narrative disclosures.
- Finalize CRA regulations so CRA Law can be implemented and CRAs registered; include record-keeping, resource, and integrity requirements.
- Strengthen entry and licensing criteria for intermediaries (fitness, integrity, ability to impose license conditions), bring investment advice into regulation.
- Implement risk-based capital and liquidity requirements for securities firms; require daily capital calculations, auditor opinions on capital sufficiency, and reporting triggers (50 percent deterioration; below 120 percent of minimum).
- Impose statutory obligations on securities firms to act with due care; place compliance responsibility on management; require risk assessments, tailored policies, annual reviews, client suitability checks, written client agreements, effective client money segregation and reconciliations.
- Amend Insolvency Law to allow CBR to appoint provisional administrators and develop detailed contingency plans and tested procedures for intermediary failure.
- Work with MOEX on supervisory priorities including disciplinary record and exchange member/listed company discipline.
- Develop MoU and enhanced cooperation between Department for Market Manipulation and Division F; review exemptions in Insider Trading Law and consider trading limits to protect investors.
- Test fund failure readiness via “war game” exercises; monitor leveraged funds closely and intensify supervision if systemic characteristics emerge.

### Collective investment schemes and specialized depositaries — implementation highlights
- Legal forms, investor rights, segregation and safekeeping:
  - UIF assets must be recorded and held in safekeeping of an SD (Article 42.1, Article 42.4); SD jointly liable with MC for failures (Article 42.5).
  - SD responsibilities and regulation set out in Regulation No. 474-P, Regulation No. 04-5/ps, and Order No. 08-17/pz-n.
  - SD independence required in law but SD can be in same group as MC; assessors recommend high-intensity supervision or legal amendment for actual independence.
- Disclosure, valuation and redemption:
  - Disclosure regime exists but lacks general obligation to provide investors with easy-to-understand material to evaluate suitability; Principle 26 assessed Not Implemented.
  - Valuation framework: Direction No. 3758-D requires fair value measurement in line with IFRS 13; MC and SD must agree valuation methodology and perform daily NAV for open UIFs; Principle 27 assessed Fully Implemented.
  - Redemption and suspension rules established (timings, 10-day payment max, suspension triggers including NAV decline >10 percent in three days).
- Supervision of MCs and SDs:
  - Offsite supervision department for CIS comprises 75 staff; usual planned onsite inspections modest: 6–7 MCs and 2–3 SDs annually; assessors consider frequency insufficient.
  - Offsite uses traffic-light classification for largest MCs: 0 red; 30 yellow; 15 green.

### Insolvency, market exit, and contingency preparedness
- Insolvency Law (Law 127) contains financial organization procedures (Articles 183.x) allowing administrators and provisional administrators; CBR currently lacks a tested contingency plan and early warning systems.
- Assessors: No documented contingency plan, no tested procedures for intermediary failure, and limited pre-default intervention powers — Principle 32 rated Not Implemented.
- Recommendations: amend Insolvency Law to enable provisional administrator appointment earlier, strengthen administrator powers (transfer client accounts, restrict intermediary activities), and develop detailed contingency plans and periodic testing.

*Source: _cr16304 - EXECUTIVE SUMMARY (IMF staff assessment and FSAP mission materials).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Key developments and context
- The Central Bank of the Russian Federation (CBR) completed a two-year process of assuming the powers and functions of the previous standalone regulator of the securities markets and the insurance industry, including absorbing 1,300 new staff.
- CBR has taken on supervisory functions across a disparate group of markets and professional market participants and has also assumed a developmental role for nonbank financial markets with emphasis on proportionate regulation and optimization of regulatory burden.
- The assessment of IOSCO Principles implementation was conducted February 3–16, 2016, as part of the FSAP by Richard Pratt and Richard Britton using the IOSCO Principles and Methodology (2010 Principles; Methodology adopted 2011 and updated 2013). Principle 38 was not assessed.

### Overall assessment observations
- CBR needs to accomplish significant work to approach good international practice as a securities regulator; many IOSCO Principles show departures from requirements.
- Causes of noncompliance observed:
  - Absence of specific requirements in the legal framework.
  - Insufficient implementation in practice.
  - Complex, highly detailed, overlapping, and in some cases inconsistent legislative provisions that lack overarching duties required by IOSCO.
- Positive elements were observed in daily supervisory work and policy development, but substantial further work is required for full compliance.

### Priority regulatory issues highlighted
- Further initiatives required in:
  - Conflicts of interest identification.
  - Improving management standards in professional market participants.
  - Creation of legal gateways enabling supervisors to provide guidance on CBR’s reasonable expectations (including necessary components of RM and internal control systems and fair treatment of clients).
- Client-facing rules:
  - Current limited criteria for customer profiling fail to ensure clients, particularly unsophisticated retail clients, are advised on and sold products that meet their personal needs.
  - Need improved checks and balances within licensees.
- Disclosure and investor information:
  - Need improvements in prospectus and continuous disclosure regimes for listed companies.
  - Need easy to understand disclosure documentation for unit investment funds that still provides sufficient and accurate information for retail investors.
  - Retail investor base is small; improved disclosure and investor protection could increase participation.

### Enforcement and resourcing
- CBR oversight covers 19,000 nonbank licensees across the financial sector.
- Inspection resources: about 250 members of inspection team.
  - In 2014, scheduled/routine inspections covered just 97 licensees.
  - 499 unscheduled inspections were carried out (investigations into complaints or allegations).
- The reduction in number of intermediaries and shift to reliance on SROs:
  - Move to place more responsibility on self-regulatory organizations (SROs) may reduce CBR burden in the long term but increase it in the short term while the new regime is developed.
- Conclusion: CBR will need additional resources and greater use of supervisory tools other than inspections to conduct a fully effective enforcement regime.

### Other transitions and implementation challenges
- Accounting standards:
  - Move to International Financial Reporting Standards (IFRS) is underway while requirement to publish accounts according to Russian Accounting Standards (RAS) remains.
- Insider trading and market manipulation:
  - Investors will expect results from the new law in the form of criminal prosecutions presented in court in the near term.

---

### INTRODUCTION

### Assessment scope and sources
- Assessment period: February 3–16, 2016.
- Assessors: Richard Pratt and Richard Britton (external Monetary and Capital Markets Department experts).
- Context: Last IOSCO assessment conducted in 2011 when FSFM was the statutory regulator; FSFM powers and functions were subsumed into CBR in September 2013 with integration completed in 2015.
- CBR’s three-year strategy (2016–18) goal: create conditions for growth of the financial industry, including “enhancing financial market regulation, inter alia through proportional regulation and optimization of the regulatory burden on financial market participants.”
- Information sources used:
  - Review of relevant laws, regulations, directions, instruction codes, and other documents provided by CBR.
  - Bilateral discussions with senior CBR staff and a CBR self-assessment.
  - Meetings in Moscow 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 market participants including the Moscow Stock Exchange.

---

### REGULATORY STRUCTURE

### Institutional framework and legal basis
- CBR is supervisor and regulator of the financial services sector and the central bank, established under Federal Law No. 86-FZ of July 10, 2002, “On the CBR” (Central Bank Law).
- Transfer of powers from FSFM to CBR 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.”
- CBR powers include:
  - Governance and management, staff hiring and remuneration policies.
  - Acting as central bank and conducting monetary policy.
  - Overseeing payment systems.
  - Conducting integrated supervision of the financial services sector.
  - Supervising conduct of takeovers and mergers of companies that have issued securities to the public.
- Other government-appointed bodies with roles:
  - Ministry of Economic Development (MED): administers Joint Stock Companies Act; disclosure requirements for companies offering securities to the public are CBR’s responsibility.
  - Ministry of Finance (MoF): responsible for setting accounting and auditing standards; relies on National Organization for Reporting Standards and the Audit Council for advice.
  - Enforcement of audit standards: Federal Financial and Fiscal Service (for public interest companies) and SROs (for all audit firms); SROs of auditors supervised by MoF.
  - Federal Anti-Monopoly Service: can intervene in markets supervised by CBR.

---

### MARKET STRUCTURE

### A. Market Intermediaries — licensing and trends
- Intermediaries licensed by CBR: brokers, dealers, investment managers, custodians, and registrars. Investment advisers are not separately licensed. Underwriting is encompassed within brokering and dealing.
- Most intermediaries hold multiple licenses:
  - NAUFOR: 59.7 percent of licensees held licenses as brokers, dealers and investment managers; of these, 65 percent also had licenses as depositories.
- As of January 21, 2016, there were 826 brokers, dealers, asset managers and custodians, most with multiple licenses.
- Table 1. Securities Licensees (as reported)
  - Broker: 624
  - Dealer: 641
  - Investment Manager: 533
  - Depository: 498
  - Source: CBR.
- Long-term trend: number of intermediaries declined substantially (figure data points preserved in original figure but summarized here):
  - By beginning of 2016 total intermediaries fell to 826, a reduction of 18.7 percent over the year.
- Trend in licences issued and cancelled: since 2010 the number of licences cancelled has exceeded those granted.
- Exchange trading participation and market concentration (2014):
  - NAUFOR: 536 organizations traded on exchanges in 2014; top ten firms accounted for 63.9 percent of trading volume (up from 61.9 percent in 2013).
  - Most active trader in non-government securities: CBR, accounting for 21.4 percent of total turnover, down from 22.7 percent in 2013.
  - CBR share by segment:
    - Corporate bonds: 32.9 percent.
    - Shares: 3.4 percent.
  - Sberbank Group:
    - Shares market: 15.5 percent (most significant trader).
    - Corporate bonds: 10.0 percent (second largest).
- Table 2. Top Government Securities Traders (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 (unit investment funds)
- At end-2014: 1,584 unit investment funds (1,542 as of 3Q2015), a decline of 2.3 percent from 2013.
- Changes by fund type (2014):
  - Open-end mutual funds (retail-focused) decreased by 5.5 percent.
  - Closed-end mutual funds decreased by 2.2 percent.
  - Closed-end funds comprised 72 percent of total unit investment funds.
- Assets under management (AUM):
  - AUM decreased by 3.1 percent to RUB 569 billion (470 as of 3Q 2015).
  - AUM of open and interval funds decreased by 24 percent to RUB 92.6 billion.
  - AUM represented 0.13 percent of GDP.
- Structural changes (2014):
  - Mixed investment funds became the largest group, comprising 63.9 percent of the total net asset value (NAV) of open and interval funds.
- Historical and concentration trends:
  - Since 2007, share of the ten largest management companies of total AUM has risen.
  - End-2014: AUM of the ten largest management companies made up 84.1 percent of the total market of open and interval funds.
- Table 3. Largest Asset Management Companies (end 2014)
  - No. 1 Sberbank Asset Management CJSC — AUM 20,074.0 (millions of rubles) — Share in the Total NAV 21.9 (In percent) — Number of Funds 19
  - No. 2 Raiffeisen Capital LLC — AUM 16,304.1 — Share 17.8 — Number of Funds 18
  - No. 3 URALSIB LLC — AUM 8,933.9 — Share 9.8 — Number of Funds 19
  - No. 4 Alfa-Capital LLC — AUM 7,706.6 — Share 8.4 — Number of Funds 17
  - No. 5 Trust Investment Company, LLC — AUM 6,918.7 — Share 7.6 — Number of Funds 3
  - Source: BCR.

### C. Markets (summary points provided)
- Figures referenced in the source (not reproduced here) include:
  - MICEX Composite Index 2013–14.
  - Structure of Futures Trade on the Derivatives Market of the Moscow Exchange Group.
  - Structure of Options Trade on the Derivatives Market of the Moscow Exchange Group.

---

*Source: _cr16304 - EXECUTIVE SUMMARY (IMF staff assessment and FSAP mission materials).*

### 23. The Moscow Exchange Group (MEG) is the largest exchange group in Russia, operating

### 23. The Moscow Exchange Group (MEG) is the largest exchange group in Russia, operating

### Overview of MEG and market infrastructure
- MEG operates trading markets in equities, bonds, derivatives, the foreign exchange market, money markets, and precious metals.
- MEG 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
  - 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.

### Market behavior and liquidity (2014)
- Market behavior in 2014 was driven primarily by geopolitical developments (sanctions by the U.S. and EU), the fall in oil prices, and capital outflows, rather than by fundamental economic indices.
- Turnover ratio of the domestic share market in 2014: 36.0 percent.
- Domestic share market liquidity decreased by 2.6 times compared with the maximum level observed in 2009.

### Investor profiles (2014)
- Number of private investors rose from 838,000 people to 906,000 people.
- Number of active private investors’ customers decreased slightly to 62,500 from 62,900 people.
- Private (resident) investors account for 90.3 percent of the total number of transactions on the Moscow Exchange and invest predominantly (89 percent) in shares.
- Number of corporate investors increased by 8.8 percent to 19,800.
- Number of active corporate investors decreased to 1,422 companies (some 4.0 percent of the total number of investors).

### Capitalization of Russian Market (Equities) on MEG (2010–14)
- 2010: 29,253.2 (in billions of rubles); 1,379.2 (in billions of U.S. dollars (Estimate)); Capitalization as percent of GDP: 63.2
- 2011: 25,708.0 (in billions of rubles); 1,096.2 (in billions of U.S. dollars (Estimate)); Capitalization as percent of GDP: 46.1
- 2012: 25,212.5 (in billions of rubles); 1,079.4 (in billions of U.S. dollars (Estimate)); Capitalization as percent of GDP: 40.4
- 2013: 25,323.8 (in billions of rubles); 1,041.1 (in billions of U.S. dollars (Estimate)); Capitalization as percent of GDP: 38.0
- 2014: 23,155.6 (in billions of rubles); 517.3 (in billions of U.S. dollars (Estimate)); Capitalization as percent of GDP: 32.6
- Source: MICEX.

### Number of listed companies on the Moscow Exchange (2011–14)
- 2011: Number of Share Issuers: 320; Number of Share Issues (ordinary, preferred) in Quotation Lists: 119
- 2012: Number of Share Issuers: 275; Number of Share Issues (ordinary, preferred) in Quotation Lists: 118
- 2013: Number of Share Issuers: 273; Number of Share Issues (ordinary, preferred) in Quotation Lists: 110
- 2014: Number of Share Issuers: 254; Number of Share Issues (ordinary, preferred) in Quotation Lists: 106
- Note: Despite the reduction trend, there are currently 30,360 open joint-stock companies; less than one percent are represented on the stock exchange.

### Corporate bond market (2014)
- New issues of corporate bonds totaled RUB 1.8 trillion, 6.6 percent more than in the previous year.
- Share of off-market over-the-counter (OTC) placements: 68 percent.
- Number of bond issuers on the Moscow Exchange: unchanged at 323 companies.
- Total value of exchange transactions in corporate bonds (at cost, excluding repo transactions and placements): RUB 4.3 trillion, 30 percent lower than in 2013.
- Secondary market trading in on-exchange bonds: 30 percent of the secondary market volume.
- 45 percent of turnover was in the bonds of 10 issuers.

### Government bond market (2014)
- Value of government bond issues traded on exchanges grew by 26 percent (par value) in 2014, reaching RUB 4.7 trillion or 6.6 percent of GDP at year-end.
- Exchange turnover (secondary market volume, at cost, excluding repo transactions and placements) decreased by 36 percent to RUB 3.8 trillion for the year.

### Sub-federal and municipal bond market
- This segment remains the most illiquid sector.
- Value of these bond issues: less than RUB 500 billion.
- Value of trading (excluding placements of new issues and repo transactions): RUB 379 billion.

### Repo market (2014)
- Value of exchange repo transactions on the Moscow Exchange in 2014: RUB 183 trillion, 10 percent lower than in 2013.
- Share of corporate bonds in the total transaction volume shrank to 39 percent.
- Share of direct repos with CBR reached 55 percent at the end of the year.

### Unit investment funds (2014)
- Value of trading in investment units on the Moscow Exchange: RUB 177.3 billion, +28.6 percent over 2013.
- Introduction of stock exchange trading in foreign exchange traded funds (ETF) in 2013.
- Aggregate volume of transactions in ETF units grew by seven times for the year and made up RUB 3.5 billion.
- ETFs accounted for about two percent in the total value of transactions in investment units.

### Derivatives markets (2014)
- Futures and options trading dominated by contracts on MOEX indices.
- Value of trading in futures contracts for securities and stock indices in 2014: RUB 28,929 billion, -8.2 percent versus 2013.
- From 2011 (maximum trade volumes) the decrease was 37.3 percent.
- Proportion between trade in futures and options: 87 percent in futures and 13 percent in options.

### Legal and regulatory framework — key issues and consequences
- The assessors conclude the Russian Federation regulatory framework for securities markets cannot be described as stable and transparent.
- Observed issues:
  - Legislation is subject to constant change; example: the Securities Law was amended five times in 2015, each amendment changing multiple articles.
  - New or amended legislation does not always comprehensively repeal previous provisions; example: SRO law brought into effect in January 2016 without repealing existing articles relating to SROs in the Securities Law and Investment Funds Laws, resulting in inconsistent obligations and both voluntary and mandatory SRO membership simultaneously.
  - Provisions on a single matter are spread across many legislative instruments, complicating compliance; example: obligations on issuers of securities appear in various laws and the Civil Code.
  - The nature and drafting level of legislative provisions vary across laws; examples include inconsistent confidentiality duties for CBR staff across different laws and explicit versus inferred licensing powers.
  - Introduction of new requirements is not always accompanied by repeal of existing ones; overlapping binding requirements exist between CBR instruments and former securities regulator provisions.
  - Some instruments contain requirements at an inappropriate level of detail, effectively micromanaging firms (e.g., legally binding instructions on distribution and handling of quarterly reports).
- CBR’s principles for resolving inconsistencies:
  - Later law overrides former law.
  - More specific law overrides more general law.
  - Courts favor interpretations that restrict liberty the least.
- Consequences and costs identified:
  - Increased compliance costs due to need for staff to track frequent changes, identify overlaps, seek interpretation, and implement internal changes.
  - Costs from fines for failure to comply with detailed rules.
  - Detailed rules inhibit innovation and development.
  - CBR must spend considerable time explaining regulatory intentions.
  - Over-emphasis on detailed rules can lead firms to ignore overarching principle-based requirements.
  - Detailed rules may miss essential requirements for effective systems (examples):
    - Internal controls regulation lacks obligations to conduct a risk assessment, prepare risk-based policies and procedures, develop management information systems for monitoring effectiveness, train staff on risk appetite, and re-evaluate policies at least annually.
    - Provisions on conflicts of interest are incomplete and lack requirements to identify, avoid, manage, or decline to act on conflicts.
    - Detailed customer information requirements exist but lack an overarching suitability requirement to obtain all necessary information.
  - Firms may comply with the letter of detailed rules but not the underlying principles (examples: audit independence practices; company disclosures lacking profit warnings).
- Enforcement and comprehension risks:
  - The complex regime is difficult to comprehend and enforce; assessors noted relevant regulations (e.g., Regulation 44 of 1998) were identified late or post-mission.
  - CBR acknowledged it will not take enforcement action under the SRO Law against securities firms for failing to comply with non-existent SRO basic standards, but the existence of legally binding provisions that cannot be complied with undermines the rule of law.
- Trend toward broader principles:
  - There is a gradual move to more general obligations (e.g., requirement to have adequate RM and systems to identify and monitor conflicts of interest).
  - However, general requirements often lack supporting detail and some CBR staff continue to regard general requirements as declaratory rather than legally binding.

*Source: IMF Staff Country Report excerpt.*

### 42. A reasonable balance between high level obligations, supported by a list of detailed but

### _cr16304 - 42. A reasonable balance between high level obligations, supported by a list of detailed but

### Legislative simplification and regulatory drafting
- Encourage CBR to embark on a simplification exercise as soon as possible.
- Specific recommendations:
  - All new legislative instruments should identify existing conflicting provisions (especially where these exist in laws administered by CBR) and repeal or amend them to remove potential inconsistency.
  - Provisions dealing with a particular subject should, so far as possible, be brought together or at least cross referenced so obligations can be found in a single place when they relate to the same matter.
  - Review the degree of detail required to limit micromanagement of the actions of securities firms.
  - Make greater use of high-level obligations in legislation so that those subject to the law can see the overall objective and do not exploit gaps created by different detailed provisions.
  - Support overarching requirements with sufficient detail focusing on the key elements that CBR regards as essential.
  - CBR should seek to limit the number of amendments (an objective easier to meet if there is less minute detail in individual instruments).

### Business laws and corporate governance
- Legal framework basis:
  - Business laws 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.
- Recent major amendments and effects:
  - Federal Law 99-FZ (2014) and Federal Law 210-FZ (2015) changed types of companies allowed, increased protection of investors holding Russian local securities, and improved conditions for participation in corporate actions (for example by allowing e-voting and e-proxy voting).
  - Insolvency Law amended in 2014 to incorporate changes in insolvency procedures for financial institutions.
  - 2015 amendments to the Federal Law No.7-FZ “On Clearing and Clearing Activities” empowered the National Clearing Center (NCC) to segregate member positions from their client positions.
  - Current legal structure meets requirements for close-out netting under ISDA master agreements and the global master repo agreement of the International Capital Markets Association.
- Other important federal laws noted:
  - State registration of legal entities and individual entrepreneurs, notaries, trade, consumer rights protection, combating money laundering and financing of terrorism, Land code, the CBR Law, and the Tax code.
- Client identification and beneficial ownership:
  - Requirement since 2013 for financial institutions to identify their clients, clients' representatives, and beneficial owners and to collect information on reputation and business purposes.
  - Definition of “beneficial owner” clarified and consistent with the FATF Forty Recommendations Glossary.

### Judiciary and judicial administration
- Governing instruments:
  - Judiciary 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.
- Principles and financing:
  - Constitution requires courts alone can administer justice; judges must be independent and obey only the Constitution and the law.
  - Courts financed solely from the federal budget.
- Structure and appointment:
  - Judicial power exercised through constitutional, civil, arbitration, administrative, and criminal proceedings; examination of cases in all courts is open.
  - Judicial system composed of the Constitutional Court, the Supreme Court, federal courts, district courts, magistrate courts, military courts, and arbitration courts.
  - All judges of the Supreme Court appointed by the Council of the Federation upon recommendation of the President; all other judges, including military and arbitration, are appointed by the President.
- International rankings:
  - World Bank Global Competitiveness Report 2014–15 ranks Russia 109th out of 144 in judicial independence.
  - Efficiency of the legal framework in settling disputes ranks 110th; in challenging regulations ranks 99th; protection of property rights ranks 120th.

### Legal profession and prosecution
- Governing laws:
  - Legal profession 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.
- Main legal professions:
  - Public prosecutor, investigator, judge, attorney (advokat), and notary.
- Public prosecution service:
  - Consists mainly of the Prosecutor General’s Office, 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.
  - Prosecutor General must be appointed and removed by the Federation Council by recommendation of the President; term of office is five years.
  - Prosecutors and investigators should not be members of elective or other bodies set up by state authorities and local self-government bodies.
- Investigative Committee of Russia:
  - Main federal investigating authority; since 2011 not included in government authorities structure and only the President carries out control.
  - Chairman appointed and dismissed by the President without approval of any legislative body and reports annually to the President.
- Licensing and bar structure:
  - Lawyers must have a license to practice law to appear in criminal courts.
  - Under the 2002 Law “On Attorneys’ Practice and the Bar,” each Russian region has a single bar body called Bar Chamber; lawyers must be members of a Bar Chamber to be recognized as an attorney.

### Credit bureaus
- Market structure and coverage:
  - Russia has 21 functioning credit bureaus according to the State Register of Credit Bureaus.
  - As of December 2014, number of borrowers recorded in credit bureaus is 61 million (60.7 million are individuals and 358,000 are legal entities).
  - Some credit bureaus are owned by banks.
- Supervision and legal powers:
  - Credit bureaus are supervised by CBR.
  - Federal Law “On Credit Histories” entitles the CBR to keep the central catalogue of credit histories, informing users, subjects of credit histories, and some other persons defined by law about the location of credit histories.
  - CBR has power to request and receive credit history reports from credit bureaus.

### Main findings — Principles relating to the regulator (Principles 1–8)
- Progress and concerns:
  - CBR has made significant advances in regulation and supervision since taking responsibility for the sector.
  - Full integration of the 1,300 staff of the FSFM was achieved only in 2015.
  - Governance concerns: direct involvement of government at the Board level and in setting the bank’s budget.
  - Significant concern: lack of legal protection for staff in the proper performance of supervisory duties.
  - Central Bank Law and other legislative requirements impose high standards of personal conduct and ethics on CBR staff, but greater clarity would be beneficial.
  - On systemic risk in securities markets and perimeter policing, CBR meets IOSCO standards with only minor issues in the latter case.
  - More needs to be done on developing an effective regime to deal with conflicts of interest and misaligned incentives.

### Main findings — Self-regulatory organizations, enforcement, and cooperation (Principles 9–15)
- Enforcement powers and supervisory approach:
  - CBR has a comprehensive set of enforcement powers and is moving to a more risk-based approach, but resources for supervision and inspections are inadequate.
  - CBR uses powers to identify and remove securities firms with little or no securities market activity.
  - For remaining firms, CBR focuses on breaches of many detailed rules and applies penalties.
- Inspection statistics and resources:
  - In 2014, for the 19,000 nonbank licensees CBR supervises in all financial sectors, there were 499 unscheduled inspections and only 97 scheduled inspections.
  - Only 250 inspectors are available to inspect all these licensees.
  - The number of routine scheduled inspections is far too low to be described as an effective compliance program.
- Supervision developments:
  - CBR inspectors are beginning qualitative discussions of the effectiveness of RM as a whole.
  - CBR is moving toward a regime where front line enforcement will be the responsibility of SROs; this transformation needs careful management.
  - Market abuse was criminalized only in 2013 and criminal penalties available only in 2015; to date only administrative penalties have been imposed.
- International cooperation:
  - CBR became a signatory to the IOSCO MMoU in 2015 and has received and responded to requests for information.
  - Central Bank Law amended to allow CBR to obtain confidential information in response to requests from foreign authorities.
  - Some duties of confidentiality lack an explicit gateway to allow disclosure when permitted by law; this practice needs to be comprehensive.
  - Drafting of the Central Bank Law prohibits the provision of unsolicited assistance; this restriction should be removed.

### Main findings — Issuers (Principles 16–18)
- Disclosure regime:
  - Disclosure provisions on issuers are reasonably comprehensive, but continuing disclosure obligations need strengthening.
  - Companies that have issued shares or bonds to the public must publish prospectuses and quarterly and annual reports.
  - General obligation to disclose all material facts in a prospectus and a continuing obligation to disclose all material facts that might affect the price of a security.
  - In practice, disclosures mostly limited to a list of specifically required disclosures (routine matters), excluding many significant matters (e.g., material change in prospects or risks).
  - Such significant disclosures would fall under “any other matter” in the law; CBR expects significant disclosures under that category, although just over 1 percent of total disclosures are made on this basis.
  - No formal derogation from disclosure obligation for state or commercial secrets, although omissions are made and accepted without effective statutory safeguards.
  - The exchange does not monitor continuing disclosure obligations by issuers, although CBR states it is under an obligation to do so.
  - Recommendation: strengthen the obligation to promptly disclose matters affecting the value of securities, monitor compliance, and enforce it by taking appropriate action.
- Financial reporting and IFRS:
  - Requirements to adopt IFRS are in place for many companies, with remaining companies with securities offered to the public coming into IFRS by 2019.
  - Market perception: of those currently subject to IFRS, only the 60–70 companies that seek listings on foreign markets comply with the requirement in substance.
  - Other companies generally use RAS as the basis for narrative and other disclosures in prospectuses, annual reports, and quarterly reports.
  - Formal financial statements prepared according to both RAS and IFRS are included in the Appendix (as per source).
  - CBR describes RAS as differing from IFRS in a number of ways, mostly with a practical focus on form rather than substance, which could yield very different results especially during asset value volatility.
  - Recommendation: ensure full compliance with IFRS in all financial reporting.

### Main findings — Auditors, CRAs, and evaluative services (Principles 19–23)
- Audit oversight and enforcement:
  - MoF heads an oversight regime allowing auditing SROs to contribute to, but not take final decisions on, auditing standards.
  - MoF appoints an independent Audit Council that considers SRO-prepared proposals and takes final decisions on what to propose to MoF; MoF as policy accepts Audit Council recommendations.
  - Audit Council approves standards of ethics and independence to be enforced by SROs and MoF (through FFFSS).
  - FFFSS enforcement focused on auditors of public interest companies (including all listed companies).
  - All auditors and audit firms must belong to one of five competing SROs and meet qualification and continuing professional development obligations.
  - Independence provisions in law largely describe prohibited relationships; Code of Ethics and Independence Rules adopt a more principle-based approach.
  - Market perception: many audit firms adopt practices breaching the substance of independence principles but not necessarily specific legal provisions.
  - Recommendation: enhance the enforcement regime to address independence enforcement difficulties.
- Credit ratings and other evaluative services:
  - New CRA Law in place but cannot yet be fully enforced; no effective requirements for other evaluative services.
  - CRA law designed to meet IOSCO Code of Conduct and IOSCO CRA Principle; requirements on registration, disclosure, conflicts of interest, methodology, and internal governance are present.
  - Enhancements suggested: stronger CBR powers to collect information from license applicants, stronger integrity requirements, and overarching recordkeeping provisions.
  - CBR working on detailed regulations; at assessment time not all in place, so no CRA could register and law could not be enforced.
  - CBR lacks a process to identify new evaluative services that may warrant regulation.
  - CBR proposes to bring investment advice into regulation; currently no specific requirements for analysts employed by brokers.
  - Detailed independence requirements for appraisers are in a Code of Ethics and Independence prepared by SROs, not supplied to assessors.

### Main findings — Collective investment schemes (Principles 24–28)
- Market characteristics and supervision:
  - Market sector is small and does not raise systemic risk concerns; hedge funds and money market funds are not significant factors.
  - Operators of collective investment schemes require a license from CBR, as do custodians (specialized depositories); use of custodians is mandatory.
  - Integrity tests for licensees should be enhanced.
  - Operators and custodians are subject to capital and organizational requirements and conduct of business requirements (improvements recommended).
  - Agents who market shares or units are also subject to licensing; CBR supervises operators, custodians, and agents.
  - Regulatory framework relies strongly on specialized depositories to ensure operator compliance with fund rules, law, and CBR regulatory acts.
  - Risk-based supervision being applied comprehensively and constructively.
  - Legal form of CIS and rights of shareholders/unit holders are well established.
  - Disclosure regime with mandatory documentation standards exists; improvements should be made.

*Source: _cr16304 - 42. A reasonable balance between high level obligations, supported by a list of detailed but (IMF content unit).*

### 64. All market intermediaries must be licensed and are subject to an evaluation by CBR, but

### _cr16304 - 64. All market intermediaries must be licensed and are subject to an evaluation by CBR, but

### Overview
- All market intermediaries must be licensed and are subject to an evaluation by CBR.
- CBR is the licensing authority but cannot impose a license condition.
- Discussion framed under Principles for the secondary markets (Principles 33–37).

### Key findings
- Licensing criteria cover competence, integrity, and financial standing.
- Detailed provisions on integrity 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 seeking a license must demonstrate compliance with matters including internal controls, RM, and capital.
- Capital requirements are flat rate and not risk-based.
- CBR lacks ability to impose license conditions and has limited early warning and intervention measures for capital deterioration.
- CBR will need to develop a contingency plan for occurrences of capital deterioration or default.

### Policy recommendations and actions for CBR
- Develop appropriate criteria for judging the adequacy of RM and internal controls.
  - Enable CBR to make a judgment on the willingness and capacity of the applicant to comply with their obligations.
- Enhance integrity provisions to allow sufficient discretion for CBR to assess relevance to the individual and the post.
- Move from flat-rate to risk-based capital requirements.
- Institute early warning reporting for deterioration of capital.
- Enhance powers to take action to avoid default.
- Develop a contingency plan for occurrences of capital deterioration or default.

### Applicable principles and context
- Principles for the secondary markets referenced: Principles 33–37.

*RUSSIAN FEDERATION 28 INTERNATIONAL MONETARY FUND*

### 65. Exchanges and non-exchange trading systems are permitted, and both are required to

### _cr16304 - 65. Exchanges and non-exchange trading systems are permitted, and both are required to

### Exchanges and non-exchange trading systems — key findings
- Exchanges and non-exchange trading systems are permitted and both are required to be licensed. Currently there are none in the non-exchange 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 fair, orderly and transparent markets.
- Exchanges must provide fair access, comply with CBR requirements, monitor the conduct of their members, and secure compliance of companies admitted to trading with listing rules; these areas merit closer examination.
- There are no effective controls or disclosure of on-exchange short selling.
- The supervisory system is relatively new and largely untested in highly stressed market conditions.
- Criminal enforcement of insider dealing and market manipulation is new and untested; CBR’s administrative enforcement record is developing a reasonably successful track record.

### Summary Implementation of the IOSCO Principles — overall grades and notable assessments
- Principle 1 (Responsibilities of the Regulator): BI
  - Federal laws set out powers and authority of CBR comprehensively, but complex and frequently changing legal framework creates inconsistencies and compliance difficulties for licensed firms and investors.
- Principle 2 (Independence and accountability): PI
  - Independence set out in Central Bank Law, but Ministers of Finance and Economic Development may attend Board meetings with recorded opinions; lack of legal protection for staff performing regulatory functions.
- Principle 3 (Powers, resources, capacity): BI
  - CBR controls operational budget once agreed, but overall budget set by National Financial Board where Governor has 1 vote among 12; potential influence by executive and legislature.
  - CBR’s regulatory costs are met from retained profits; powers and staffing policies appear adequate.
- Principle 4 (Regulatory processes): FI
  - Consultation processes taken seriously; CBR has reasonable processes for procedural fairness and transparency.
- Principle 5 (Staff standards): BI
  - Staff obligations substantial but fragmented across many laws; two-tier restrictions apply to limited senior staff only.
- Principle 6 (Systemic risk): FI
  - Financial Stability Committee focuses on NFEs and systemically important FMIs; FSR addresses securities market systemic issues when they arise.
- Principle 7 (Perimeter review): BI
  - Perimeter review undertaken but could be further formalized.
- Principle 8 (Conflicts of interest): NI
  - CBR is not sufficiently proactive in identifying or evaluating potential conflicts of interest; process is primarily reactive.
- Principle 9 (SRO oversight): NI
  - Conflict of laws prevents enforcement of old SRO regime; transitional provisions limit new SRO Law enforcement; SRO primary purpose not focused on investor protection; gaps in CBR powers and SRO duties.
- Principle 10 (Inspection, investigation, surveillance powers): FI
  - CBR has comprehensive powers; no single overarching record-keeping obligation for securities firms despite extensive requirements.
- Principle 11 (Enforcement powers): BI
  - Broad investigation and sanction powers; fines modest but should be dissuasive relative to income; criminal prosecutions of market abuse are rare; beneficial ownership information may not always be available.
- Principle 12 (Effective enforcement and compliance): NI
  - Enforcement regime not fully effective: inspections not risk based or routine; very few scheduled inspections; no inspections of exchanges.
  - Supervision focuses on punishment rather than risk mitigation; only 250 inspectors for 19,000 nonbank entities across CBR; periodic reports lack RM indicators.
- Principle 13 (Authority to share information): PI
  - Powers exist to share information via MMoU and other agreements; no power to initiate unsolicited sharing; Investment Fund Law confidentiality conflicts with Central Bank Law; beneficial ownership information may be unavailable.
- Principles 14–15 (Information sharing mechanisms and assistance): FI
  - CBR is a signatory to the MMoU and actively meets obligations.
- Principle 16 (Disclosure by issuers): NI
  - No effective general ongoing obligation to disclose any material fact affecting value of securities.
  - In practice, disclosures outside enumerated items are rare (just over 1 percent).
  - No explicit derogation safeguards for state/commercial secrets; inadequate provision for advertisements outside prospectus.
- Principle 17 (Fair treatment of securities holders): PI
  - Protections broadly in place; provisions on acting in concert limited to specified affiliated persons.
- Principle 18 (Accounting standards): PI
  - Legal obligation to apply IFRS is complex and not comprehensive; many obliged companies continue to use RAS for narrative disclosures; RAS not internationally accepted in practice.
- Principles 19–21 (Auditor oversight, independence, standards): FI/PI/FI
  - Oversight led by MoF and Audit Council (FI); auditor independence principles not fully implemented in practice (PI); international audit standards effectively applied to public companies (FI).
- Principle 22 (Credit rating agencies): NI
  - New CRA law comprehensive but regulations not yet issued and no CRAs registered at assessment time.
- Principle 23 (Other analysts/evaluative services): NI
  - No process to identify unregulated activities; insufficient provisions to address broker analyst conflicts.
- Principles 24–27 (Collective investment schemes): PI/FI/NI/FI/FI
  - Managers and selling agents licensed by CBR (PI); legal forms and investor rights set in law and model fund rules; custodian (SD) responsibilities onerous; UIF disclosure reasonably comprehensive but no overarching obligation for easily understood current information; NAV valuation appears high standard and untested suspension/winding-up powers appear sufficient.
- Principle 28 (Hedge funds): BI
  - Hedge funds not a systemic risk currently; regulated at same level as other funds for qualified investors.
- Principles 29–31 (Market intermediaries entry standards, prudential requirements, internal compliance): PI/NI/NI
  - Licensing is thorough but gaps: no regulation of investment advisers, license criteria not comprehensive on integrity, no power to impose license conditions, no general obligation to report suitability changes.
  - Capital requirements not tailored to risks; no liquidity requirement; no daily capital calculation requirement; no requirement for auditors to check capital sufficiency; CBR powers to intervene limited.
  - Internal conduct obligations lacking: no overriding duties to act with due care; no requirement for tailored RM, annual reviews, conflict management, client suitability information, written client agreements, effective client money segregation, robust client identification; client money accounts reconciled monthly and client assets quarterly (insufficient).
- Principle 32 (Failure procedures for intermediaries): NI
  - Insolvency Law powers exist but no documented contingency plan, no early warning systems, limited pre-default investor protection powers.
- Principle 33 (Authorization of trading systems and exchanges): FI
  - Licensing of merged MICEX and RTS thorough and skillful; opening new exchange rare.
- Principle 34 (Ongoing supervision of exchanges): PI
  - Supervision elements appear met via documentation flows but untested by onsite inspections or market stress/failures.
- Principle 35 (Transparency of trading): FI
  - No obvious omissions in transparency on MOEX; more transparency than typical in some OTC-like markets; absence of dark pools; High Frequency Trading (HFT) significant in equities.
- Principle 36 (Detecting and deterring manipulation): BI
  - Law and resources appear in place but new and untested; fines unlikely dissuasive but loss of three years’ salary and prison sentences could be strong deterrents; CBR developing good administrative detection record.
- Principle 37 (Management of large exposures and market disruption): PI
  - Regime to monitor large exposures largely comprehensive and real-time; FSD threshold for concern—“a single exposure which equals or exceeds 100 percent of an entities’ own funds”—is too high.
  - Lack of effective controls on short selling on MOEX; NCC protects itself from naked short selling but that is not sufficient.
- Principle 38 (Securities settlement systems and CCPs): Not assessed

### Key quantitative observations and operational figures
- Just over 1 percent of disclosures fall into the category of material information outside enumerated items.
- Inspections resources: 250 inspectors for 19,000 nonbank entities across CBR.
- Criminal sanction magnitude referenced as loss of three years’ salary for certain sanctions.
- FSD threshold of concern for single exposure equals or exceeds 100 percent of an entity’s own funds; recommendation to reduce possibly to a maximum of 25 percent.
- Capital deterioration reporting recommendation: report a deterioration of excess capital of 50 percent since last report; report to CBR if capital falls below 120 percent of the minimum.
- Client account reconciliation recommendations: client money reconciled daily; client assets reconciled weekly for high-intensity trading clients and monthly for other clients, with quarterly for clients not trading for three months.
- Record keeping recommendation: keep records for five years.
- Draft Guidelines reference period: 2016–18.
- Disclosure framework includes “50 detailed matters” currently in the Securities Law.

### Recommended Action Plan — selected priority recommendations
- Simplify and rationalize the regulatory framework consistent with the draft Guidelines for the Development and Stability of the Financial Market of the Russian Federation for the Period of 2016–18.
- Consider legal protections (immunity) for CBR staff performing regulatory functions; reconsider Ministers’ right to attend Board meetings.
- Review the budget-setting role of the National Financial Board to strengthen CBR operational independence.
- Review and codify staff professional standards into a comprehensive Code of Professional Ethics; reassess two-tier staff restrictions.
- Formalize perimeter review processes and assign senior responsibility; provide specialized training (e.g., detection of Ponzi schemes).
- Establish proactive processes to identify and manage conflicts of interest and misaligned incentives.
- Amend laws and SRO framework to ensure SROs’ primary purpose includes investor protection, require SRO internal rules approval by CBR, and grant CBR oversight and inspection powers over SROs.
- Introduce an overriding record-keeping obligation in Securities Law, Investment Funds Law, and Organized Trading Law with five-year retention.
- Seek AML Law amendment to require identification of beneficial owners and to refuse to act when beneficial owner cannot be identified.
- Allocate sufficient resources to enable a risk-based, routine inspection program; commence regular inspections of exchanges (first onsite MOEX inspection emphasized).
- Amend CBR Law to permit unsolicited sharing of confidential information with foreign regulators; reconcile Investment Funds Law confidentiality with disclosure needs.
- Amend Securities Law to impose an effective obligation to disclose any material fact reasonably expected to affect security price; refine the 50 detailed matters to exclude routine events and include material changes in prospects, risks, major contracts, and similar items.
- Strengthen shareholder protections (Joint Stock Company Law) on acting in concert thresholds, general meeting information, and liquidation entitlements.
- Continue progressive IFRS implementation and require IFRS accounts be basis for prospectus and periodic narrative disclosures.
- Finalize CRA regulations so CRA Law can be implemented and CRAs registered; include record-keeping, resource, and integrity requirements.
- Strengthen entry and licensing criteria for intermediaries (fitness, integrity, ability to impose license conditions), bring investment advice into regulation.
- Implement risk-based capital and liquidity requirements for securities firms; require daily capital calculations, auditor opinions on capital sufficiency, and reporting triggers (50 percent deterioration; below 120 percent of minimum).
- Impose statutory obligations on securities firms to act with due care; place compliance responsibility on management; require risk assessments, tailored policies, annual reviews, client suitability checks, written client agreements, effective client money segregation and reconciliations.
- Amend Insolvency Law to allow CBR to appoint provisional administrators and develop detailed contingency plans and tested procedures for intermediary failure.
- Work with MOEX on supervisory priorities including disciplinary record and exchange member/listed company discipline.
- Develop MoU and enhanced cooperation between Department for Market Manipulation and Division F; review exemptions in Insider Trading Law and consider trading limits to protect investors.
- Test fund failure readiness via “war game” exercises; monitor development of leveraged funds closely and intensify supervision if systemic characteristics emerge.

*Source: IMF assessment text contained in _cr16304 - 65. Exchanges and non-exchange trading systems are permitted, and both are required to*

### Introduction

### _cr16304 - Introduction

### Appreciation and purpose of the assessment
- 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.
- 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.
  - Results of the mission have deepened the CBR’s understanding of improvements to be made, helped articulate policy recommendations, and could be used for better discussions with market participants to provide support for policy and institutional changes.

### Principle-by-Principle responses — summary and suggested rephrasing
- Principle 6
  - Suggested rephrasing: "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
  - On March 10, 2016, seven SROs were registered under the new SRO Law, and four of them are SROs of professional securities firms.
  - CBR suggests eliminating inconsistences in the text of Principle 9 implementation assessment.
  - The assessment statement that "the CBR must approve basic standards no later than three months after the first SRO is registered" is not accurate; correct formulation: 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 — inspections, enforcement, and grading
- CBR contests downgrade from "partly implemented" to "not implemented" for Principle 12 and argues that:
  - The grade "not implemented" implies serious deviations from criteria, which CBR considers not substantiated.
  - Specified criteria regarding the competencies of the Chief Inspection are implemented and therefore are partly implemented.
- Inspections data (exact figures provided):
  - 2014: Chief Inspection carried out 37 onsite inspections of professional securities market participants, including 9 (24 percent) unscheduled inspections.
  - 2015: 27 onsite inspections of professional securities market participants were carried out, including 4 (15 percent) unscheduled inspections.
  - As regards asset management companies:
    - 2014: Chief Inspection carried out 43 onsite inspections, including 36 (84 percent) unscheduled inspections.
    - 2015: 25 onsite inspections, including 13 (52 percent) unscheduled inspections.
- Additional observations on inspections and supervision:
  - Inspections are generally conducted at the suggestion of the off-site team and based on facts regarding deterioration of financial position, breaches of regulations, complaints by clients and federal authorities, profile, exposure and concentration of risk, business transparency, among others.
  - CBR has adopted coordinated onsite inspections of financial groups (including non-institutionalized groups) to identify group-level risks, uncover procedures used to mask risks, improve transparency of financial activities, and improve market discipline.
- Risk-based supervision and inspection findings (2014–15):
  - Chief Inspection carried out onsite inspections initiated by the Securities Market and Commodity Market Department implementing risk-based supervision, mainly of relatively small professional securities market participants about which there was substantial negative information.
  - During most inspections, violations were discovered, including absence of assets or significant overvaluation associated with “structured” operations to comply with capital structure requirements, investment of funds in financial instruments of dubious quality, and increased risk of deliberate substitution of high-quality and liquid assets.
  - Many inspected professional securities market participants lacked organized internal control and risk-management systems; corporate governance was not compliant with international principles, which were treated as violations of legislation.
  - Assessment of quality and level of implementation of declared procedures had limited opportunity where subjects for assessment were absent. Approaches are constantly improving; examples of best practices were reported during training sessions.
- Final inspection reporting and follow-up:
  - Mission report does not accurately state 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.
  - CBR notes: the final report must not include an agreed rectification program. Monitoring elimination of violations found during onsite inspections is not within the competence of the Chief Inspection.

### Principle 16 — disclosure and prospectus requirements
- CBR contests assessment of Principle 16 as "not implemented" and states that Russian legislation provides for major requirements for prospectus, financial statements, and disclosure of material facts:
  - Legislative provisions cited: Federal Law No. 39-FZ “On the securities market” (Article 24(4), Article 30, 30(2), 30.1) and the federal law “On joint stock companies” (Chapter 13).
  - Detailed disclosure requirements for securities issuers set out in the Regulation of the Bank of Russia dated December 30, 2014, No 454-P.
  - These requirements are set in line with multiple IOSCO standards and are enforced by CBR.
- Specific points raised in response to the mission report:
  - Advertisements during securities offering:
    - Current Russian legislation provides mechanisms to ban offering advertisements before a prospectus is published.
    - Securities Law prohibits unfair and inaccurate advertisements and advertisements missing material information concerning the offering.
    - CBR will take into account recommendation to require prior approval of securities advertisements by CBR, which is currently missing.
  - Material facts disclosures:
    - Russian legislation requires companies to disclose any material fact potentially able to influence the price of the security.
    - Article 30(13) of the Securities Law defines the material fact as any event which may cause a substantial change in securities’ price.
    - Article 30 (4) mandates disclosure of such material events; CBR can require issuer to make such disclosure through a CBR order in case of failure.
    - Article 30 (14) covers most situations requiring disclosure; Article 30 (4)(13)(14) provides a general obligation to disclose any material fact that could affect the value of securities.
    - Examples cited by the report as not covered (signing of a major new contract, loss of a major contract, significant change in line of business, decision to acquire or sell significant assets) are in fact covered; certain items (such as profit warnings) are not applicable in Russian practice where approved financial statements are considered valid disclosure documents.
  - Absence of explicit derogation from disclosure obligations and safeguards:
    - Assessors’ statement of explicit derogation for state and commercial secrets is arguable per CBR: general provisions require disclosure of essential information; if not disclosed issuer must provide the reason.
    - When state and commercial secrets are not disclosed pursuant to corresponding laws, issuer must still disclose that information was not disclosed because it constitutes a state or commercial secret.
    - Recommendation to provide CBR power to require advance notice of any decision to delay or abstain from disclosures will be considered.
- CBR position:
  - Disagrees with "not implemented" assessment for Principle 16.
  - Believes major safeguards requiring full disclosure are implemented in legislation.
  - Acknowledges certain shortcomings in the disclosure regime but considers them not of a gross nature and not justifying downgrade from prior FSAP assessment of "partially implemented," especially as legislation has not weakened.

### Principle 17 — treatment of security holders
- CBR does not agree with downgrade from "broadly implemented" to "partly implemented."
- Russian legislation provides major safeguards for fair and equitable treatment of holders of securities.
- Joint Stock Company Law provisions on takeovers address actions of buyer acting with affiliated persons rather than shareholders acting in concert; affiliated persons definition is broad and lists are obligatory for disclosure, ensuring practical functioning.
- CBR is working on amendments in response to recommendations.

### Principle 22 — oversight of credit rating agencies (CRAs)
- To apply the newly adopted CRA Law, CBR issued Regulation No 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."
- Under the Regulation, business companies can apply to be registered as credit rating agencies.
- As of February 29, 2016, one business company applied to be registered under Regulation No 521-P as a CRA.
- On relevance of work experience, Section 4 of Article 7 of Federal Law 222-FZ sets specific requirements:
  - Senior manager experience 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 experience with CBR or a federal executive body acting as a regulator of the financial market in a position not lower than structural unit head:
    - At least one year in case of higher education degree in Economics, Law, Mathematics (technical).
    - At least two years in the event of a different higher education degree.

### Principle 29 — regulation of investment advisors
- Assessors noted absence of a regulation on investment advisors.
- Draft law amending the Securities Law on investment advisors’ activity was submitted to the State Duma.
- Provisions of the new law would:
  - Establish a financial consulting implementation framework, including requirements for investment advisors and self-regulatory organizations of investment advisors.
  - Govern interactions between the investment advisor and clients, set requirements on clients’ investment profiles, and determine rights and duties of a financial advisor.

### Principle 31 — internal functions, compliance, and intermediary obligations
- Principle 31 was downgraded from "partly implemented" to "not implemented" due to findings of lack of regulation in certain respects.
- Conflicts of interest:
  - CBR Regulation No 3234 contains specific requirements on brokers to control risks inherent in direct (or indirect) client access to the exchange.
  - A mandatory system of pre-order validation for every client allows a broker to set limits to prevent a client from placing orders exceeding those limits.
- Internal controls:
  - Article 10(1) of the Securities Law requires professional intermediaries operating in the securities market to organize and exercise compliance and internal audit.
  - Professional intermediaries must appoint a compliance officer or form a separate compliance service.
  - Professional intermediaries are required to organize a RM system with respect to their professional activity and operations with own funds; RM system must be commensurate with the nature of operations and include a risk monitoring system that provides timely information to the Board.
  - Requirements aimed at regulation of compliance, internal audit, and organization of RM systems are currently under development.
- Protection of clients’ rights:
  - 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.

### Purpose of the detailed assessment
- The assessment’s primary purpose is to ascertain whether legal and regulatory securities market requirements and the securities regulatory authorities’ operations in implementing and enforcing these requirements in practice meet IOSCO Principles.
- The assessment aims to identify potential gaps, inconsistencies, weaknesses, and areas where further powers and/or better implementation of the existing framework may be necessary, and to establish priorities for improvements to the current regulatory scheme.

*Source: Introduction*

### 98. The assessment of the country’s observance of each individual principle is made by

### _cr16304 - 98. The assessment of the country’s observance of each individual principle is made by

### Assessment methodology and categories
- Assessment categories: fully implemented, broadly implemented, partly implemented, not implemented, and not applicable.
- The IOSCO assessment methodology provides assessment criteria for each principle to achieve designated benchmarks.
- Methodology recognizes variation in means of implementation depending on domestic context, structure, and stage of development of the country’s capital market.

### Principle 1 — The responsibilities of the Regulator should be clear and objectively stated (Description)
- In September 2013 a process began by Presidential decree transferring powers and functions of the Federal Service for Financial Markets (FSFM) to CBR; a three stage process completed in the course of 2015.
- Most of the 1,300 employees of the FSFM became employees of the central bank.
- FSFM duties included regulating financial markets, supervising exchanges, overseeing credit and commodity markets, pension funds, and enforcing insider trading and market manipulation laws.
- Transfer effected by 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 responsibilities, powers, and authority are set out in multiple federal laws, including:
  - 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;
  - Federal Law No. 414-FZ of December 7, 2011, On the Central Depository.
- Example statutory powers (Securities Market Law Article 51.6) for unlicensed activity enforcement include:
  - 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 inspection materials to a court of law for administrative responsibility enforcement against brokerage officials;
  - file a claim with a court of arbitration for recovery of incomes received from unlicensed activity; and
  - file a claim with a court of arbitration for forcible liquidation of a brokerage company if it failed to obtain a license within the fixed period.
- Article 44(4) provides for suspension or annulment of a securities market license if a professional participant repeatedly violates securities legislation within one year; single offenses require other administrative measures first.
- Central Bank Act (Article 3) purposes (relevant excerpts):
  - To develop the financial market of the Russian Federation; and
  - to ensure stability of the financial market of the Russian Federation.
- Central Bank Act (Article 4) functions (relevant excerpts) include:
  - elaborate and pursue financial market policy with the Government;
  - set rules to effect settlements in the Russian Federation;
  - exercise supervision over credit institutions and banking groups;
  - exercise regulation, control and supervision over non-credit financial institutions in compliance with federal laws;
  - register equity securities issues, securities prospectuses and reports on results of issuance of equity securities;
  - exercise control and supervision over observance by issuers of joint-stock companies and securities legislation;
  - exercise regulation, control and supervision in corporate relations in joint-stock companies;
  - approve sectoral accounting standards for credit institutions, CBR and non-credit financial institutions;
  - exercise control over observance of requirements on countering illegal use of insider information and market manipulation;
  - protect rights and legitimate interests of shareholders and investors on financial markets.
- CBR issues legal acts in the form of regulations, instructions and directions; compliance is obligatory for federal, regional, local authorities and all legal and physical persons; rules for drafting normative acts set by CBR independently.
- Regulation No. 519 dated September 15, 1997 (“On the order of drafting and entrance into force of CBR legal acts”) classifies acts:
  - direction: separate rules on matters related to CBR competence;
  - regulation: systemically connected rules on matters related to CBR competence;
  - instruction: rules of application of federal laws on matters related to CBR competence.
- CBR also issues internal acts and non-regulatory instruments (orders, information letters, methodological clarifications, decrees).
- Hierarchy of laws: general laws over-ridden by special laws where overlap/conflict; newer laws override older laws; CBR’s interpretive authority constrained by federal laws and public consultation obligations.
- Regulatory concentration: regulation of securities markets and participants carried out solely by CBR; CBR must manage regulatory arbitrage and consolidated supervision of multi-functional groups.
- Committees of Banking and Securities Supervision meet twice weekly; working groups established as needed (examples: securitization and internal audit).
- Article 21 of Central Bank Law: CBR participates in developing economic policy, CBR Chairman or deputy may take part in Government meetings and State Duma sessions on economic/financial drafts.
- Board of Directors cooperates with Government to develop draft guidelines for financial markets (Article 18).
- Assessment: Broadly Implemented.
- Comments:
  - Federal laws comprehensively set powers and authority but repeated amendments and numerous CBR/FSFM acts have created overlapping legal obligations.
  - Many FSFM acts remain in force; variations can make compliance difficult and create unequal obligations among market participants (see Principle 9 and 11 references).
  - Investors face difficulties understanding rights in relationships with market participants or financial products.
  - The draft Guidelines for the Development and Stability of the Financial Market of the Russian Federation for the Period of 2016–18 identifies “enhancing financial market regulation, inter alia through proportional regulation and optimization of the regulatory burden on financial market participants” as critical; suggests program to substantially simplify regulatory framework while retaining necessary regulatory, supervisory and enforcement elements.

### Principle 2 — The Regulator should be operationally independent and accountable (Description and Governance)
- Independence:
  - Central Bank Law Article 1: CBR status, purposes, functions and powers stipulated by Constitution and federal laws; CBR shall fulfill functions independently from other federal bodies, constituent entities, and local self-government bodies.
  - Article 2: authorized capital and other property of CBR in federal ownership; property may not be confiscated or encumbered without CBR consent unless federal law stipulates otherwise; state not liable for CBR obligations and vice versa except where assumed or law stipulates; CBR shall cover expenses with its own revenues.
- Board of Directors composition and restrictions:
  - Board comprised of CBR Chairman (Governor) and 14 Board members (first deputy governors and deputy governors) working full-time.
  - Article 21: Minister of Finance and Minister of Economic Development or their representatives participate in Board meetings with “consultative vote.”
  - Article 19: Board members cannot be deputies of the State Duma, members of Federation Council, deputies of regional legislatures, deputies of local self-government bodies, civil servants or members of the Government.
  - A Board member cannot be a political party member or hold position in public, political, or religious organization.
- Board functions (Article 18) include monetary policy, annual financial statement matters, draft guidelines for financial markets, approving compulsory standards and sectoral accounting standards, and deciding on disclosure of confidential information to foreign regulators (Article 51.1).
- Board excluded from direct role in approving supervisory decisions, granting/revoking licenses, imposing administrative sanctions, or criminal referrals — these reserved to executive (Committees on Banking and Securities Market Supervision).
- Measures preventing commercial influence:
  - Article 90 limits outside employment, holding positions in credit and other institutions, and acquiring securities that may yield income in cases of conflict of interest (exceptions by federal law).
  - Article 8 prevents CBR from taking commercial interests in credit institutions or other organizations unless law permits; exception for holdings in Savings Bank of the Russian Federation (Sberbank) where CBR owns 51 percent.
- Consultation with Government (Article 21): parties inform each other on matters of national importance, coordinate policies, and hold regular joint consultations.
- Funding:
  - CBR covers expenses from own revenues (Article 2).
  - 2014 annual report: income of RUB 590,860 million, expenses of RUB 407,532 million, and a profit of RUB 183,508 million.
  - Profit up from RUB 129,261 million in 2013.
  - 90 percent of profit goes to the state budget; remainder stays in reserves; percentage can be changed by government.
- Legal protection:
  - No special protections from legal liability for Board or staff for acts done or omitted in good faith; CBR believes actions against individual staff unlikely as decisions are collegial.
- Accountability to State Duma:
  - Article 5: CBR accountable to State Duma.
  - State Duma powers: appoint/dismiss CBR Chairman at President’s proposal; appoint/dismiss Board members at Chairman’s proposal with President agreement.
  - Article 14: chairman appointed by State Duma for a term of five years by majority of total deputies; dismissal grounds specified (term expiry, health, resignation, indictable crime, violation of federal law regulating CBR, violation of anti-corruption laws).
  - Article 15: Directors can be dismissed upon expiry of five-year term, at Chairman’s proposal before expiry, or at Chairman’s proposal for failure to take measures on anti-corruption provisions.
- Accountability mechanisms:
  - State Duma considers annual reports, decides on Audit Chamber inspections based on National Financial Council proposal, conducts parliamentary hearings.
  - CBR must provide information to State Duma and President as per federal laws; some disclosure restrictions apply.
  - 2014 statements audited by PWC and Financial and Accounting Consultants LLC; Audit Chamber assessed state secret data and passed opinion to auditors.
- Sanctions, appeals, disclosure:
  - CBR publishes decisions to impose administrative sanctions in certain cases (insider dealing, market manipulation) per Article 15 of Federal Law No. 224-FZ.
  - Laws require written reasons for material decisions.
  - Article 44.1 Securities Market Law: CBR required to provide within 30 days reasoned replies to requests from legal and natural persons on competence matters.
  - License revocation requires specification of grounds (Article 39.1).
  - Internal appeals procedure for administrative sanctions short of license revocation; appeal heard by deputy governor from different department; license revocation appeal only to court.
  - In case of a fine, party has 10 days to appeal and not required to pay until appeals process exhausted; license revocation enforced from the day decision is taken.
- Examples of appeal rights:
  - Federal Law No. 156-FZ Article 60.1 Clause 16: applicant entitled to appeal refusal to grant license or omission to act.
  - Federal Law No. 325-FZ Article 26.13: applicant for trading system license may appeal refusal or failure to decide.
  - Securities Market Law No. 39-FZ Article 21: refusal to register issue of securities or prospectus may be appealed in court or arbitration.
  - Securities Market Law Article 51.8: professional participant or issuer may appeal CBR actions aimed at stopping breaches to arbitration court.
  - Securities Market Law Article 51.8: natural persons whose qualification certificates withdrawn have right to appeal to arbitration court.
- Assessment: Partly Implemented.
- Comments:
  - Rating driven by lack of legal protection for staff performing regulatory functions (immunity) when acting in good faith; immunity considered essential for effective regulatory performance.
  - Ministers of Finance and Economic Development have right to attend Board meetings with consultative vote; concerns about direct political influence and lack of transparency as minutes are not published.

### Principle 3 — The Regulator should have adequate powers, proper resources and capacity (Description)
- CBR powers include licensing, supervision, inspection, enforcement, sanctioning all professional market participants, and drafting associated regulations.
- Professional market participant fees are set in the tax code and go to state budget; CBR income derived from central bank sources (interest income, trading in securities, foreign exchange, and gold).
- Retained profit appears sufficient for CBR responsibilities as securities market regulator and central bank supervisor of banks, insurance companies, and non-state pension funds.
- Budget process:
  - Bottom-up departmental budget estimates aggregated by internal budget commission; draft budget considered and approved by Board.
  - Budget referred to National Financial Board (NFB) whose approval necessary for:
    - Staff salaries;
    - Life insurance and medical insurance for staff;
    - Administrative expenses; and
    - Capital expenses.
  - NFB is a collegiate body (Article 12) with twelve members: governor; two from Federation Council; three from State Duma; three from government; three from president’s administration. Chairman appointed by majority; quorum seven.
  - CBR cannot exceed amount for staff and the three areas requiring NFB approval; otherwise may alter expenditure within NFB limits.
  - In last 12 years, NFB has never revised CBR budget.
  - Departments responsible for financial market supervision receive equitable treatment in allocation of funds.
- Staffing:
  - CBR staff turnover is low, at 5 percent.
  - 2014 changes to pay and incentive system introduced new bonus policy focusing on employees’ and divisions’ performance.
  - 2014 training: 4,300 training events; 33,880 employees completed training; 92 training events for 1,825 executives and experts in supervision function; 51 employees completed professional retraining programs of over 500 academic hours.
  - 104 CBR employees completed FSI Connect online learning program; since 2012, 437 employees have undergone this training.
- Governance practices and organization:
  - CBR structure: central office, 81 regional branches, seven main branches with 72 divisions and two divisions—in Crimea and Sebastopol.
  - Headquarters has 39 structural units; territorial units implement policy; central units oversee territorial units.
  - Internal Audit Department of 100–120 people; headed by controller who reports to chief auditor who reports directly to governor.
  - Legal Department reports to governor.
- Regulatory development activity:
  - In February 2016 at least 18 work streams focused on regulatory and legislative amendments to enhance CBR supervision effectiveness; cost of regulation is critical in decision-making.
- Drafting process:
  - Regulation No. 519 (September 15, 1997) governs drafting; structural unit consults other units, places draft on CBR website for public discussion, considers comments, then to Committees on Banking and Securities Market Supervision, governor signature, MoJ registration; final act published and comes into force ten days later; CBR can vary entry into force timings of different provisions.
- Investor education initiatives (priority for next three years per draft Guidelines 2016–18):
  - Introduction of obligatory financial literacy classes in general education institutes;
  - Creation of a specialized CBR webpage devoted to financial literacy issues in an easily understandable way;
  - Defining optimal financial literacy promotion channels for different household groups and most suitable financial products considering individual characteristics and consumer expectations;
  - Creation of financial literacy level evaluation toolkit.
- Assessment: Broadly Implemented.
- Comments:
  - Although CBR has operational control of budget once agreed, overall size of budget established by NFB where governor has one vote among 12; potential for Presidential administration, federal government, and legislature to influence resources for regulation and supervision.
  - Within legal and regulatory complexity, CBR appears to have policies and governance practices to perform functions effectively.
  - CBR investor education work is well regarded by an independent body sponsoring financial literacy initiatives and defending consumer rights.

### Principle 4 — The regulator should adopt clear and consistent regulatory processes (Description)
- Legal and procedural framework:
  - CBR subject to Constitution (Article 75), Central Bank Law, Administrative Code, and Article 172.1 of the Criminal Code re falsifying financial documents.
  - Article 761 of Central Bank Law: CBR cannot interfere in operational activities of non-credit financial institutions except cases strictly defined by federal laws.
  - CBR aims for predictable, comprehensible, and transparent policies and procedures within legal constraints.
- Strategic planning:
  - CBR’s Basic Guidelines for the Development and Operational Stability of the Russian Federation Financial Market in 2016–18 (required every three years) sets strategic medium-term objectives including optimization of regulatory burden and use of proportional regulation and selective supervisory approaches.
- Public consultation:
  - CBR posts drafts of newsletters, directives, orders, and other regulatory approach documents on its website and publishes them in "Bulletin of CBR."
  - Working groups with business representatives set up for public discussion.
  - CBR publishes commentaries on prior actions in defined situations.
- Regulatory Impact Assessment:
  - Order No. ML-3716 (December 27, 2014) “On the order of the regulatory impact assessment of draft normative acts of CBR” evaluates drafts for excessive duties, prohibitions, restrictions, and unreasonable costs; steps include public discussion, analysis of proposals, and adoption of conclusions.
- Procedural fairness and appeals:
  - CBR allows supervised institutions to eliminate minor violations without major sanctions.
  - Decision-making on sanctions is a group responsibility; affected parties may present position prior to decision.
  - Internal appeals procedure for administrative sanctions short of license revocation; license revocation appeal only to court.
  - CBR required to give written reasons for decisions; normative acts may be appealed in court.
- Licensing criteria:
  - Instruction No. 168 (September 13, 2015) on licensing procedure and register of professional participants.
  - Instruction No. 166 (June 29, 2015) on licensing joint-stock investment funds, management companies and specialized depositaries and related registers and notifications.
  - Instructions published in "Bulletin of CBR" and on official website.
- Investigation and disclosure policy:
  - Reports on investigations not public while ongoing; may be made public once decision to impose administrative sanctions taken.
  - CBR discloses decisions on insider dealing and market manipulation on its website shortly after case conclusion.
- Inspection procedures:
  - CBR Instruction 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.”
  - CBR Instruction 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.”
- Internal consistency:
  - Financial Supervision Committee chaired by a first deputy governor considers cases; membership includes a deputy governor, heads and deputy heads of structural units; decision-making by majority; reviews circulated for learning; Internal Audit provides additional check.
- Assessment: Fully Implemented.
- Comments:
  - Industry views on consultation vary but majority consider CBR serious in seeking views and that engagement is worthwhile.
  - Some nonbank licensees uneasy with more intrusive central bank style regulation; CBR must maintain support for consultation to secure willing compliance.

### Principle 5 — The staff of the regulator should observe highest professional standards, including confidentiality (Description)
- Legal basis:
  - Chapter 14 of the Central Bank Law sets many employee requirements.
  - Article 90(3) prohibits certain employees (positions listed by Board) from buying securities that may yield income or result in conflicts of interest (exceptions established by federal laws).
  - Article 11.1 of Federal Law No. 273-FZ (December 25, 2008) “On Corruption Counteraction” requires CBR employees to eliminate conflict of interest possibilities and notify superiors of personal interests including benefits to close family members (Article 10, item 2).
  - CBR Ordinance No. 2723-U (October 31, 2011) “On Insider Information of CBR” lists such information.
  - Requirements to prevent conflicts of interest, ownership restrictions, and disclosure of financial position set out in Article 90 and Article 90.1.
- In-house conflicts and market activity:
  - CBR is an active trader on several MOEX markets (repo, government and corporate bond trading); Sberbank (CBR owns 51 percent) also active.
  - Decision-making on monetary policy, supervision and regulation assigned to different deputy governors to prevent in-house conflicts.
  - Measures in 2014 to reduce CBR and Sberbank influence on MOEX:
    - CBR stake in MOEX reduced from 22.47 percent to 11.73 percent in 2014.
    - CBR no longer holds a blocking shareholding individually or jointly with Sberbank.
    - Number of CBR representatives on MOEX Supervisory Board reduced to 2 of 15 members: Chief Auditor of CBR and Dean of Free Art and Science Faculty of St. Petersburg Statutory University.
  - CBR trading and trading supervision functions carried out by different departments.
  - Some MOEX products designed for trading with CBR only (Repo with CBR); others use MOEX platforms used by all participants.
- Restrictions and instruments governing employee conduct:
  - Article 92 and Position No. 484-p (July 8, 2015) and Instruction No. 3414-u (July 10, 2014) address restrictions on use of proprietary/confidential information and personal data, and procedures on prevention and resolution of conflicts of interest.
  - Additional acts relevant to conflict of interest and anti-corruption include:
    - Federal Law No. 273-FZ of December 25, 2008 (Articles 9–11, 11.1, 13.2);
    - Instruction No. 3414-U (October 7, 2014) on avoidance and regulation of conflict of interests;
    - Instruction No. 3336-U (July 22, 2014) on notification and verification procedures for corruption-related applications;
    - Regulation No. 438-P (October 23, 2014) on notification on gift presentation due to official position and related procedures;
    - Regulation No. 484-P (August 7, 2015) on compliance with official conduct and conflict of interest regulation;
    - Order No. OD-914 (November 18, 2013) forming the Commission on Compliance with Requirements on Official Conduct and Regulation of Conflict of Interest.
  - CBR website contains a separate anti-corruption section with additional documents.
- Restrictions on acquiring/disposing securities:
  - Part 7 Article 11, Article 12.3 of Federal Law No. 273-FZ (December 25, 2008) set restrictions.
- Financial disclosure requirements:
  - Regulation for Procedure on Inspections of the Accuracy and Certification of the Data on Income, Property, and Property-Related Obligations (approved August 20, 2013 No. 405-P);
  - Order No. 3651-U (May 25, 2015) “On List of Positions that Requires Disclosure of the Data on Income, Expenses, Property and Property-Related Obligations” approved May 26, 2015;
  - Order No. 2991-У (April 8, 2013) “On List of Positions … that have to provide Data 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 (approved May 21, 2013 No. 399-P);
  - Instruction No. 3027-U (July 16, 2013) “On procedure for Placement of Data on Income, Expenses, Property and Property-Related Obligations by the Russian Mass Media for the Purposes of Publication”;
  - Regulation for Commissions on Compliance with Requirements on the Official Business and Regulation of the Conflict of Interests (approved August 7, 2015 No. 484-P).
- Fragmented obligations and responsibilities:
  - Fragmentation reflects Russian legal system operation; CBR cannot consolidate all norms into one non-legal document.
  - CBR ensures staff understand responsibilities: new applicants receive information, sign documents acknowledging obligations, induction processes in place.
  - Each staff member has staff instructions describing powers and duties; heads of departments ensure familiarity with new laws; CBR website contains legal texts, explanatory notes and diagrams.
- Operational and disciplinary processes:
  - Governing acts include:
    - Federal Law No. 59-FZ of May 2, 2006 “On procedure of consideration of application of individuals”;
    - Regulation No. 484-P (August 7, 2015) on Commissions on Compliance with Requirements to Official Business and Conflict of Interest Regulation;
    - Regulation No. 405-P (August 20, 2013) on inspections of accuracy and certification of disclosed data.
  - Disciplinary system per CBR Instruction No. 3336-u (July 22, 2014) on notifying employee representatives about corruption-related facts; Article 90/1: nonperformance of obligations on conflict of interest prevention is violation punishable by termination for listed positions.
  - HR inspections of compliance with legislation and internal Code of Conduct conducted regularly.
  - From beginning of 2013 to early 2016 at CBR headquarters: 38 people held disciplinarily liable; 19 received disciplinary action notices; remainder received reprimands.
  - Other federal laws apply for corruption offenses with criminal, administrative, civil and disciplinary liability; sanctions include bans on occupying certain State and municipal service positions.
- Definition of conflict of interest:
  - Law contains definition as it applies to state or municipal employees (Article 10 referenced).
- Assessment: (Principle 5 description concludes before explicit assessment in supplied content — content ends at Article 10 reference.)

_Italic: Russian Federation — Detailed Assessment of Implementation of the IOSCO Principles (excerpts provided in source PDF)._

### 1. In this federal law, the conflict of interest in state or municipal service is understood to

### 1. In this federal law, the conflict of interest in state or municipal service is understood to

### Definition and scope
- 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.
- It covers situations where a contradiction may arise between personal interests of the servant and rights and lawful interests of citizens, organizations, society or the state.
- It includes circumstances which can be to the detriment of rights and lawful interests of citizens, organizations, society or the state.

*Source: _cr16304 - 1. In this federal law, the conflict of interest in state or municipal service is understood to*

### 2. Personal interest of a state or municipal servant, which influences or can influence

### 2. Personal interest of a state or municipal servant, which influences or can influence

### Definition and assessment of personal interest
- Definition: 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
- Key findings and comments:
  - References to restrictions apply only to “CBR employees holding a position included in the list approved by the board of directors” rather than to “staff” generally; staff below middle manager level (e.g., below deputy head of division) are not included.
  - Staff not on the “list” face more general obligations (e.g., section 5.3 of the Regulation of CBR of July 25, 2003 N 235-P) requiring transfer of securities to fiducial management if holding them may lead to conflict of interest.
  - The two-tier approach (list vs. general obligations) lacks a clear justification.
  - Reliance on the term “third parties” in Article 10(2) of the anti-corruption law could be clarified to ensure constraints apply equally to family members.
  - Although multiple laws/regulations create potential gaps/ambiguities, CBR has made substantial efforts to enable staff understanding of duties and penalties; scope remains to provide greater clarity and minimize undetected/inappropriate behavior.

### Principle 6 — Monitor, mitigate, and manage systemic risk
- Description:
  - Statutory obligation: Article 45 of the Central Bank Law requires CBR to elaborate and pursue, in collaboration with the government, a policy to develop and ensure stable functioning of financial markets, monitor the state of Russian financial markets, detect situations endangering financial stability, and develop measures to reduce threats.
  - Primary public disclosure: twice yearly Financial Stability Report (FSR). First updated edition covered 2014 Q4 2015 Q1; second edition covering 2015 Q2 and Q3 was being translated into English as of February 2016.
  - FSR content example: discussed December 2014 increased volatility in stock exchange and FX markets, stabilizing measures by CBR, liquidity problems of professional securities market participants, NCC response, tightened supervision, and development of repo liquidity mechanism via central counterparties.
  - Technical work by Financial Stability Department (FSD): uses a dashboard with indicators and thresholds (yellow and red zones); dashboard updated at least monthly and submitted to FSC com members; list of risk factors for NFEs under development.
  - Longer-term requirement: submit draft guidelines to the President and State Duma once every three years for developing and ensuring stable functioning of financial markets; State Duma considers draft in a parliamentary hearing and sends recommendations to CBR.
  - Coordination structures: National Council on Financial Stability (NCFS) established in 2013 (meets at least quarterly) and internal high-level FSC Com established November 2014, chaired by the governor, with responsibilities including assessment of systemic risks, FMIs, largest non-financial institutions, and review of draft FSR.
  - Shadow banking / NFEs: total assets of shadow banking entities amounted to US$126 billion in 2014, representing 6 percent of total assets of the Russian financial sector; increase in ruble terms but decrease in dollar terms due to ruble depreciation; liquidity and maturity transformation risks are main risks.
- Assessment: Fully Implemented
- Comments:
  - FSR addresses systemic issues across financial market segments with appropriate focus and analysis.
  - Nonbanking sector departments are fully engaged in systemic risk work.
  - FSC Com focuses on NFEs and systemically important FMIs.
  - NCC (clearing house and CCP) and National Settlement Depository (CSD) declared systemically important financial institutions (SIFIs).

### Principle 7 — Review perimeter of regulation regularly
- Description:
  - CBR analyzes regulatory standards and compliance risks and takes action to amend legislation where necessary.
  - Following 2013 consolidation, CBR initiated a Task Force under the President’s Council producing an initial list of 233 proposals from the professional community, ranked by priority; Task Force annual meetings serve as forum for CBR to discuss priorities with professional community.
  - Expert councils established under CBR include:
    - 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;
    - Expert Council on Financial Literacy in the Operations of Non-Lending Financial Institutions.
  - Perimeter issues examined include securitization quality, agricultural infrastructure bonds, derivatives market enhancements, NFEs offering quasi-banking products, retail foreign exchange dealers, and microfinance sector concerns.
  - CBR cooperates with law enforcement to counter Ponzi schemes and developed an analytical process to distinguish Ponzi schemes from legitimate products.
  - Sources of information: market participants, banks, SROs, Territorial Units, complaints, and foreign regulators’ websites.
- Assessment: Broadly Implemented
- Comments and recommendations:
  - Scope exists to further formalize perimeter review (appoint senior manager and staff with explicit responsibility and reporting lines).
  - Consider providing specialized training for Territorial Units to better recognize Ponzi schemes and outright fraudulent practices, especially in isolated/rural communities where financial literacy is low.

### Principle 8 — Conflicts of interest and misalignment of incentives
- Description:
  - Central Bank Law (Article 4.1) obliges CBR to elaborate and pursue a policy for preventing, detecting and managing conflicts of interest.
  - Existing provisions:
    - Securities Markets Law (Article 3.2): broker must compensate client if unnotified conflict of interest causes damage; client must go to court; CBR has levied administrative fines in such cases; CBR considering power to order remediation by brokers where client losses resulted from conflicts.
    - Investment Funds Law Article 2.2: CBR shall establish requirements aimed at preventing conflicts of interest of management companies and specialized custodians (no equivalent compensation provision).
    - CBR Regulation of August 3, 2015 No. 482-II (Chapter 6): managers must identify, monitor, prevent and notify clients about conflicts if prevention fails.
    - Investment Funds Law Article 40(1)(8): MC prohibited from transactions involving securities issued by participants, subsidiaries, affiliates, specialized depositary, external auditor, registrar, or holders of shares in these persons.
    - Article 19 of the SRO Law requires SROs to have rules addressing conflicts; Auditor Law Article 8 prohibits conflict-causing actions; CRA law Articles 3(3) and 3(9) prohibit certain activities and require CRAs to identify, manage and disclose conflicts.
  - Misaligned incentives:
    - CBR Instruction No. 154-I of June 17, 2014 on remuneration policy addresses banks and non-state pension funds; may be extended to broker dealers as recommendation.
    - Disclosure requirements exist but are tempered by phrase “depending on the resources of the intermediary.”
  - Identification of conflicts: generally reactive—identified from investor complaints after damage has occurred.
- Assessment: Not Implemented
- Comments and recommendations:
  - Key deficiency: lack of an ongoing process to identify and evaluate conflicts of interest that may affect investor protection, market fairness, efficiency, transparency, or pose systemic risk (Key Question 1). CBR is not sufficiently proactive; responses are primarily reactive.
  - Responsibility placed on clients to identify losses caused by conflict mis-management is inadequate.
  - Difficulties exist in drafting enforceable provisions under the Russian legal system that impose on professional participants obligations to identify, avoid, eliminate, disclose or manage conflicts and to enable CBR to provide non-exhaustive guidance on situations constituting conflicts.
  - Strong recommendation that authorities seek a solution to align the regulatory framework with international standards.
  - Recommendation to review remit of remuneration instruction and consider mandatory extension to broker dealers and fund managers.

### Principles for Self-Regulation — Principle 9 (SROs)
- Description (context and current state):
  - Legislative framework: SRO provisions found in Law 223 of July 13, 2015 (SRO Law) effective January 11, 2016, plus Articles 48–50 of the Securities Law and Articles 57–59 of the Investment Funds Law. New SRO Law does not repeal prior SRO provisions.
  - The new SRO Law:
    - Makes membership mandatory for firms engaging in an activity for which an SRO is registered, while older laws kept membership voluntary—both sets remain in force.
    - Changes statutory purpose of SROs: Article 3 emphasizes promoting members’ interests, market development and efficiency, rather than investor protection (contrary to Securities Law Article 48).
    - Requires internal standards and basic standards; basic standards must be approved by CBR and adopted by all SROs in a field; CBR must approve basic standards no later than three months after the first SRO is registered.
    - Registration criteria include having 26 percent of participants in the relevant field as members, internal rules consistent with law/regulations, and appropriate governance arrangements.
    - SRO powers: collect information, conduct onsite inspections of members (not more than one scheduled inspection a year), monitor compliance, apply sanctions, submit budgets for CBR review.
    - CBR supervisory powers over SROs under Article 28; powers to collect information, require scheduled onsite inspection lists, and in certain cases terminate SRO status or require dismissal of SRO Head.
  - Transition and practical issues:
    - At time of assessment, no SROs had yet registered under the new SRO Law; existing SROs continue under old laws and have until end of March 2016 to apply; associations existing more than a year have two years to comply fully.
    - Because basic standards do not yet exist, professional securities firms are legally obliged to comply with them though none are in place; CBR stated it would not take enforcement action while basic standards are absent.
- Assessment: Not Implemented
- Key findings, gaps, and concerns:
  - Contradictions between new SRO Law and pre-existing provisions in Securities Law and Investment Funds Law create a highly confused legal picture.
  - Specific gaps identified:
    - New law’s primary purpose for SROs favors member interests over investor protection.
    - No explicit requirement for CBR to assess SRO capacity to fulfill its function.
    - Single prohibition on unjustified privilege and conflict provisions in SRO Charter are insufficiently explicit to ensure equal treatment and avoid misuse of information.
    - No procedural fairness requirements for SRO internal processes; CBR cannot intervene to amend internal rules except where they break law/regulation.
    - No comprehensive record-keeping requirement for SROs beyond member register.
    - No explicit power in SRO Law for CBR to conduct onsite inspections of SROs (though Securities Law contains an inspection power).
    - No explicit override of SRO confidentiality duty when CBR requests information.
    - Requirement that an SRO have 26 percent of participants as members creates a significant barrier to entry for new SROs.
    - Potential for SROs to act in members’ interests to the detriment of investor protection due to statutory primacy of members’ interests.
  - CBR has not finalized its view on the extent of delegated regulatory role to SROs; will consider effectiveness in operation under the new law before deciding.
- Recommendations (selected, verbatim-preserving substance):
  - Clarify legal position urgently: amend or repeal conflicting provisions, adopt new regulations, and register SROs under the new SRO Law.
  - Amend SRO Law to include:
    - Primary purpose of SROs must be implementation of high standards of professional behavior and investor protection (not advancement of members’ interests).
    - Registration condition: demonstrate willingness and capacity to provide adequate standards of professional behavior and investor protection.
    - Prevent members/employees from abusing position to gain unfair competitive advantage.
    - Internal rules must include provisions on procedural fairness matching those of CBR and prohibition on inappropriate use of information.
    - Internal rules must ensure similarly situated members/applicants are treated equally.
    - Membership criteria must not be a barrier to entry.
    - SRO internal rules should be submitted to CBR for approval; CBR able to approve, deny, or insist on changes.
    - SRO record-keeping required for a minimum of five years to demonstrate compliance with charter and statutory responsibilities.
    - CBR must have power to conduct onsite inspections of SROs.
    - CBR power to collect information from SROs overrides confidentiality duties imposed by SRO Law or other statute.
  - Further recommendations:
    - CBR develop, with SROs, standards for supervision of members using all supervisory tools (meetings with management, guidance letters, public statements, periodic reporting, questionnaires, varied onsite inspections).
    - Basic standards adopted by CBR should replace, not add to, existing regulatory regime when CBR considers SROs ready.
    - CBR develop a supervision program addressing barriers to entry and misuse of advantage, including regular management meetings, reviews of internal/basic standards operation, effectiveness reports (risk assessments, corporate governance practices, client agreements, internal staff training, complaints, number of inspections and sanctions), and onsite inspections of SROs and member firms.

### Principles for Enforcement — Principle 10 (Inspection, investigation and surveillance powers)
- Description:
  - CBR possesses inspection, investigation and surveillance powers across statutes:
    - Central Bank Law Article 76(1) responsibilities for supervision of non-credit institutions; Article 76(5) onsite inspection power.
    - Securities Law Article 44 grants supervisory powers and onsite inspection power (Article 44(6)) over professional securities firms.
    - Investment Funds Law Article 55(3) gives inspection power over investment funds, management companies and special depositories.
    - Organized Trading Law Article 25(2) and Clearing Law Article 25 give inspection powers for organized trading and clearing houses respectively.
  - Distinctions exist between scheduled and unscheduled inspections in some laws (scheduled no more than once a year; unscheduled require complaint or suspicion), but no such restriction in Central Bank Law or Securities Law inspection powers.
  - CBR powers to obtain books, records and data: Article 76(6) Central Bank Law; Article 44(7) Securities Law; Article 55(13) Investment Funds Law; Article 25(5) Organized Trading Law; Article 25(4–5) Clearing Law.
  - Exchange surveillance:
    - Organized Trading Law obliges exchanges to conduct trading supervision (Article 5); CBR has unrestricted access (Article 25).
    - Regulation 474 Appendix 4 paragraph 32 requires a remote terminal supplied to CBR to facilitate surveillance (see Principle 36).
  - Record keeping:
    - Accounting Law (Law 402 of December 6, 2011) requires accounting records for wide range of entities; records must be kept for five years (Article 29).
    - No general record keeping obligation in Securities Law, Investment Funds Law or Organized Trading Law; however, numerous specific recordkeeping requirements exist across laws and FSFR Decision No. 32 (Deals Recordkeeping Order) imposes detailed transaction record requirements and five-year retention (paragraph 13).
    - AML Law (Law 115 of August 7, 2001) Article 7 requires obtaining and keeping client identity records, with exceptions for transactions under RUB 15,000 (US$200) and five-year retention after termination (Article 7(4)).
- Assessment: Fully Implemented
- Comments and recommendation:
  - The absence of a general record-keeping requirement could have led to downgrade, but combination of Accounting Law and specific requirements meet the principle criteria.
  - Recommendation: seek amendment to Securities Law, Investment Funds Law, Organized Trading Law, and Clearing Law to impose a general record-keeping requirement for securities businesses, with five-year retention.

### Principle 11 — Comprehensive enforcement powers
- Description:
  - CBR enforcement toolkit:
    - Powers to collect information, conduct onsite inspections, and conduct investigations (Central Bank Law; Securities Law; Investment Funds Law).
    - Powers to direct regulated entities to correct breaches (Article 44(7) Securities Law; Article 74 Central Bank Law; Article 55(2)(13) Investment Funds Law; Article 25 Organized Trading Law; Clearing Law Article 25).
    - Administrative sanctions under Law 9 FZ of February 9, 2009 on Administrative Offenses: fines and disqualifications; natural person fines up to RUB 50,000 (US$750) and disqualification up to two years; legal person fines up to RUB 1 million (US$14,000).
    - Powers over unregulated persons: obtain information from issuers (Article 44(7) Securities Law); require information in connection with organized trading (Article 25(4) Organized Trading Law); investigate insider dealing under Law 224 of July 27, 2010.
    - Referral to Public Prosecutor (Article 44(8) Securities Law).
    - Criminal penalties for market manipulation (Article 185.3 Criminal Code) and illegal use of inside information (Article 185.6 Criminal Code) with thresholds and penalties:
      - Market manipulation: large losses/profits threshold RUB 2.5 million (US$37,000) triggers penalties including fines from RUB 300,000 to RUB 500,000 (US$7,000) or one to three years’ salary or imprisonment up to four years with fine up to RUB 50,000 (or up to three months’ salary) and subsequent professional restrictions up to three years; particularly serious cases threshold RUB 10 million US$150 million with stiffer penalties including imprisonment two to seven years and fines.
      - Illegal use of inside information (including tipping) subject to similar criminal penalties with RUB 2.5 million (US$37,000) threshold.
    - Administrative fines for legal entities where offense not criminal: Articles 15.21 and 15.30 Administrative Offenses Code impose fines equal to profit or avoided loss but no less than RUB 700,000 (US$10,000).
    - Power to stop or suspend trading (Organized Trading Law Article 21; Securities Law Article 25(2)).
    - Private rights: Article 7(7) Insider Dealing Law permits those suffering loss from insider dealing or market manipulation to claim compensation.
  - Information on beneficial ownership:
    - CBR can obtain beneficial ownership information where available in jurisdiction; registrar obligations provide nominal owner records but client confidentiality limits direct beneficial ownership disclosure in some cases.
    - AML Law Article 7 requires regulated persons to identify beneficial owners (defined in Article 2 as direct or indirect control of 25 percent), but allows assumptions when identification is not “affordable” and may treat executive body as beneficial owner when measures fail—likely to result in non-identification in some cases, especially foreign ownership structures.
    - Deals Recordkeeping Order lacks explicit requirement to record beneficial owner of securities.
- Assessment: Broadly Implemented
- Comments and recommendations:
  - Rating downgraded because beneficial ownership information may not always be available to CBR due to AML Law provisions permitting assumptions and possible non-identification, especially for legal persons with foreign ownership.
  - Although CBR has sufficient powers over regulated and unregulated persons and is developing market surveillance and enforcement capabilities, criminal prosecutions for insider dealing have been virtually non-existent at the time of assessment.
  - CBR has used powers to cancel licenses and impose administrative penalties; financial sanctions are modest but withdrawal of qualification certificates and potential prison sentences render sanctions potentially effective, proportionate, and dissuasive.
  - CBR is encouraged to continue developing relations with law enforcement and enhancing use of enforcement powers.
  - Recommendation: address beneficial ownership data gaps to improve enforcement effectiveness.

*Source: _cr16304 - 2. Personal interest of a state or municipal servant, which influences or can influence (IMF document).*

### 1. The rulings of the federal executive body in charge of securities markets [now the CBR] shall

### _cr16304 - 1. The rulings of the federal executive body in charge of securities markets [now the CBR] shall

### Legal scope and nature of CBR rulings
- The rulings of the federal executive body in charge of securities markets [now the CBR] shall be mandatory for:
  - 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.

### Specific enforcement powers described
- 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.
- The text highlights two interpretations of the breadth of Article 11 powers:
  - A broad interpretation that would allow CBR to instruct any person (legal or natural) to do anything within its competence and to obtain information from unregulated persons even where matters are not connected to insider dealing or market manipulation.
  - A narrower interpretation that qualifies the power by reference to the need to stop violations of the Law on Joint Stock companies and securities markets laws.
- CBR has indicated practical limits in use of Article 11 powers (e.g., reluctance to use them to transfer client assets from one broker to another even where such action would protect investors), citing absence of a specific legal provision and concerns about judicial enforcement of broad undefined powers.

### Assessment considerations and legal uncertainty
- Assessors cannot reach a definitive legal conclusion on the scope of Article 11.
- If Article 11 is interpreted broadly, it could:
  - Enable collection of information from unregulated persons in circumstances not explicitly provided elsewhere in the laws;
  - Support asset transfers between brokers to protect investors.
- If Article 11 cannot be used for such purposes, the report notes that:
  - Other CBR powers in the Insider Dealing Law appear sufficient to collect information with respect to market abuse;
  - Powers over issuers and users of organized markets provide further investigative reach;
  - CBR can refer matters to the public prosecutor where needed.

### Recommendations (explicit)
- 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 — Supervision, inspection, investigation and enforcement framework
- Principle statement: The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
- CBR’s supervision and enforcement program consists primarily of:
  - offsite supervision; and
  - onsite inspections.
- Offsite supervision is conducted by specialists in capital market activity and uses periodic reports (primarily financial data), complaints, reports of violations and other intelligence to determine a six-month inspection plan.
- The offsite team currently does not produce a comprehensive risk scoring of intermediaries that accounts for adequacy of RM, internal controls and procedures (except for the limited and detailed provisions in the internal controls regulation), or a broader view of management quality and compliance culture.
- There is a move towards a risk-based approach, particularly to identify and remove intermediaries that carry out limited or no business.

### Inspection resourcing, methodology and scope
- The inspection team:
  - Has 250 staff to inspect over the 19,000 non-credit financial organizations for whose supervision CBR is responsible.
  - Does not have any dedicated capital markets specialists.
  - Is formed of: employees of Federal Service of Financial Markets (financial markets specialists) transferred to CBR; employees with banks’ inspections experience; and hires from different financial market segments (including Big four audit firms).
- Onsite inspections follow a methodology developed by the headquarters Policy Division, with a primary focus on identification of breaches of the regulations.
- Inspections review internal documents and customer files—focusing on files with indications of potential wrongdoing.
- Inspection findings (including lists of violations) are reviewed by the offsite team during inspections; repeated or egregious violations may prompt a special intermediate report with evidence for immediate supervisory measures.
- A final report of violations together with an agreed rectification program is handed to the regulated entity on departure; the onsite inspection team is responsible for follow-up to check implementation.

### Inspection scheduling and market monitoring
- Inspections were both scheduled and unscheduled. CBR did not provide data on the number of inspections of securities firms until its final comments on the report.
- According to the Annual Report of CBR, most inspections are unscheduled—generally made in response to a suspicion of a specific breach or a complaint—thus more investigative than routine.
- 2014 inspection data for the nonbank regulated financial sector (some 19,000 entities):
  - 97 inspections were scheduled; and
  - 499 inspections were unscheduled.
- There have been no inspections of exchanges.
- Exchanges have automated systems monitoring market activity and report to CBR. CBR also has terminals receiving information from all nine exchanges showing trading in real time with investors identified by codes.
- CBR is developing a system to obtain and analyze information from all exchanges to identify cross market activity; currently CBR states the extent of cross market activity is relatively small.

### Market abuse monitoring and outcomes
- Monitoring purpose: detect patterns indicating market manipulation, insider dealing, and front running.
- Since 2013, alerts prompting investigation:
  - 70 alerts in total;
    - 57 were suspected market manipulation; and
    - 13 were insider trading.
- Administrative penalties imposed in 18 cases of market abuse.
- None of these cases resulted in criminal penalties.
- 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.

### 2015 enforcement actions and sanctions (professional securities firms)
- 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.
- CBR reports that in 2015 there were 96 administrative penalties imposed on professional securities firms but in only seven cases were there notices for improvement—indicating a focus on penalties over improvement notices.

### Internal controls, compliance officers and managerial responsibility
- 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.
- FSFR Order 12-32 of May 24, 2012 — the Internal Control Regulations — imposes more detailed requirements largely concerned with the appointment, duties and functions of a compliance officer.
- The Internal Control Regulation:
  - Does not include a general obligation to have adequate internal controls in place;
  - Charges the compliance officer primarily with identifying compliance breaches, reporting them and dealing with them;
  - Does not impose a detailed requirement to have an adequate RM system or adequate policies and procedures designed to prevent breaches of the regulations.
- There are no provisions that enable CBR to take action against the management of securities firms for breaches committed by staff.
  - Article 69 of the Law on Joint Stock Companies gives responsibility to the executive body for everyday running but does not give legal responsibility for violations committed by subordinates.
  - Article 44(10) of the Securities Law enables CBR to withdraw qualification certificates of senior officials only if there are repeated violations by them (not by other staff).
  - The Internal Control Regulation makes the compliance officer responsible for violations, not the 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 audit these transactions using the powers in Principles 10 and 11.

### Use of enforcement powers and supervisory focus
- CBR demonstrates active monitoring of regulated persons and has been engaged in efforts in 2015–16 to identify professional securities firms that conducted little or no business in practice.
- Certain intermediaries have been placed on a watch list and subjected to more intensive supervision using offsite reporting, inspections and market intelligence.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16304.pdf*

### 18.7 percent have had their licenses cancelled (see Principle 29). For example, in 2015, there

### _cr16304 - 18.7 percent have had their licenses cancelled (see Principle 29). For example, in 2015, there

### Enforcement and supervision of securities market participants
- 18.7 percent have had their licenses cancelled.
- 2015 enforcement actions:
  - 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).
  - 228 administrative penalties imposed.
- CBR enforcement and supervision practices:
  - No onsite inspections of exchanges for some four years; onsite inspections are now beginning.
  - Offsite supervision by quarterly reports focused primarily on financial information and extensive transaction data.
  - No active monitoring of short selling by the exchange (see Principle 37).
  - CBR conducts its own market data analysis and participates on exchange user committees to monitor exchange surveillance effectiveness.
- Insider dealing and market manipulation:
  - Insider Dealing Law first enacted in 2013; penalties not fully available for a further year.
  - Prior to 2013, there were no criminal offenses for market abuse.
  - Since the insider dealing law enacted in 2011, there has been one criminal investigation into market manipulation in four years.
  - 70 investigations in total: 13 on insider dealing and 57 on market manipulation.
  - These investigations led to 18 cases involving administrative fines and no criminal sanctions.
  - CBR directed approximately 30 preventive orders, cancelled more than 40 qualification certificates of individuals and more than 20 licenses of professional securities market participants.

### Assessment, key weaknesses and operational constraints
- Assessment: Not implemented.
- Reasons for rating and key findings:
  - Enforcement program not fully effective.
  - Inspection planning neither risk-based nor routine/periodic: 97 scheduled inspections across 19,000 nonbank institutions in 2014 cannot be described as routine or periodic.
  - No onsite inspection of the exchange (prior to recent resumption).
  - Supervision system emphasises finding and punishing violations rather than assessing overall compliance and firm operations.
  - Incidence of improvement notices is relatively rare compared with administrative penalties.
  - Inspection resources extremely limited and spread across the entire financial sector:
    - 250 inspection staff responsible for 19,000 nonbank financial institutions.
    - Most inspection resources 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 in 2014.
  - Discrepancies in reported inspection numbers:
    - CBR stated 28 scheduled inspections (and 9 unscheduled inspections) of securities market intermediaries in 2014 and 23 (plus 4 unscheduled) in 2015.
    - Assessors could not reconcile these figures with Annual Report data (28 scheduled inspections of 1,000 securities market intermediaries vs. 97 for 19,000 nonbank entities).
  - Focus of inspections is on identifying violations and fraudulent customers, rather than ensuring intermediaries protect customers’ interests through disclosure, ethical conduct or segregation of assets.
  - Action on market abuse has not extended to misrepresentation of material information or other fraudulent activity.
  - Internal controls regulation focuses on compliance officer appointment, duties and micromanagement (e.g., procedure when compliance officer is away, number of copies of quarterly reports), rather than risk management fundamentals.

### Recommended elements for an internal control / risk management (RM) regulation
- An obligation on management to undertake a business risk assessment.
- A requirement to implement policies and procedures to mitigate those risks and maintain compliance.
- A duty to appoint a compliance officer to monitor the effectiveness of policies and procedures.
- An obligation to appoint an internal auditor to monitor compliance with internal policies and procedures.
- A requirement for management to implement a management information system to provide information on compliance and effectiveness.
- An obligation to provide training to staff on internal controls.
- A requirement that management review their risk assessment and the effectiveness of policies and procedures no less frequently than annually.
- A duty for management to report any material breaches of regulations to CBR.
- Explicit assignment of final responsibility for compliance to executive management (not solely the compliance officer), with CBR empowered to take action against management for breaches even without direct managerial participation.

### Suggested supervisory program components and broader supervisory tools
- Issue guidance, public statements and interpretations of regulations and implications of enforcement to clarify CBR expectations for good RM.
- Regular management meetings with significant regulated persons to discuss business development and emerging risks.
- Regular meetings with stakeholders (regulated community, SROs, issuers, investors, auditors) to discuss market developments and compliance trends.
- Surveys of the regulated community on regulatory matters related to key risks.
- Require regulated entities to report on measures indicating compliance adequacy: risk assessments, customer risk scoring, business line development, number of complaints, staff training, disciplinary measures taken, etc. (not confined to financial information).
- Clarify division of duties between CBR and SROs and supervise SROs as frontline regulators.
- Use a mix of themed, targeted and full-scope inspections.

### Recommendations (enforcement & inspections)
- CBR should devote sufficient resources to the Inspection team to enable a routine, periodic, or risk-based inspection program.
- CBR should inspect the exchanges and conduct such inspections regularly going forward.
- CBR should seek amendments to the Securities Law placing specific responsibility for regulatory compliance on securities firm management.
- CBR should redraft internal controls regulation to focus on essential elements of internal control systems rather than micromanagement of compliance officer tasks.
- CBR should review and remove micromanagement provisions (e.g., number of copies a compliance officer must prepare) from detailed regulations.
- CBR should adopt an inspection and enforcement approach focused on risks to securities regulation objectives, identify key mitigating measures, and use all supervisory tools to ensure compliance.
- CBR should develop periodic reporting requirements to obtain more information relevant to adequacy of RM and compliance by securities firms.
- Recommendations in Principle 9 on SROs’ new frontline role are also applicable.

### Criminal vs. administrative investigations and coordination with law enforcement
- Assessors recommend detailed consideration of procedures to commence insider dealing and market manipulation investigations:
  - CBR must begin investigations to decide on administrative penalties.
  - For criminal cases, Law Enforcement authorities should take the lead due to expertise in criminal investigations and prosecution preparation.
  - Risk that early CBR investigations could taint evidence for criminal proceedings if procedures are not aligned.
  - Authorities aware of the issue, but assessors not convinced there is full practical appreciation of the challenges; recommend developing procedures to avoid identified risks.

### Principles for Cooperation in Regulation (Principles 13–15)
- Domestic information exchange agreements in place with:
  - General Prosecutor's Office of the Russian Federation; Ministry of Internal Affairs; Federal Service for Financial Monitoring; Federal Tax Service; Federal Customs Service.
- Presidential Decree 224 mandates exchange of information between domestic agencies to assist enforcement.
- Key legal provisions and issues:
  - Article 44(1) Securities Law and Article 23 Organized Trading law require confidentiality of supervisory information; Article 56 Investment Funds Law makes CBR staff personally accountable for disclosure of commercial secrets.
  - Article 21 Central Bank Law empowers CBR to provide information to advisory and coordinating bodies, except where prevented by federal law.
  - Article 51(1) Central Bank Law allows information exchange with foreign regulators in compliance with IOSCO MMoU, international treaty, or bilateral treaty; covers confidential information including bank secrets and does not require ministerial/attorney approval.
  - Sanctions for failure to respond to demands under Article 76: RUB 30,000 (US$425) for individuals and RUB 700,000 (US$10,000) for legal entities.
- Limitations and conflicts:
  - Article 51(1) would override Article 44(1) and Article 23 because they allow disclosures required by law, but Article 56 Investment Funds Law contains no explicit override and imposes personal liability on staff—creating uncertainty.
  - Confidential information cannot be exchanged on an unsolicited basis; CBR can only provide information based on a reasoned enquiry from a foreign financial market regulator (Article 51(1)).
  - Gaps in record-keeping provisions may limit ability to provide beneficial ownership data if such information was not collected domestically.
  - Article 51(1) requires information received from foreign authorities to be kept confidential and only disclosed with source authority approval or a court, but also obliges CBR to comply with Russian disclosure requirements—ambiguity exists on precedence.
- Assessment of Principle 13: Partly Implemented.
  - Key reasons:
    - Article 56 Investment Funds Law confidentiality not explicitly overridden.
    - CBR cannot provide confidential information unsolicited.
    - Limitations on providing beneficial ownership/control information where not collected domestically.
- Recommendations for Principle 13:
  - Amend Central Bank Law to enable provision of confidential information to a foreign regulator on an unsolicited basis.
  - Amend Investment Funds Law to provide an exception to the commercial secrets provision where disclosure is permitted by law.
  - Address record keeping recommendations in Enforcement Principles.

- Principle 14 (information-sharing mechanisms):
  - CBR has legal agreements with multiple domestic agencies (Federal State Statistics Service; Ministry of Internal Affairs; Federal Financial Monitoring Service; Federal Tax Service; Deposit Insurance Agency State Corporation; Prosecutor General; Federal Security Service; Federal Drug Control Service; Federal Customs Service; Investigative Committee; Federal Financial and Fiscal Supervision Service).
  - CBR entering into legal agreements with Federal Financial Monitoring Service, Federal Tax Service, Ministry of Internal Affairs.
  - CBR is signatory to IOSCO MMoU and has signed agreements with regulators in Cyprus, Lao, and Belarus.
  - In practice in 2015: CBR responded to 26 of 30 foreign requests; 16 of 30 requests under MMoU; four incomplete due to insufficient identifying information; typical response time 1.5 to 2 months (two requests took about six months).
  - Article 51(1) requires confidentiality of information received.
  - Assessment: Fully Implemented.

- Principle 15 (assistance to foreign regulators):
  - Article 51(1) and powers in Central Bank Law, Securities Law, Investment Funds Law, Organized Trading Law, and Clearing Law enable exchange of all relevant categories of information, subject to the caveats noted (Article 56 conflict; record-keeping gaps).
  - No requirement for domestic interest or ministerial approval to exchange information with foreign regulators.
  - In practice in 2015: CBR responded to 26 of 30 requests; response times 1.5 to 2 months.
  - Assessment: Fully Implemented.
  - Comment: Rating assumes Article 56 absence of exemption and legislative gaps have not inhibited practical assistance.

### Principles for Issuers (Principle 16: disclosure; Principle 17: shareholder treatment)
- Corporate forms and transition:
  - Historically closed joint stock companies and open companies; 2014 Civil Code changes simplify to public companies listed on an exchange and private companies.
  - Existing public companies that issued a prospectus prior to July 1, 2015, have five years to amend to private or listed.
  - CBR estimates in 2016: approximately 4,000 public companies issued a prospectus but are not listed; around 400 have issued a prospectus and are listed.
- Prospectus and reporting requirements:
  - Article 22(1) Securities Law requires a prospectus for public offers except where exemptions apply (qualified investors; limited number of investors; threshold offer size):
    - Exemptions include offers placed with qualified investors and no more than 500 existing shareholders, no more than 500 investors with pre-emptive rights and no more than 150 other investors.
    - Offer not raising more than RUB 200 million (US$2.7 million), or for bond offer by a credit institution not more than RUB 4 billion (US$54 million).
    - Minimum subscription of RUB 4 million (US$ 57,000) except for those with pre-emptive rights, provided no more than 500 such investors.
  - Article 22(2) requires prospectus include three years audited accounts and latest interim accounts for last three, six or nine-month period.
  - Article 24.1 requires amended prospectus if accounts affected by a major event between registration and placement.
  - Article 22 obliges disclosure of issuer information, business activities, accounting and financial data, consolidated statements where applicable, securities details, and security providers for bond issues.
  - Annex to Regulation 454–P of December 30, 2104 (Disclosure Regulation) includes detailed prospectus content, covering IOSCO expectations.
  - Prospectus must be registered with CBR; CBR can refuse registration under Article 21 and can suspend an issue or go to court to declare an issue invalid under Article 26.
  - Article 92 Joint Stock Company Law obliges publication of an annual report with detailed disclosures including risk factors, related party transactions, board information, remuneration.
  - Article 30(4) Securities Law requires issuers who issued a prospectus to publish quarterly as well as annual reports.
  - Article 30(12) requires audited annual consolidated financial statement within 120 days after year end and interim financial statements within 60 days after end of the second quarter.
- Material facts disclosure regime and practical weaknesses:
  - Article 30(14) and paragraph 12.7 of Disclosure Regulation list 50 examples of material facts requiring disclosure; list excludes many common events likely to affect security price (e.g., material change in prospects, signing/losing a major contract, major physical events).
  - Last of 50 items: “any other fact which, in the issuer’s opinion significantly influences the value of securities.”
  - Material events must be disclosed in quarterly reports and at any time: within one day for a news feed and two days for a website (paragraph 13.1 Disclosure Regulations).
  - In practice, CBR and industry participants say disclosures under “any other event” are very rare:
    - In 2015, of total 243,000 “material fact” disclosures, 2,814 were in the “any other event” category.
    - CBR indicates difficulty imposing sanctions unless event is proven to have affected price.
  - Profit warnings are rare; inclusion ofgeneric “any other matter” obligation does not amount to a real enforceable obligation.
  - Article 92(1) Joint Stock Company Law and Article 30.1 Securities Law allow companies (public non-listed with fewer than 500 shareholders) to seek relief from disclosure duty; CBR will grant waiver if criteria met (including 95 percent shareholder agreement).
- Liability and enforcement:
  - Article 22.1(3) and Disclosure Regulation paragraphs 8.5–8.7: persons signing prospectus must confirm reliability; signatories, those who voted for the prospectus and the audit firm are jointly and severally liable for damages from unreliable or incomplete info.
  - Articles 185 et seq of the Criminal Code create criminal liability for failures to disclose in certain contexts (no criminal penalties imposed for prospectus failures to date; other disclosure violations have led to criminal penalties).
  - CBR monitors disclosure obligations; exchange does not separately monitor disclosures in practice.
  - Complaints/prescriptions/sanctions data:
    - 2014: Complaints 422; Prescriptions 924; Administrative sanctions 274.
    - 2015: Complaints 405; Prescriptions 1,683; Administrative sanctions 360.
- Advertising and investor protection:
  - Article 4(1) Law 46-FZ of March 5, 1999 (Investor Protection Law) prohibits publication of any advertisement to an unlimited number of people unless following legislative provisions for new issues (prospectus).
  - In practice, advertisements for public offers are allowed once a prospectus published, despite Investor Protection Law prohibition.
  - Advertising Law 38-FZ (March 13, 2006) contains general provisions (no requirement for prior CBR approval).
- Assessment of Principle 16: Not Implemented.
  - Reasons:
    - No effective ongoing general obligation to disclose any material fact that may affect buy/sell decisions beyond the 50 listed items which exclude critical disclosures.
    - No proper provisions enabling derogation for state or commercial secrets with safeguards; in practice such secrets are withheld without legal safeguards.
    - No specific power to require a company to make disclosure proactively (only after CBR discovers omission).
    - Advertising provisions inconsistent and not enforced in line with Investor Protection Law.
    - Disclosure requirements spread across multiple laws/regulations causing complexity, duplication and uncertainty.
  - Commendation: CBR does take action to impose penalties for failures to disclose.
  - Transition concerns: need provisions for companies that fail to meet conditions to become private or listed by end of transition period.
- Recommendations for disclosure (Principle 16):
  - Amend Securities Law to require disclosure of any material fact that would reasonably affect the price or decision to buy/sell, as the overriding disclosure provision.
  - Move the 50 detailed matters from Securities Law into Disclosure Regulations and reinforce primacy of the overriding obligation.
  - Modify the 50 detailed matters to exclude routine events unlikely to affect price and explicitly include: material change in prospects, significant change in risks, changes in economic circumstances of key markets, significant change in trading environment, signing/losing major contracts, major physical/weather events affecting operations, significant change in line of business, decisions to acquire/sell significant assets, or other major events affecting asset value or profit-making ability.
  - Amend Securities Law to specify acceptable derogations from disclosure (e.g., state/commercial secrets), a procedure for approval, and safeguards (such as trading suspension).
  - Amend Investor Protection Law and Advertising Law to comprehensively regulate advertisements in connection with public offers: issuable only by issuer or authorized advisers, truthful and not misleading, refer to prospectus, and subject to CBR approval.
  - Give CBR specific powers to require issuers to make disclosures when material events occur or when issuers fail to meet obligations.
  - Consult private sector to simplify legal and regulatory framework to create clearer, enforceable regime.

### Shareholder rights and corporate governance (Principle 17: fair and equitable treatment)
- Registration and voting:
  - Ownership registration provided by Article 44 Law 208 of December 26, 1995 on Joint Stock Companies.
  - Article 49(1) Joint Stock Company Law: shareholders’ right to vote; Article 59: one share carries one vote.
  - Agenda, election of directors, constitutional changes and dividend decisions as matters for general meeting; Article 52(1) requires 20 days’ notice for general meetings (70 days for emergency meetings).
  - Article 53 grants holders of more than 2 percent of voting shares the right to put items on the agenda.
  - Proxy representation by power of attorney under Civil Code or notarised appointment (Article 57(1)).
  - 2014 legislation allows shareholders with nominee accounts at the central depository to vote electronically; new legislation effective July 2016 will give voting rights to beneficial owners holding via custodians.
- Holding directors to account:
  - Shareholders may hold directors to account at general meetings and in court for violations (Article 68(6); Civil Code Articles 53/53.1; Article 71(1) Joint Stock Company Law).
- Minority shareholders:
  - Minority shareholders can go to court if holders of 1 percent of voting rights consider their interests not protected (Article 71 Joint Stock Company Law).
  - Redemption rights for shareholders of particular categories when terms change and they voted against (Article 75(1)).
- Insolvency and information rights:
  - Law 127 of October 26, 2002 on Insolvency contains provisions for orderly bankruptcy, shareholder notices and rights to participate, dispute creditor claims and seek compensation from management for bankruptcy losses.
- Takeovers:
  - Articles 84.1 and 84.2 deal with voluntary/mandatory offers.
  - Offers required when acquiring more than 30 percent; mandatory at 30 percent, 50 percent or 75 percent thresholds depending on prior holdings.
  - Minimum price typically weighted average of previous six months; uniform price for all shareholders of a class.
  - Board must assess bid and recommend within 15 days including effect on share value and bidder plans (Article 84.3).
  - Timetable: minimum 70 days and maximum 80 or 90 days for shareholder consideration in mandatory and voluntary offers respectively (Articles 84.1(2), 84.2(2)).
  - Shareholders must receive offer details and assessments; revised offers must be available to all holders.
  - Article 84.7 allows shareholders to demand offeror acquire more than 95 percent; Article 84.8 includes a squeeze-out when offeror acquires more than 95 percent with remaining shareholders able to insist on sale at offer price.
- Shareholding disclosure:
  - Article 30(14)(25) Securities Law requires disclosures when a person acquires 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent, 50 percent, 75 percent or 95 percent of voting rights.
  - Acquirers must inform the issuer within 10 days (Article 30(23) reference).

*Source: IMF staff report text (excerpts as provided in content unit)._*

### 2.2 and 2.3 of the Disclosure Regulation. Paragraph 13.1 of the Disclosure Regulation states

### _cr16304 - 2.2 and 2.3 of the Disclosure Regulation. Paragraph 13.1 of the Disclosure Regulation states

### Disclosure of major shareholdings and directors’ transactions
- Paragraph 13.1 of the Disclosure Regulation: a material fact (of which the passing of an ownership threshold is one) shall be disclosed within one day on a news feed and two days on the issuer’s website.
- Major shareholdings must also be disclosed in the annual and quarterly reports according to the Disclosure Regulations.
- Paragraph 70.3 of the Disclosure Regulation: any transactions in shares by directors during the accounting year shall be disclosed in the annual report.
- Article 30(14(40) states such matters to be a material fact and therefore should also be disclosed immediately.
- Annex to the Disclosure Regulations (paragraph 5.2 of Section V): shareholdings of directors should be disclosed in the prospectus.
- Paragraph 5.2 of Annex 3 of the Disclosure Regulations requires this information to be disclosed in the quarterly report; requirement extends to the executive body of the issuer and thus includes senior managers.
- CBR enforcement activity: typical violations include violations related to GSM convocation and holding, breach of Chapter 11.1 of the Joint Stock Company Law (mandatory bids and buy-outs), related party transaction approval, dividends payment, provision of certain documents at the shareholder request.
- Public offers by foreign companies are not significant in the Russian Federation.
- Assessment: Partly Implemented
- Comment summary:
  - Thresholds for disclosure of substantial shareholdings or mandatory takeover offers apply only to those acting in concert with affiliated persons (as defined in Russian legislation), not those acting in concert with any person.
  - Legislative “acting in concert” provisions are obscure and difficult to interpret; definition of “affiliated persons” is scattered across two competition laws (1991 and 2006) and notes to the Joint Stock Company Law are not helpful.
  - Two-step disclosure process: acquirer must inform issuer within 10 days and issuer must make a public announcement within one or two days.
  - Suggestion: CBR may consider requiring immediate disclosure by the acquirer where the issuer is a listed company.
- CBR recommendations (extracted):
  - Amend the Joint Stock Company Law so disclosure and takeover offer requirements apply to those acting in concert with any person, not only affiliated persons.
  - Extend information requirements for general meetings to include full information on reasons for proposals and consequences of decisions on the agenda.
  - State explicitly the rights of shareholders to receive remaining assets after liquidation, in proportion to shareholdings (in relation to all assets and not just dividends credited but not paid).

### Principle 18 — Accounting standards used by issuers
- High-level legal requirements:
  - Article 22(2) of the Securities Law: prospectus must include audited financial statements—individual and consolidated.
  - Article 30(6): quarterly reports required; first quarter report should include audited consolidated financial statements for the last complete accounting year.
  - Interim consolidated financial statements for a six-month period shall be published no later than 60 days after the end of the period to which they relate.
  - Articles apply to all public companies whose shares are offered to and held by the public (see Principle 16).
- Transition to IFRS:
  - Law 208 of July 27, 2010 (Financial Reporting Law) requires a specified range of companies, including banks, insurance companies, non-government pension funds, investment fund management companies, clearing organizations, some companies with government ownership or control, and all listed companies, to publish consolidated financial statements according to IFRS.
  - Article 3 of the Financial Reporting Law: consolidated financial reporting standards shall be drawn up in accordance with IFRS.
  - Companies that made a public offer but whose shares are not listed are not automatically covered by Law 208 unless members of a group.
  - As a result, companies that are not listed but are members of a group must prepare consolidated IFRS statements; only companies that offered shares to the public but are neither listed nor group members were not yet subject to IFRS at time of assessment.
- Implementation schedule and practice:
  - Certain insurance companies and companies with listed bonds had to submit accounts according to IFRS from the reporting year 2012.
  - State pension funds, investment fund management companies, non-government pension funds and clearing organizations required to adopt IFRS beginning with the reports for 2015 (Instruction 3374–U of September 1, 2014).
  - Summary statements in the report:
    - All listed companies and most companies whose shares are held by more than a narrow group are already subject to IFRS.
    - Remaining companies will be required to comply according to a schedule that will bring them all into IFRS by 2019.
    - Many companies that formerly offered shares to the public but are not widely held will be required to choose becoming listed or going private by 2019.
    - Thus, by 2019, all companies whose shares are widely held will be required to publish financial statements in IFRS and all other companies will be private by 2019.
- Practical divergence between IFRS and RAS:
  - Industry practice: majority of companies issuing prospectuses for the Russian capital market publish prospectus using RAS as the primary basis; IFRS statements often included only as an appendix to satisfy formal requirement.
  - Companies listing abroad (approximately 50–60) produce prospectuses and reports fully compliant with IFRS throughout.
  - RAS differences from IFRS (material respects stated):
    - RAS: in practice, greater attention to form over substance; primacy to legal form rather than economic substance; limited professional judgment compared with IFRS.
    - Discounting rarely used under RAS except for financial investments; IFRS requires discounting in wider situations.
    - RAS generally uses historic cost basis (except impairments); IFRS applies fair value concepts where market values available.
  - Authorities’ position: MoF states RAS being brought into compliance with IFRS and will be fully in line by 2017.
- Oversight and enforcement:
  - MoF responsible for accounting standards (Accounting Law Law 402 of December 6, 2011); Article 25 establishes Council on Accounting Standards; NOFARS acts as independent reviewer (appointed by MoF).
  - Article 6 of the Financial Reporting Law gives CBR responsibility for supervising provision and publishing of financial statements; CBR examines sample accounts and monitors compliance but relies mainly on auditors.
  - No data supplied on enforcement activity with respect to accounting standards; CBR reports no instance of requiring resubmission of accounts for non-compliance with IFRS.
- Assessment: Partly Implemented
- Comments:
  - Majority of widely held public companies obligated to publish IFRS statements or to be transitioned by 2019; however, in practice most of those (all but 50–60) meet requirement in form only (IFRS appended) while main disclosures rely on RAS.
  - RAS cannot be described as internationally accepted accounting standards; thus rating would strictly be “Not Implemented,” but upgraded to “Partly Implemented” due to formal IFRS disclosure.
  - Concerns about NOFARS appointment being indefinite; recommendation to retender periodically.
  - Lack of instances requiring resubmission of accounts suggests possible inadequate enforcement.
- Recommendations (extracted):
  - CBR should continue program to oblige public companies to publish IFRS financial statements and require IFRS accounts to be the basis for narrative and other disclosures in prospectuses and quarterly reports.
  - MoF should consider amending agreement with NOFARS to give MoF formal oversight powers to check internal processes and transparency; include such provisions in future agreements with independent advisers.

### Principles for Auditors, Credit Rating Agencies and Other Evaluative Services

Principle 19 — Oversight of auditors
- Legal framework: Auditing Law 307 of December 30, 2008 governs auditing, requiring audit standards, independence standards, Code of Professional Ethics, internal quality control.
- Oversight architecture:
  - MoF heads oversight and sets audit standards (Article 15); acts on advice of Audit Council (Article 16).
  - Audit Council membership fixed at 16: ten representatives of users of financial statements, 2 MoF, 1 CBR, 2 auditor SROs, 1 MED.
  - Working Committee conducts detailed work; at least 70 percent of its members must be from audit SROs.
- FFFSS enforcement:
  - For major public interest firms, compliance checked by FFFSS (part of MoF).
  - Article 9: scheduled inspections of audit firms that audit listed companies once every two years.
  - FFFSS had 66 inspectors (of which 11 are in territorial units). In 2015, it conducted 258 inspections.
  - As a result of inspections:
    - Gave 144 written warnings about violation of law, audit standards, independence rules or ethics code;
    - Issued 29 directives to eliminate violations;
    - Gave 5 binding directives suspending audit firm’s membership in an SRO (suspends its ability to practice);
    - Issued 1 directive to an SRO to expel an audit firm from an SRO; and
    - Conducted 23 administrative proceedings.
  - Article 20 gives FFFSS right to instruct an SRO to suspend or expel an auditor or audit firm.
- SROs:
  - Article 3: all audit firms must be SRO members; Article 4: cannot practice unless member of one of five SROs.
  - SROs must have 700 members or 500 audit firms (Article 17).
  - SROs set and enforce independence, ethics, quality control standards; conduct inspections (at least once every three years) and have disciplinary sanctions.
- Professional qualifications:
  - Article 11: auditors must have qualification certificate issued by an SRO after examination and work record of three years (two with audit firm). CPD requirements set; Article 12: failure to complete CPD can lead to annulment.
- Assessment: Fully Implemented
- Comment: inspection regime regarded as effective by auditors.

Principle 20 — Auditor independence
- Legal and regulatory provisions:
  - Article 8 obliges SROs to adopt independence standards set by Audit Council.
  - Audit Council published Code of Professional Ethics and Independence Rules; compliance mandatory (Articles 7 and 16).
  - Auditing Law prohibits actions threatening independence (e.g., audit firm officials being founders or stakeholders in client or affiliates; prohibition where audit firm provided bookkeeping services in previous three years).
  - General conflict of interest provisions prevent audit where conflict would affect opinion.
- Gaps and weaknesses:
  - No general prohibition on provision of other non-audit services (but general prohibition on relations compromising independence); specific prohibition on audit when bookkeeping provided in last three years (Article 8(1)).
  - No mandatory requirements for rotation of auditors.
  - No mandatory governance requirements ensuring auditor selection and oversight is independent of management for public issuers; Corporate Governance Code is voluntary.
  - No requirement to disclose resignation, removal or replacement of auditor.
  - FFFSS reported no identified breaches of independence; difficulty proving violations of broad principles.
  - Perception that market behavior sometimes conflicts with independence (e.g., same firm conducting valuation then auditing that entity).
- Assessment: Partly Implemented
- Comments:
  - Rating reflects market behavior conflicting with independence principle, absence of governance provisions for auditor appointment oversight, absence of disclosure and rotation requirements.
  - Despite deficits, substantial provisions exist and inspection program is generally effective, leading to “Partly Implemented” rather than “Not Implemented.”
- Recommendations (extracted):
  - Amend Auditing Law (or other legislation) to include:
    - A general provision prohibiting financial, corporate and personal relations between auditor/audit firm and client that might threaten independence.
    - A general prohibition on provision of non-audit services where they may compromise independence.
    - Provisions requiring governance arrangements to ensure auditor selection and oversight is carried out by a body independent of management for public issuers.
    - A requirement to disclose promptly the resignation, replacement or removal of an auditor and the reasons for the change.
  - Audit Council should ensure internal quality controls directly address independence and consider mandatory rotation of individual auditors if not audit firms.
  - MoF to increase priority on assessing auditors’ independence in substance during inspections.

Principle 21 — Audit standards quality
- Article 7 of the Auditing Law requires audits according to Russian auditing standards; MoF intends full compliance with ISA by 2017.
- Audit Council reviews standards; MoF implements new standards. Process reasonably transparent; public consultation used.
- Compliance monitoring: SROs and FFFSS (for public interest firms); MoF oversees SROs.
- Assessment: Fully Implemented

Principle 22 — Credit rating agencies oversight
- CRA Law 222 of 13 July 2015:
  - Defines CRA and credit rating activity (Article 2).
  - Registration mandatory (Article 3); no other legal entities may carry out rating activities.
  - Refusal criteria (Article 5): failure to submit information; submitting false information; failing regulatory requirements including fitness and properness (Articles 6–8) and conflict of interest measures (Article 9).
  - Fitness and properness criteria apply to owners holding more than 10 percent equity and prohibition on banks/insurance groups holding more than 20 percent equity (Article 6(6)). Criteria also apply to managers and internal control bodies (Article 7).
  - Representative office of a foreign CRA must register as a subsidiary to carry out rating activities (Articles 3(10) and (11)); branch may operate if ratings assigned on behalf of foreign CRA; CBR will assess home country regime and enter information exchange arrangements.
- Governance and methodology:
  - Article 12: CRAs must adopt and implement written methodology; disclose methodology on website (Article 13); document and disclose departures from methodology; more than three departures in a quarter triggers methodology review; amendments disclosed and related ratings reviewed within six months (Article 12(12)).
  - Article 11 mandates creation of rating committee; Article 12 requires methodology committee and monitoring of ratings at least within a year.
- Conflict of interest and independence measures:
  - Article 3(3): prohibition on activities other than specified, with consulting services prohibited (Article 9(12)).
  - Article 3(9) requires CRAs to ensure independence from political/economic influence.
  - Article 8(2) governance requirements: larger CRAs (>20 employees) must have at least two (or one third if greater) independent governing board members.
  - Article 10(5–6): rotation system for lead analysts (no more than four years on one entity; five years for sovereign ratings) with two-year layoff before return.
  - Remuneration requirements: board and rating analysts’ remuneration must not be related to performance or level of rating (Article 8(6), Article 10(7)); fee cannot be related to rating level or consent (Article 9(8)). Gifts caps: no gifts above RUB 3,000 (Article 10(9)).
  - Article 13 requires disclosure of methodology, models, key rating assumptions, quantitative/qualitative factors, data sources, and historical default rates.
- Supervision powers:
  - CBR powers: inspections (Article 15(1)(5)), information collection (Article 15(1)(9)), prior notification and approval for CEO/head of internal control (Article 7), require documents on internal control and rating activities (Article 7(11), Article 13(6)), power to instruct remedies and deregister (Article 15(1)6) and remove staff on management/internal control bodies (Article 7(3)).
- Gaps and implementation status:
  - At assessment time, no CRA had registered because full regime not completed; new regulations on licensing pending.
  - No specific provisions requiring CRAs to maintain records (to be covered in forthcoming regulation).
  - No specific requirement for sufficient resources to apply methodology rigorously.
  - Integrity tests: 15 specific tests, but gaps (e.g., adverse findings by professional organization or SRO, employment termination implications, personal bankruptcy not covered); tests rigid and limit CBR discretion to assess relevance/seriousness.
- Assessment: Not Implemented
- Comments:
  - CRA Law comprehensive and aligned with IOSCO, but rating is “Not Implemented” because:
    - Regulatory regime not completed and no CRAs registered;
    - No power for CRA to ask for additional documents beyond those prescribed (CBR can ask for explanations only);
    - No general record keeping requirement in primary law;
    - No specific requirement on sufficiency of resources;
    - Integrity tests give insufficient discretion to CBR to consider substance and relevance.
- Recommendations (extracted):
  - CBR should complete regulation-writing so law can come into effect.
  - CRA Law should be amended to include:
    - A general record keeping requirement in primary law.
    - Power for CBR to require CRAs to provide additional information.
    - An obligation for CRAs to maintain sufficient resources to apply methodology rigorously.
    - An expanded integrity test with broader disclosure obligations and discretion for CBR to assess suitability.

Principle 23 — Other evaluative/analytical services
- No CBR procedure to periodically review entities providing analytical or evaluative services for potential regulation.
- Two categories identified:
  - Analysts working for brokers (providing reports on securities to customers) — investment advice not a regulated activity in the Russian Federation; such analysts are not separately licensed.
  - Appraisers (valuation providers) — regulated under Law 135 of July 29, 1998 on evaluation activity (Appraisers Law).
- Analysts:
  - Not regulated as a separate activity; if within broking firms they fall under broker regulation and general conflicts of interest provisions (Securities Law Articles 3 and 5; Licensing Instruction 168; Regulation 44 of 1998 on conflicts of interest).
  - No provisions specifically addressing analysts for:
    - Identifying/managing conflicts of interest;
    - Restrictions on analysts’ trading activities;
    - Constraints on employing entities’ business relationships or reporting lines;
    - Requiring internal procedures to manage conflicts or influence of issuers;
    - Requiring disclosure of conflicts by management or prescribing behavioral norms.
- Appraisers:
  - Appraisers Law requires SRO membership and ethical rules (Articles 15, 20.1, 22.1).
  - Independence requirements: appraiser cannot evaluate object if appraiser is founder, shareholder, official, employee, member, creditor of client or close relative, or has proprietary interest in object (Article 16).
  - Client must not interfere and remuneration must not depend on valuation (Article 16).
  - Authorities did not provide SRO ethics standards for appraisers; no assessment made of their adequacy.
- Assessment: Not Implemented
- Comments:
  - No process to assess whether activities warrant regulation under this principle.
  - Analysts unregulated; existing broker-related conflict provisions inadequate for analysts.
  - Lack of evidence on appraiser SRO ethics standards prevents determination of consistency with principle.
  - Regulation 44 of 1998 on conflicts of interest considered declaratory and difficult to enforce; not supported by detailed SRO requirements and not widely referenced by stakeholders.
- Recommendations (extracted):
  - Recommendations in Principle 29 (investment advisers) also relevant.
  - CBR should create regulations specifically addressing potential conflicts of interest of analysts when introducing regulatory regime for advisers.
  - CBR should review SRO ethical standards for appraisers to ensure compliance with this principle.

*Source: _cr16304 - 2.2 and 2.3 of the Disclosure Regulation. Paragraph 13.1 of the Disclosure Regulation states*

### introduction to the code notes, “corporate governance" is a concept that covers a system of

### _cr16304 - introduction to the code notes, “corporate governance" is a concept that covers a system of

### Risk management
- CBR is keeping the issue of RM under review as fund management becomes more technologically complex and RM by MCs has become more of a focus among regulators globally.
- CBR carried out a thematic review in 2015 of the relevance of the current asset composition requirement (regulation on the composition and structure of assets of joint-stock investment funds and assets of mutual funds, approved by Order of the FSFM December 28, 2010 No. 10-79 / pz-n).
- CBR is developing a draft regulation to make the requirement more meaningful to the management of liquidity risk.
- MCs may invest in derivatives only if they satisfy CBR requirements aimed at risk limitation in derivatives trading.
- MC management must report to its board on a quarterly basis on measures employed to reduce risks associated with management of its funds (paragraph 5.11 Regulation No. 04-5/ps).
- CBR Supervision can review these reports, request explanations, and employs several people with relevant fund management experience for analysis, but it does not have formal criteria for this analysis and not all reports are reviewed.

### Internal controls
- MC must have an internal document approved by the board determining mechanisms of internal control (paragraph 5.6 of No 04-5 / ps).
- Article 38.15 of the Investment Funds Act: MC must arrange internal controls to ensure compliance with license-based activities, fund rules, constitutional documents, and relevant laws and regulations.
- Article 38.16: responsibility for internal controls must be exercised by a “controller” or by a separate internal control service; the controller or head is accountable to the board of directors (supervisory board) or a general meeting of shareholders.
- Article 38.18: approval of rules of internal control is a (supervisory) board responsibility; rules and amendments must be endorsed by the board or, if absent, by a general meeting of shareholders.

### Capital
- CBR imposes a minimum capital requirement on MCs: equity capital (own funds) must not be less than RUB 80 million and in a form satisfactory to CBR (paragraph 5 of the CBR Direction from July 21, 2014 No 3329-U "On the requirements for own funds of professional participants of the securities market and investment fund management companies, mutual funds and private pension funds").
- Acceptable capital includes (without limitation) real estate, listed securities, bank deposits and cash.
- Other assets which can be included with limitations include unfinished properties, unlisted securities, deposits in affiliated banks and software.
- CBR is drafting a regulation which may exclude some assets and impose limitations on others.
- Capital is not risk based; there are no add-ons for AUM above a certain level.
- SDs: base requirement is also RUB 80 million but increased if the SD uses sub-custodians that CBR views as insufficiently capitalized.

### Supervision and ongoing monitoring (legal powers and reporting)
- Article 55.2.1.10 of the Investment Funds Law grants CBR general power to exercise control and supervision over activities of MCs, SDs, agents and registrars.
- Article 55.2.1.12: CBR must carry out checks on whether these entities meet legal and regulatory requirements.
- CBR has authority to require provision of any information on the status of the MC including internal control (subparagraph 13 of paragraph 2 of Article 55).
- Under Article 55.3, CBR is entitled:
  - to hold planned inspections no more than once a year; and
  - to hold “for cause” inspections if signs of violations have been detected, including on the basis of statements/reports and notices of an SD, complaints, and mass media data.
- MCs and SDs must file financial reports with CBR monthly, quarterly and annually; content and schedule determined by CBR.
- New direction of CBR from December 16, 2015 No. 3901-U "On the timing and preparation and submission of reports to CBR by MCs and private pension funds" will further enhance reporting.
- The offsite supervision department for CIS comprises 75 staff located in Moscow, Saint Petersburg and the Novosibirsk region.
- The department can require additional or clarifying information at any time.

### Offsite supervision process and risk classification
- The department analyzes reports and other inputs (complaints, media reports, banking supervision referrals) and develops a schedule for onsite inspections for the next six months agreed with the Inspectorate.
- Offsite sets the agenda for onsite teams; inspections may be “deep dive” or thematic; onsite teams provide weekly updates during multiweek inspections.
- Onsite reports are considered by the offsite department; the director in charge of financial services engages for larger MCs or serious breaches.
- Problem resolution includes meetings with management and, in serious cases, owners to agree remedial plans; offsite monitors implementation and assesses outcomes.
- Repeated failures could result in license revocation (one SD revoked in 2015).
- Issues with SDs arise more frequently regarding failure to maintain independence between SD and its MC clients as required by the Investment Funds Law.
- The department has a voluntary program of visits to MCs to analyze RM policies and internal controls and to identify good and bad industry practice.
- The 45 largest MCs are categorized using a traffic light approach: red, yellow, green. Current distribution:
  - 0 in red,
  - 30 in yellow,
  - 15 in green.
- MCs in green: onsite inspection every three to four years.
- If an MC falls into red: increased frequency and detail of reporting; unlimited onsite visits; use inspectorate resources for problem resolution.
- Focus on three groups of institutions:
  - Group one: managing assets of high net worth individuals (not open to public, less important unless big or systemic),
  - Group two: raises public funds but small in value,
  - Group three: collects substantial funds from the general public (greatest importance).
- Proactive action on improving management is currently applied only to group three.
- Most MCs are part of banking groups; second largest is part of a foreign-owned banking group.
- The department handles 300 to 400 requests a quarter for clarification on compliance; common inquiries indicate industry-wide concerns.

### Onsite inspections
- Procedure prescribed in CBR Regulation on 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."
- In inspections, CBR officials have right of unrestricted access to premises, documents and information of organizations specified in Article 55.2.1.10.
- 2014 coordinated inspections improved risk identification across credit institutions and NFEs; internal control system and information and analytical support for inspectors were developed.
- 2014–15 project: determining whether private pension funds satisfied requirements for participation in the guarantee system for insured persons.
- Inspections numbers:
  - 2014: 43 MCs and 11 SDs inspected.
  - 2015: 25 MCs and 5 SDs inspected.
- Usual number of planned onsite inspections: 6–7 for MCs and 2–3 for SDs annually.
- Where MC is member of an SRO, Article 58 sets out SRO powers exercised alongside CBR, including information access, monitoring, training and qualification, sanctions/fines under SRO rules, and filing petitions with CBR for licenses.

### Enforcement and sanctions
- Article 55.2.1.13: CBR may issue orders to be followed “without fail” by MCs, SDs, agents and registrars to eliminate violations and to prohibit operations.
- Article 55.2.13.1: CBR may issue orders “without fail” to compensate unit holders for actual damage caused by MC or SD failure to attend to unit holders’ interests.
- Further powers (selected):
  - Article 55.2.14: suspend allocation, redemption and exchange of investment shares;
  - Article 55.2.15: file claims with a court for liquidation of entities operating without licenses and other cases provided by federal laws;
  - Article 55.2.16: file claims with court in interests of stockholders/unit holders for breaches of rights under Investment Funds Law;
  - Article 55.2.17: cancel qualification certificates for repeated or gross violations by certified persons;
  - Article 55.2.18.1: appoint a provisional administrator;
  - Article 55.2.19: exercise any other authority envisaged by law.
- Sanctions by CBR: prohibit performing all or part of operations, apply penalties established by federal laws, terminate license and assign temporary administrator (Article 61.1).
- Interim administrator appointment may use powers under subsection 18.1, paragraph 2 of Article 55 of the Investment Funds Law; grounds for appointment reference Article 183.5 of Federal Law of October 26, 2002 No 127-FZ "On Insolvency (Bankruptcy)."
- Grounds include:
  - repeated refusal within a month to satisfy creditors' claims on monetary obligations;
  - dereliction of duty to make mandatory payments more than ten working days from date of request;
  - decision of a control body during field inspection to appoint an interim administrator to implement a solvency recovery plan or control implementation of such a plan;
  - nonperformance or improper performance of a financial institution’s plan to restore solvency.

### Governance of UIF management companies
- Laws do not enable CBR to exercise discretion or give formal guidance on standards of good governance for MCs or SDs; governance requirements are expressed implicitly via specific prohibitions in the Investment Funds Law.
- Prohibitions, restrictions and requirements address conflicts of interest between unit holders, MC and associates/connected parties.
- MC may not use assets constituting the UIF to guarantee its own obligations unrelated to fiduciary management of the fund (subparagraph 4 of paragraph 3 of Article 40 of the Investment Funds Law).
- SD has heavy responsibility under the Investment Funds Law to ensure MC follows fund rules (described in Principle 25).
- SD is required to be independent of the MC and can be considered the “responsible entity” as described by IOSCO.
- Paragraph 1 of Article 39: MC must act reasonably and in good faith in exercising rights and performing duties for benefit of unit holders; this provision is recorded in the fund rules and, with the division of responsibilities between MC and SD, is seen as primary protection of unit holder rights.
- Annual audit requirement: Article 49 of the Investment Funds Law requires an annual audit.

### Annual audit scope
- Annual audit report must cover:
  - the financial statements of the MC;
  - records and reporting in respect of the assets of the fund and transactions by the MC with those assets having regard to the legal requires on composition and structure of the assets;
  - assessment of the estimated value of the fund;
  - compliance with the custody requirement; and
  - validation of the certification of investors’ rights to the assets in the fund, of property constituting the mutual fund, and documents certifying the rights to the property constituting the mutual investment fund.
- The auditor's report is required to be attached to the financial statements of the MC.
- The auditor does not have an obligation to report deficiencies to CBR.

### Notifications, disclosure, and record keeping
- MC must report certain changes to CBR, such as changes to fund rules; such changes may not take place until registered by CBR.
- MC must forward to CBR a notice of changes in composition of the board of directors (supervisory board) and executive bodies within five working days of the events (Article 39.2.7).
- MC must publish notices of any change of corporate name, location, telephone and fax numbers, email address, website address or new CEO.
- Changes and additions to rules for determining the NAV of a UIF sold to unqualified (retail) investors are to be disclosed on the MC website no later than five working days before the changes take effect (Direction of CBR from August 25, 2015 No. 3758-U "On the determination of the NAV of investment funds...").
- Certain key changes such as to the manager’s remuneration cannot come into effect until one month after disclosure.
- There is no general and continuing obligation for MC to report to CBR or investors prior to or after event any other information relating to material changes in management or organization; in practice, detailed CBR reporting requirements cover necessary particulars.
- Extensive record keeping requirements and responsibilities for originals and copies are contained in several legislative instruments.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16304.pdf*

### Chapter IX of the Investment Funds Law sets out extensive record keeping requirements related

### _cr16304 - Chapter IX of the Investment Funds Law sets out extensive record keeping requirements related

### Record keeping requirements and responsibilities
- Article 42.1 requires that the SD record the property making up a unit investment fund (UIF).  
- Article 42.4: CBR shall establish the rules for the recording and storing by the SD of the property provided for by Article 42 of the Investment Funds Law.  
- Detailed and comprehensive requirements for record keeping and responsibilities of the MC, SD, and registrar are contained in:
  - “Regulation on the activities of specialized depositaries” No. 474-P,
  - Regulation No. 04-5/ps, and
  - Order of FFMS of Russia April 15, 2008 No. 08-17/pz-n.  
- Article 42.5: in the event of failure to discharge or improper discharge by the SD of its duties related to recording and custody of the assets making up a UIF, the specialized depository shall be jointly liable with the MC to the owners of shares/units of the unit investment fund.

### Conflicts of interest and operational conduct
- Subparagraph 2 of paragraph 2 of Article 55 of the Investment Funds Law No. 156-FZ gives CBR authority to establish requirements aimed at preventing conflicts of interest at management companies (MCs), specialized depositaries (SDs) and shareholders of joint stock investment funds.  
- Resolution of the Government of the Russian Federation (No. 564; No. 600; No. 633; No. 684) provides that the MC should act reasonably and in good faith for the benefit of holders of investment units.  
- Measures to prevent conflicts include:
  - Requirement to appoint a controller or an internal control unit who reports directly to the supervisory board and cannot be the CEO;
  - Employees of the MC must notify the controller of any conflict of interest;
  - Measures aimed at preventing conflicts must be specified as part of the quarterly and annual report of the executive of an MC to the supervisory board (Item 5.11 Provision No 04-5 /ps).  
- Item 9 paragraph 1 of Article 40 restricts transactions involving acquisitions of property belonging to the MC, its participants, and related parties, with exceptions for exchange transactions and anonymous exchange trading based on fair bidding and best prices.  
- Specific trading controls (status):
  - Best execution: dealt with only via the overarching requirement to act reasonably and in good faith for the benefit of holders of investment units (no explicit best execution rule).
  - Appropriate trading and timely allocation: MC must declare to its broker or dealer the fund for which the trade is being executed when giving the order and the fund's name is entered onto the order.
  - Churning: not specifically prohibited; Article 17 requires fund rules to specify overall size of permitted expenses (including broker commissions), intended to limit excessive commission generation.
  - Related party transactions: fully covered.
  - Underwriting: an MC is not permitted to be an underwriter except for a rights offering on an existing UIF holding.
  - Due diligence in selection of investments: considered implicitly within obligations to act fairly and stay within asset composition and structure.
- Disclosure of fees and expenses: amount of remuneration and a list of expenses regulated by Direction of CBR 3506-V must be specified in the fund rules; costs and fees in excess of specified amounts are to be paid by the MC at its own expense. CBR has not seen soft commissions practice and has not yet regulated them.

### Delegation
- Only limited delegation by an MC is permitted (e.g., acceptance of applications for purchase or redemption to an agent; broker execution of transactions).
- The MC remains responsible for actions of its delegates consistent with international standards.
- No specific statutory requirement that an MC has adequate capacity and resources or processes to monitor and evaluate delegates, although MC responsibility provides commercial incentive.
- No specific disclosure requirements to investors about delegation arrangements and identity of delegates.
- CBR may ban delegation arrangements that give rise to a conflict of interest threatening rights and legitimate interests of unit holders (item 9 paragraph 2 of Article 61.1 of Law No. 156-FZ).

### International cooperation and cross-border issues
- Foreign funds may be advertised only if listed on a Russian Stock Exchange; currently only one is listed with AUM totaling US$20 million.
- Russian funds cannot have an SD outside Russia; both the MC and SD must be resident in Russia.
- The depository can use a sub-custodian for foreign securities (e.g., Eurobonds).
- Foreign funds can be sold to qualified investors only through private placement, via a broker.
- CBR’s international cooperation governed by Central Bank Law; CBR is a signatory to the IOSCO MMoU.

### Assessment — implementation status and key deficiencies
- Overall assessment: Partly implemented.
- Primary deficiencies identified:
  - Absence of an obligation to obtain the best price when buying or selling securities for the fund (no explicit “best execution” rule).
  - Absence of a regulation requiring an MC to exercise due diligence in the selection of securities to buy or sell (separate from duty to act in clients’ best interests).
  - Weaknesses in fit-and-proper/licensing criteria for individuals (insufficient integrity testing; administrative disqualifications are disregarded after completion; criminal conviction test limited to unexpunged economic crimes).
- Additional supervisory and market-conduct observations:
  - CBR should examine whether SDs are adequately informed to recognize churning, which may be possible even within overall fees limits.
  - Post-trade allocation rule addresses allocation after the trade, but IOSCO expects preventative allocation controls to avoid systemic favoritism of certain funds.
  - Given limited delegation, absence of investor disclosure on delegation is not currently significant but should be kept under review if delegation scope expands.
  - Suggestion: CBR consider placing greater supervisory emphasis on internal controls in SDs due to investor exposure risks (inadequate segregation, misuse of assets, pricing errors, redemption delays).
  - CBR’s work on more rigorous capital requirements for MCs, with focus on holding liquid assets, is welcomed.
  - Onsite inspection frequency: usual annual planned inspections (6–7 for MCs and 2–3 for SDs) is assessed as insufficient; inspectors should also focus on evidence of product misselling and unfair treatment of clients.

### Principle 25 — legal form, investor rights, segregation and safekeeping
- Legal form and investor rights:
  - Federal Law No. 156-FZ of November 29, 2001 “On Investment Funds” codifies legal form of investment funds, MCs and SDs and establishes disclosure and investor protection principles.
  - Two legal forms: joint stock funds and UIFs (corporate model and contractual model per IOSCO terminology); primary retail product is the open-ended UIF.
  - Fund rules must be registered with CBR and constitute the prospectus/offer document; use of Model Rules is mandatory, with MC discretion on terminology and investment policy description.
  - Model Rules cited:
    - August 27, 2002 No. 633 (open-end investment fund);
    - September 18, 2002 No. 684 (interval unit investment fund);
    - July 15, 2013 No. 600 (exchange unit investment fund trust management);
    - July 25, 2002 No. 564 (closed mutual investment fund trust management).  
  - Article 20: amendments and addenda to fund rules generally enter into force as of date of disclosure of their registration with CBR, except for:
    - alteration to the investment declaration (investment policy);
    - alteration of the type of a unit investment trust;
    - increase in rate of remuneration for a MC or specialized custodian (including discounts on redemption).
    - For these exceptions, amendments enter into force one month after disclosure of registration notice, giving unit holders time to decide whether to remain or redeem.
  - MC must send CBR notice of changes in composition of the board of directors (supervisory board) and executive bodies within five working days (Article 39).
  - Article 54: general obligation on MC and SD to file reports with CBR; CBR operates a schedule with submission deadlines.
  - CBR believes this regime will achieve IOSCO-required material change reporting to CBR, though no general obligation to notify CBR of all material changes exists.

- Separation of assets and safekeeping:
  - All assets of a UIF must be completely segregated from assets of the MC and the SD. When assets are held by a sub-custodian, the specialized depository retains responsibility.
  - There were 39 SDs in February 2016. One SD license was revoked in 2015.
  - A UIF can have only one SD. Article 42: property making up a UIF must be recorded and held in safekeeping of an SD except as otherwise required for specific property types (e.g., real estate). SD is not entitled to use and dispose of property making up a UIF. Rights to securities must be recorded on a custodial account in the SD.
  - Article 44.6: provisions to secure independence of the SD from the MC; one cannot be a subsidiary of another, though both can be members of the same group. SD cannot own shares in the UIF for which it is the SD. Article 44.7: limits to other activities of an SD (e.g., may be a credit institution but cannot be a registrar except where acting as registrar for a stock exchange).
  - CBR Regulation No. 474-P of June 10, 2015 “On the activity of specialized depositaries” covers:
    - form of accounting system to be established (capable of being sorted and sampled to find discrepancies) and procedures for operating it;
    - reports the system must generate;
    - procedures by which the SD must perform functions;
    - contents of operational rulebook of the SD;
    - requirements to notify CBR of infringements and discrepancies and their elimination (or otherwise);
    - disclosure of significant shareholders and other controllers of the SD;
    - mechanism for transfer of fund assets to another SD;
    - mechanism for appointment by the SD of a replacement MC if necessary.
  - Generally, the SD is responsible for losses arising in the course of performance of its functions. Exemptions exist when the SD employs certain sub-custodians (such as the Russian CSD and certain foreign depositaries) included in a list maintained by CBR under Item 4 of Article 25 of Federal Law No. 414-FZ of December 7, 2011 ”On the Central Depositary.”

*Source: Chapter IX and associated sections of the Investment Funds Law and accompanying regulations as presented in the provided content unit.*

### Chapter V of the Investment Funds Law sets out the processes to be followed in the winding up

### Chapter V of the Investment Funds Law sets out the processes to be followed in the winding up

### Winding up process and supervisory powers
- Chapter V establishes the processes to be followed in the winding up of an MC.
- It establishes who is responsible for managing the process, which may be the SD or a provisional administrator, and sets out detailed requirements that they must carry out.
- It sets out the supervisory powers of CBR over the process and the persons responsible.
- Article 39: the decision on voluntary liquidation of the MC cannot be accepted prior to the termination of all the funds for which it is the MC, and until all the rights and obligations attached to those assets have been transferred to another MC.
- Article 13.2: Funds in an account pending investment or pending disbursement are specifically protected in the event of a MC bankruptcy.
- The topic is discussed further in Principle 27.

### Assessment and comments on SD responsibilities and independence
- Assessment: Fully Implemented
- Comments:
  - The regulatory system places onerous obligations on SDs to ensure that a UIF is managed solely in the interests of unit holders.
  - SD responsibilities include agreeing with the MC the price at which securities in the fund are bought or sold and the value of the securities for determining the NAV of the fund units.
  - An SD must be a separate legal entity from the MC, but it is able to be a company within the same group as the MC. This does not amount to full independence in law or fact.
  - There is a potential in these circumstances, despite the current regulation of the activities of SDs, for collusion to occur.
  - Suggested mitigation mechanisms:
    - Assign a High Risk or “red zone” rating to SDs in this position and submit them to the highest intensity of SD supervision.
    - Alternatively, amend the Investment Funds Law to secure actual independence of the SD.

### Principle 26 — Disclosure: description
- Principle 26 requirement: 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.
- Primary regulatory sources:
  - Investment Funds law.
  - Order of the FSFM No. 05-23/pz -n of June 22, 2005, “On Approving the Regulation on Requirements for the Procedures and Times of Disclosure of Information Related to the Operation of Joint-Stock Investment Funds and Management Companies of Mutual Funds, and for the Content of Disclosed Information”.
- Exemptions: limited exemptions for sales to qualified investors.
- General obligations:
  - All information required by the law or regulatory acts of CBR must be published on a MCs internet site on a timely basis.
  - Article 20: sets out material changes which do not enter into force until one month after the date of disclosing a notice of registration of such amendments and addenda, giving unit holders time to decide whether to remain in the fund or redeem units.
- Gaps noted:
  - No general obligation to disclose all matters material to the valuation of the fund on a timely basis (e.g., changes in risk profile from market or economic conditions).
  - No general disclosure obligation to provide sufficient information to allow investors and potential investors to evaluate the suitability of the CIS for them.
- Prohibited disclosures (Article 51.7) — long list includes:
  - unfair, unreliable, unethical, deliberately false, concealed or misleading information;
  - any guarantees and promises of would-be effectiveness and yield level in particular, those based on their actual past performance;
  - information having no direct relation to the joint-stock investment fund, the MC of the UIF or the UIF itself;
  - references to approval or endorsement by the state authorities of any information on the activities on the joint-stock investment fund or the MC of the UIF;
  - false or improperly formulated statements or assertions on factors significantly affecting the results of the fund, in particular, supported by documents but relating to some other period of time or event;
  - statements or assertions on a change or other comparisons of the results of the fund not based on the yield calculations made in compliance with regulatory acts of CBR;
  - overstated or unsubstantiated statements on the managerial skills of the MC staff and also on their connections with the state authorities and local self-government bodies; and
  - statements to the effect that the results of activities of the joint-stock investment fund and the MC of the UIF that have been attained before can be repeated in the future.
- CBR powers regarding disclosures:
  - Demand the retraction of disseminated, supplied or disclosed information which does not satisfy the requirements of the Investment Funds Law or regulatory acts of CBR, as well as to demand dissemination, or disclosure of corrected information.
  - Prohibit dissemination, supply or disclosure of non-compliant information.
  - Upon detection of false or misleading information in the fund rules, CBR sends the MC its conclusions. If within 25 working days the violations are not corrected, CBR has the right to refuse to register the rules or changes and additions to them.
  - Paragraph 10 of Article 51: CBR has the right to demand correction of false, inaccurate or misleading information.
  - Paragraph 9 of Article 51: requires a MC to present all information, including advertisements, to CBR for approval.
- Presentation and accessibility:
  - No requirement to present information in easy to understand language.
  - Model Rules (mandatory) require information in a standard format, but legal text concerning investor rights must be copied from the law and cannot be simplified without allegedly changing meaning.
  - CBR is studying whether some improvements can be made to assist the understanding of retail investors.
- Other disclosure points:
  - CBR disclosure requirements cover most IOSCO itemized information for offering documents (registered model fund rules).
  - No requirement to disclose information on delegated activities; omission considered not significant because scope for delegation is limited and MC remains responsible.
  - Fund rules must be kept current as it is not possible to change the activities of the MC until changes have been registered at CBR.
- Financial reporting requirements:
  - A MC is required to publish a range of reports on its financial condition and the condition of funds it manages in accordance with a schedule set by CBR.
  - Reports include monthly, quarterly, and annual reports.
  - Timings: 15, 30, and 120 days (or before the AGM in the last case). CBR is considering reducing publication times.

### Principle 26 — Assessment and reasons for downgrade
- Assessment: Not Implemented
- Comments and key deficiencies:
  - Four issues (three closely connected) led to the downgrade:
    - Absence of a general obligation to disclose relevant matters.
    - Absence of general requirements on fund management companies to disclose to investors and potential investors all matters material to the valuation of a fund (KQ1).
    - Absence of a general disclosure obligation to provide sufficient information to allow investors, and potential investors to evaluate the suitability of the fund for that investor or potential investor (KQ4).
    - Absence of a general obligation to keep the fund rules up to date to take account of any material changes affecting the fund (KQ8).
    - Lack of a requirement that material matters be disclosed to investors and potential investors in an easy to understand format and language having regard to the type of investor (KQ2).
  - Note: Some jurisdictions require a “key features” document to accompany a full prospectus to help retail investors; such a requirement is not present.

### Principle 27 — Valuation: description
- Principle 27 requirement: 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.
- Legal and regulatory sources:
  - Chapter VII of the Federal Law of November 29, 2001 156-FZ "On Investment Funds”.
  - CBR Direction of August 25, 2015 No. 3758-D “On determination of NAV for investment funds.”
- Use of IFRS 13:
  - According to Direction of August 25, 2015 No. 3758-D the assets’ values and the amount of liabilities shall be estimated at fair value according to the IFRS 13 "Fair Value Measurement."
- Methodology and governance:
  - The detailed methodology, and any changes or additions to it, must be agreed by the CEOs of the MC and SD (Direction 1.16).
  - Methodology is not set out in the fund rules but must be on the website of the MC and be sent to CBR.
  - Any changes or additions must be notified to CBR within two days of their being made. An explanation of the reasons for introducing changes in and additions to the rules for estimating the NAV must be attached to such changes and additions (Direction 1.22).
  - Direction 1.17: non-exhaustive but detailed list of components that must be included in the methodology, including:
    - procedure for the recognition of the markets as active;
    - criteria of the choice of ways and models of estimating the value depending on kinds of assets;
    - frequency of making such estimations.
  - Direction 1.10: value of the net assets of an open-ended UIF is to be determined on daily.
  - For a closed-ended UIF, NAV must be determined monthly.
  - Direction 2.2: NAV of a unit is to be calculated by dividing the total NAV of the UIF by the number of units held by registered owners.
- Valuation hierarchy and model consistency:
  - The use of IFRS 13 requires the MC and SD to agree on the inputs to be used based on a three level hierarchy for fair value:
    - Level 1 when reliable quoted prices in an active market for the asset are available;
    - Level 2 where, for example, a quoted price in an active market is not available but a reliable yield curve for the asset (e.g., government bonds) is directly applicable or by correlation; and
    - Level 3 where the inputs are unobservable but may be inferred from various sources including the MC’s and SD’s own data and reasonable assumptions about market participants’ behavior.
  - IFRS 13 requires the MC and SD to agree to follow IFRS guidance on measurement and to agree on the valuation techniques to be employed in valuing assets consistently on a daily basis.
  - Where valuation is dependent on the use of a pricing model (Level 2 and 3), the MC and the SD have to use the same model and the same inputs.
  - Direction 1.18: where a MC has the same assets in more than one fund it has to use the same methodology for valuing the assets in each fund.
  - Each time an asset is valued, the MC and the SD must agree. They each calculate the value. If they agree, this is published. If the SD reaches a different value, procedures for resolving and publication are set out in the Direction (text ends at point where SD reaches different value).

*Source: _cr16304 - Chapter V of the Investment Funds Law sets out the processes to be followed in the winding up*

### conclusion and they cannot agree, the SD reports this failure to agree to CBR.

### _cr16304 - conclusion and they cannot agree, the SD reports this failure to agree to CBR.

### Valuation and pricing of UIF assets
- Requirement: MC and SD must agree on detailed methodology to value assets (permitted by IFRS 13) and use it daily when pricing securities.  
- CBR view: Agreement requirement minimizes incentive for MC or employees (e.g., trader) to incorrectly value assets when reliable active market prices are not available.  
- Risk mitigation: Collusion between MC and SD considered "highly unlikely" given limited significance of one MC to an SD and potential SD civil liability.  
- External assurance: An external auditor must value each fund on an annual basis; CBR understands this will normally be on a random sampling basis.  
- Regulatory citation: Open UIFs must be valued on a daily basis and the unit NAV must be published on the MC’s website on the next day according to paragraph 3.20 of FSFM decree of June 22, 2005 No. 05-23/pz-n.

### Pricing errors and redemptions
- Pricing errors: MC legally required to correct pricing errors subject to a de minimis exemption of 0.1 percent (Direction 1.12).  
- Redemptions rules (Investment Funds Law, Chapter IV):
  - Redemption applications for an open UIF must be accepted every business day (Article 24).  
  - Payment of proceeds can be no longer than 10 days after completion of necessary bookkeeping procedures following receipt of the redemption application (Article 25.2).  
  - Redemption rules must be registered with CBR and made available to investors.  
- MC options to meet redemptions under regulation 22-ps:
  - sell assets; or
  - redeem units out of own resources; or
  - borrow funds (with a limit of 10 percent of the NAV); or
  - repo sufficient assets to meet redemptions.  
- Trigger for termination: Acceptance within one working day of applications for redemption of 75 percent or more of units in an open UIF is grounds for termination of the trust (Article 23.4 4).  
- Discount on redemption: Fund rules may provide a discount on estimated value when redeemed; maximum rate may not exceed 3 percent of the estimated value; discount benefits remaining investors (Article 26.7).  
- Record retention: Direction of August 25, 2015 No. 3758-D Article 1.13 requires data supporting calculation of redemption values be kept for at least three years from the date of the relevant calculation.  
- Complaints: If a customer complains to CBR about redemption price, CBR may investigate.

### Suspensions of redemptions and CBR powers
- Suspension conditions (Article 29):
  - Allocation, redemption and exchange may be suspended simultaneously only if:
    - it is impossible to assess the value of the UIF’s units for reasons beyond MC control; or
    - the NAV of the fund had declined by more than 10 percent over a three-day period; and only if MC judges suspension to be in unit holders’ best interests.
- Obligations on suspension:
  - MC must publish a statement stating reasons for suspending redemptions.  
  - MC must notify CBR in writing on the same day specifying reasons and provide at least daily updates of the position (Article 29.2).  
- CBR enforcement: If CBR believes MC is failing to honor redemptions or improperly imposing suspension, CBR may suspend all or part of an MC’s operations, terminate the license, and appoint a temporary administrator (Article 61.1 Investment Funds Law).  
- Operational timing in normal circumstances:
  - MC has three days to manage bookkeeping on receipt of a redemption request (can be shorter if fund rules provide).  
  - Price received by unit holder is the price on the day bookkeeping is completed.  
  - MC then has a further 10 days to pay proceeds of sale.  
  - Effective breathing space before winding up actions: up to 13 days from initial request.

### Assessment — UIF valuation, redemptions, and operational resilience
- Assessment: Fully Implemented.  
- Findings:
  - Daily agreed valuation methodology and daily pricing minimize mis-valuation risks when active market prices are not available.  
  - Law and regulation provide strict parameters for MC actions if unable to meet redemptions due to spikes; normal procedures provide flexibility and a two-week window that may enable MC to meet obligations and avoid formal winding up.  
  - Unit holders’ cash and rights to securities appear properly protected.  
  - No fund failure for a long time; laws and regulatory acts have changed, some repeatedly, in recent years.  
- CBR consideration: CBR might wish to consider running an exercise ("war game") to test legal and operational position against a hypothetical failure of a fund or group of funds.

### Hedge funds (Principle 28)
- Regulatory definition: Hedge-funds defined as one kind of joint stock investment fund or closed-end, interval UIF with restricted shares (FSFM decree of December 28, 2010 No. 10-79/pz-n).  
- Regulation: Hedge funds regulated similarly to ordinary investment funds; MC, SD, and registrar licensed by CBR; hedge fund rules registered with CBR.  
- Distribution restriction: Funds meeting hedge-fund definition can be sold only to qualified investors (institutional and high net worth and experienced individuals).  
- IOSCO observation: Supervision does not meet IOSCO requirement that hedge funds should be subject to more intensive supervision irrespective of clients’ competence.  
- Systemic risk assessment:
  - Hedge funds do not pose systemic risk in the Russian Federation currently.  
  - Total AUM by hedge funds at end of 2015 amounted to US$1.1 billion.  
  - Leverage: Unlike open UIFs, such funds can borrow to invest without limitation; if market share grew significantly, leverage could become a systemic risk, but no indication of this trend in early 2016.  
- Assessment: Broadly implemented.  
- Recommendation: CBR should closely monitor development of hedge funds and funds that can borrow to invest and consider more intensive supervision if systemic risk characteristics appear.

### Market intermediaries — licensing and entry standards (Principle 29)
- Licensing scope: Securities Law prohibits conducting professional securities market firm business without CBR license (Article 51(6)). Licensed activities include brokers, dealers, investment managers, custodians, and registrars (Articles 3-8). Investment advisers are not required to be licensed unless they deal on behalf of customers or hold assets (Article 5).  
- Licensing authority and procedural framework:
  - CBR is licensing authority (Article 39(1)). Licensing Instruction (Instruction 168 of September 11, 2015) gives specific grounds for refusing a license. CBR has no explicit statutory power to impose a license condition.  
- Licensing criteria categories:
  - Integrity:
    - Articles 10.1 and 10.1.2 apply integrity test for specified senior officials and owners of more than 10 percent equity. No one with an unexpunged conviction for an economic crime can hold specified positions or more than 10 percent shares.  
    - CEO must not have held a senior position of control of a regulated financial organization whose license was cancelled or suspended within the last three years.  
    - Other integrity tests under consideration (bankruptcy, business reputation) not yet finalized.
  - Financial standing:
    - Regulation 481 of July 27, 2015 imposes capital requirements; calculation method defined in FSFR Order 8-41/pz-n of October 23, 2008. Direction 3329 of July 21, 2014 specifies capital requirement for brokers, dealers, investment managers, custodians and registrars. No capital requirement under securities legislation for professional securities firms that are also banks. No requirements relating to financial standing of owners or senior management of license applicants.
  - Competence:
    - Qualification Regulation (Regulation 10-4 PZ-N of January 28, 2010) specifies qualification certificates for CEO, compliance officer, and other key office holders; requirements include specified higher education, relevant work experience, and passing relevant examination. No requirement that higher education be in a relevant area; work experience need only be in a financial organization (not necessarily similar kind).  
    - Licensing Regulation requires applicants to have specialists, supervisory board, CEO, compliance officer, finance director, IT infrastructure, physical address, two-year business plan, internal controls, RM measures, AML and insider dealing controls.
- Verification and grounds for refusal:
  - Licensing Instruction details document checks and identifies grounds for refusal: missing required documents; documents non-conforming to legislative requirements; documents inaccurate/unreliable.
- License maintenance and reporting:
  - CBR can suspend or cancel license for violations (Article 44(4)); maximum suspension period six months (Licensing Regulation paragraph 3.4).  
  - Reporting requirements: Regulation 3353 imposes reporting on firm and affiliates; financial information monthly/quarterly; large number of specific reporting requirements but no general requirement to report any material change affecting license conditions.  
- Recent licensing activity:
  - CBR action: From January 2015 to 2016, 18.7 percent of organizations (amounting to over 200) in the securities market had licenses revoked without appreciable effect on market activity. CBR has approximately 70 licensees on a watch list.
- Assessment: Partly Implemented.  
- Key reasons for Partly Implemented:
  - No regulation of investment advisers; limited tests for integrity, competence, and financial standing; no power for CBR to impose license conditions; no general obligation to report material change in circumstances.
- Recommendations (extract):
  - Broaden integrity criteria and disclosure obligations beyond Article 10 of the Securities Law.  
  - Impose a general disclosure obligation to report matters that might affect CBR’s judgment on suitability.  
  - Grant CBR discretion to consider seriousness and relevance of disclosure when determining suitability.  
  - Give CBR broader discretion to judge organizational and governance adequacy and RM quality (including internal controls and conflicts policies).  
  - Permit CBR to grant licenses with conditions and to vary or remove such conditions.  
  - Require general obligation to report any material change in circumstances that may affect licensing.  
  - Develop criteria to judge adequacy of organization, RM, internal controls, and management information systems.  
  - Amend Securities Law to bring investment advice into regulation.

### Prudential requirements for intermediaries (Principle 30)
- Current capital framework:
  - Capital Calculation Regulation (Regulation 8-41 of October 23, 2008) specifies "own funds" calculation as net asset calculation; allows inclusion of fixed assets and intangible assets (subject to 40 percent reduction).  
  - Direction 3329 of July 21, 2014 specifies flat-rate capital requirements by activity. Examples:
    - Dealer capital requirement: RUB 3 million, or US$40,000 (paragraph 4(d) of the Capital Direction).  
    - Brokers that can use client funds in their own interest: RUB 35 million (US$500,000), unless member of qualifying SRO, in which case RUB 15 million (US$200,000) (paragraphs 4(a) and (b)).  
  - No liquidity requirement.  
  - Capital requirements do not apply to banks undertaking securities activity (their capital set elsewhere).  
  - Capital amounts do not vary with firm size or volume of business; flat rates do not explicitly address market, credit or liquidity risk; do not address risks from outside regulated entity.  
- Reporting and monitoring:
  - Firms must calculate own funds monthly (last day of each calendar month) and submit monthly/quarterly reports (Capital Reporting Direction 3533 of January 15, 2015). No general obligation to report deterioration of capital at any time.  
  - Annual audited financial statements required, but no auditor obligation to check capital sufficiency for full range of risks; no statutory deadline for audited report submission in Auditing Law (CBR states 120 days deadline from Law 208 applies in practice).  
- Intervention powers:
  - Powers under Insolvency Law (Law 127 of October 26, 2002) to appoint administrator exist but can be used only when certain conditions amounting to default are met; cannot be used in advance to avoid default.  
  - CBR has used powers in Article 11 of the Investor Protection Law to restrict activities of firms with limited capital but cannot transfer client assets to another broker except under Insolvency Law conditions.
- Assessment: Not Implemented.  
- Rationale for Not Implemented:
  - Capital requirements lack liquidity element and do not address solvency because they include non-liquid assets.  
  - Flat-rate capital requirements insufficiently risk-sensitive and not scaled to firm size or activity.  
  - No requirement that capital be sufficient to absorb losses and wind down orderly.  
  - No requirement for records to determine capital levels at any time; no auditor duty to check capital sufficiency; no immediate reporting obligation on deterioration.  
  - CBR’s intervention powers cannot be used pre-default to protect clients/market.
- CBR intended reforms (stated):
  - Move to risk-based approach drawing on Basel methods.  
  - Include a requirement to report deterioration of capital of 50 percent from the last monthly report.  
  - Require auditors to report on adequacy of capital for full range of risks.  
  - Professional securities firms will be subject to IFRS as from 2017.
- Recommendations (extract):
  - Set capital requirements based on full range of risks, accounting for nature, scope and scale of activities.  
  - Require capital to be maintained at all times and impose liquidity requirement enabling absorption of losses and orderly wind down.  
  - Oblige firms to report deterioration in excess capital of 50 percent since last report.  
  - Require firms to report to CBR if capital falls below 120 percent of the minimum.  
  - Require daily calculation of capital and filing on the file for random checks by CBR and auditors.  
  - Set deadline for submission of annual audited reports.  
  - Require annual auditor opinion on capital sufficiency for full range of risks.  
  - Seek amendment to law to allow CBR to take preventive intervention (restrict activities, transfer client assets, other actions) when necessary to avoid imminent risk of default.

### Internal organization, controls, and conflicts (Principle 31)
- Internal controls and governance requirements:
  - Licensing Regulation (Regulation 481 of July 27, 2015) requires supervisory board, CEO, compliance officer, finance director, and specialist staff/IT as licensing conditions.  
  - Article 10.1.1 of Securities Law obliges firms to organize and document internal controls, establish RM department and risk monitoring system. Licensing Instruction requires statement of internal controls. No general statutory obligation on adequacy or coverage of internal controls.  
  - Internal Controls Regulation focuses on compliance officer appointment, qualifications, duties; compliance officer obliged to report regulatory breaches to CEO and make quarterly report to supervisory board. CBR states corporate law assigns ultimate responsibility to CEO.  
  - No general obligation to implement management information system to enable management to assess internal control effectiveness. No general statutory obligation for regular review of internal controls and RM processes except via external auditor or voluntary Corporate Governance Code (primarily for listed companies). CBR checks compliance function effectiveness during onsite inspections.
- Conflicts of interest:
  - Article 3: broker must compensate client if conflict of interest not disclosed and client suffered loss. Article 5: similar provision for investment managers. Article 44(3) empowers CBR to make conflicts of interest regulations.  
  - Regulation 44 of 1998: general obligation to put client’s interests before firm; requires SROs to develop standards to avert conflicts. Does not provide guidance on actions to address conflicts (e.g., information barriers, disclosure, or declining to act).  
- Assessment: (contextual within Principle 31 description)  
  - Regulatory framework establishes key roles and obligations but lacks overarching obligations on adequacy, management information systems, and regular independent review of RM and internal controls.
- Recommendations (implicit within prior sections):
  - Develop and require management information systems and regular review processes to ensure management can assess internal control effectiveness.  
  - Enhance conflicts of interest rules to provide operational guidance on mitigation measures (e.g., information barriers, disclosures, decline-to-act protocols).

*Source: _cr16304 - conclusion and they cannot agree, the SD reports this failure to agree to CBR.*

### references to conflicts of interest with respect to investment managers. Paragraphs 6.1. and 6.2

### _cr16304 - references to conflicts of interest with respect to investment managers. Paragraphs 6.1. and 6.2

### Conflicts of interest: legal requirements and limitations
- Paragraphs 6.1. and 6.2 require an investment manager to identify, monitor, and manage conflicts of interest (6.1).
- If the risk mitigation measures are not sufficient to prevent the risk of damage to the client, the manager must notify the client (6.2).
- Limitations and gaps:
  - Requirement applies only to investment managers; "this does not apply to other securities activities."
  - There is no requirement that the investment manager decline to act if measures are insufficient: "it does not require the investment manager to decline to act if the measures are insufficient."
  - No indication is provided of specific measures that might be taken: "it does not give any indication of the measures that might be taken."
  - A more general definition of fiduciary responsibilities exists in the Civil Code, which include the obligation to act in the best interests of the client.
- Licensing Instruction 168 (paragraph 2.1.29):
  - States that an applicant must supply a document listing measures that have been put in place to address conflicts of interest.
  - This licensing requirement "does not apply to firms that only conduct one form of activity (implying that the only conflicts are between different kinds of activity)."
  - In practice, "the vast majority of brokers are also dealers and many of them are investment managers as well. So most licensees will be caught by these provisions."
- Licensing Regulation 481:
  - Obliges an applicant engaging in certain specified combinations of activities (such as broking and dealing, or broking and investment management) to create exclusive structural sub-divisions for each area of activity.
  - Example: "separate sub-division for depository activity, a separate sub division for broking, for dealing and for investment management."
  - No requirements for information barriers or other practical safeguards to manage conflicts of interest.

### Observed absence of general rules on conflicts management
- There are no general provisions requiring a securities firm to:
  - Address conflicts of interest arising with a client or those between clients.
  - Have mechanisms for managing conflicts of interest, which should include disclosure, internal organizational barriers or a decision to decline to act.

### Segregation of duties
- Licensing Regulation 481 states that certain specified combinations of securities market activities must be accompanied by measures designed to mitigate the risk of conflict of interest (paragraphs 2.2.1, 2.3.1 et seq).
- The Internal Controls Regulation specifies the functions that a compliance officer may not perform, in combination with the compliance officer role (paragraph 3.2).
- Gap: "there is no general requirement for the segregation of duties where the performance of such a combination would create unmanageable risks of conflicts of interest, undetected errors, potential breaches of internal controls or abuse more generally."

### Client protection and risk management
- No general requirements oblige the professional securities firm to have in place appropriate systems of client protection and RM.
- Record keeping:
  - Detailed record keeping provisions exist regarding the taking of client orders in the Record Keeping Regulation.
  - There are no general provisions requiring a firm to have systems in place to ensure the integrity of its dealing practices and the fair, honest, and professional treatment of clients.
- Direct access controls:
  - "There are no provisions relating to the controls necessary to prevent a client that has direct access to an exchange from placing an order that exceeds specified limits."
  - In practice, firms that allow direct market access impose controls depending on "the cash and collateral provided to the broker by the client."
  - These practical controls, together with arrangements for posting margin and collateral (discussed in Principle 37), provide some risk control.
  - No specific regulatory requirements on brokers to control risks inherent in direct client access beyond the general requirement to have an adequate RM system (Article 10.1.1).
- No regulatory obligations for professional securities firms "to act with due care and diligence in the interests of the client or in a way that protects the integrity of the market."

### Segregation of client funds
- Securities Law Article 3 (brokers):
  - If a broker holds client money, it should be held in a special broker’s account clearly designated as being for clients and the bank cannot use the money in that account to satisfy the liabilities of the broker.
  - Broker should keep accounting records that identify the client money held.
  - For some brokers, it is acceptable for the broker to use client money in its own interests provided this is allowed in the client agreement; capital requirements are considerably higher for such brokers (Regulation 3329).
  - Article 3 obliges the broker to keep funds in this category separate from client funds where there is no agreement to use them in the broker’s interests and to follow client’s instructions and return funds when requested.
  - CBR commentary: this arrangement "could enable the broker to use the funds and speculate in the market to its own profit" and any loss "would have to be made good, unless the broker were no longer in a position to meet such liabilities."
  - In practice, this arrangement is normally used to lend to other clients and to manage minor and temporary shortfalls.
  - Apart from enhanced capital requirements and the client agreement reference, "there are otherwise no safeguards to protect the client money in the event of a default by the broker."
  - No obligations to ensure this element in a client agreement is given prominence, nor to ensure a broker explains the increased risks associated with this practice.
  - If a broker fails and there is a shortfall in the client account, the Insolvency Law states that the clients would be paid pro rata to the amount in the client account and would be unsecured creditors for the remainder.
- Custodians and other intermediaries:
  - Article 7 of the Securities Law: "it is not possible to use client securities held by a custodian to meet the liabilities of the custodian."
  - Article 7 contains similar provisions with respect to client money as those in Article 3 with respect to brokers.
  - There are no comparable provisions for other intermediaries such as investment managers, who may also hold client money; CBR states clients are protected in that case by the provisions of the Civil Code (Chapter 53).
- Record reconciliation:
  - Paragraph 57 of the record keeping regulation obliges professional securities markets firms to reconcile their records of client money every month and client assets every three months.
- Other gaps:
  - "There are no other safeguards to protect client assets."
  - "There is no obligation to entrust securities held on behalf of an individual investment portfolio client to a custodian."

*Source: _cr16304 - references to conflicts of interest with respect to investment managers. Paragraphs 6.1. and 6.2*

### Chapter VII of the internal control regulation sets procedures for the handling of complaints.

### _cr16304 - Chapter VII of the internal control regulation sets procedures for the handling of complaints.

### Complaints handling (Chapter VII)
- Procedures set out steps to be taken and include strict timetables.
- No direct obligation in the regulation that complaints must be handled fairly.
- Replies must be signed by the chief executive of the securities firm, or by the compliance officer.
- No obligation that a complaint against a specific person be investigated by a different person; signing by the CEO or compliance officer partially addresses this.

### Client identity and beneficial ownership
- No provisions in the Securities Law obliging professional securities market firms to identify and verify the client’s identity using reliable, independent data, including persons who beneficially own and control such securities.
- Article 7 of the AML Law requires obtaining and keeping records of client identity, with exceptions:
  - Transactions involving less than RUB 15,000 (US$200) (Article 7(1.1, 1,2, 1,3))—an exception not permitted under the IOSCO Principles.
- AML Law includes general requirement to identify the beneficial owner (Article 7); definition in Article 3 includes any person with direct or indirect control of 25 percent of the shares of a legal entity.
- For a natural person, the law permits assuming the natural person is the beneficial owner unless reasons to suppose otherwise.
- Article 7 allows that if “affordable” measures fail to identify the beneficial owner of a legal entity, the executive body of the legal entity can be assumed to be the beneficial owner.
  - Such provisions likely lead to cases where the beneficial owner is not identified, especially if a shareholder of a Russian legal entity is owned by a foreign legal entity.
- Investment Management Regulation 482 (paragraphs 1.2 and 1,3) obliges an investment manager to create an investment profile consisting of:
  - statement of the loss the client can bear;
  - he desired return on assets; and
  - the investment horizon (which must not be longer than the client contract).
- Additional profile information (1.4): age, income, and expenditure over 12 months and savings.
- General obligation to seek to achieve the investment objectives of the client (1.1), but no corresponding objective to establish fully what that objective might be.
- Regulation 482 applies only to investment managers, not other professional securities firms.
- Accounting records kept by professional securities firms must be kept for five years (Article 29 of the accounting Law and in the Record. Keeping Regulation (12–32)).

### Client disclosures and agreements
- No general requirement in the Securities Law that a client be given a written client agreement, except:
  - Article 7 of the Securities Law mandates a written agreement between a depository and the client.
- CBR states a written agreement requirement can be found in Articles 159 and 161 of the Civil Code, but no securities-firm-specific provisions on the nature of client agreements.
- No provision requiring professional securities firms to disclose sufficient information on a proposed investment to enable informed decisions.
  - Article 6 of the Investor Protection Law specifies certain information must be disclosed—but only at the request of the investor.
  - No obligation to provide this information spontaneously, or to ensure disclosure is timely and comprehensible.
- Record Keeping Regulation (Paragraphs 64 to 72) requires professional securities firms to submit reports to a client at various intervals, but no less than once a quarter.
- No general requirements to disclose fees and charges to a client, though CBR states some requirements exist for depositories and registrars in unavailable regulations.

### Supervision structure and risk-based approach
- Supervision responsibility split between CBR headquarters and territorial units:
  - Headquarters: general policy, supervision methodology, and practical supervision of the 30 largest firms (account for 75 percent of the business).
  - Territorial units: supervision of other firms.
- Since 2015, CBR began moving towards a risk-based supervision system, developing a risk scoring system dividing firms into five groups using a range of information (physical location, behavior, financial flows, transactions data, monthly/quarterly reports, extent of borrowing, news reports, supervisory judgments, payments and insurance data).
- By the time of assessment, 430 firms had been categorized to one of the five risk groups, distributed as:
  - Green I: 46
  - Yellow II: 166
  - Red III: 38
  - IV: 121
  - V: 59
  - Total: 430
- “Red zone” firms (most risky) are smaller firms supervised intensively by territorial units with inspections, requests for detailed information, and weekly activity reports; these firms may be considered for license cancellation.

### Market exit and enforcement outcomes
- Result of intensive supervision: 250 firms have left the market:
  - 91 firms had their licenses revoked (59 did no activity, 28 were found to be in serious breach of the regulations);
  - 38 firms left because they were part of a bank whose license had been cancelled;
  - 115 gave up their license voluntarily; and
  - 6 left the market for other reasons.
- CBR cancelled qualification certificates of 64 persons and issued orders for 228 administrative penalties.
- There were 1,163 separate orders to prevent violations.
- Offenses detected included:
  - inclusion of ineligible assets in capital calculations of professional securities firms;
  - improper categorization of investors as qualified;
  - use of securities firms to conduct illegal gambling; and
  - inaccurate records of client information by depositories.

### Inspections, reporting, and supervisory practice
- For non-intensively supervised firms, CBR analyzes monthly and quarterly reports per headquarters methodology and conducts meetings with management on stress testing, market developments, new products, and other matters.
- Inspections performed by Inspections Department (covers banks and nonbank financial institutions; no specialist securities teams)—both scheduled (routine) and unscheduled (investigations).
- Inspectors review internal documents and client files primarily to detect suspicious client activity rather than to assess firms’ fulfillment of obligations to clients (e.g., collecting appropriate information on financial objectives).
- Inspection process: inspectors maintain contact with offsite team during inspection; final report given to licensee at conclusion.
- Inspection team emphasizes compliance with detailed rules; considers practical difficulty in imposing sanctions for breaches of broader obligations (e.g., good RM) absent specific rule breaches.
- CBR could not provide number of inspections for professional securities firms; Annual Report 2014 shows 97 scheduled inspections and 499 unscheduled inspections for 19,000 entities under CBR’s regulation.
- CBR not yet in a position to impose RM and good governance practices on professional securities firms, though some firms voluntarily conducted risk assessments.

### Assessment: Not Implemented — Key departures from IOSCO requirements (comments)
- No overriding obligation on professional securities firms to:
  - act with due care and diligence in the interests of a client and place client interests above their own;
  - have systems and controls ensuring integrity of dealing practices, market integrity, and fair, honest, professional treatment of clients.
- No overriding obligations for adequate internal controls, including management responsibility to:
  - undertake a RM of its business;
  - devise policies and procedures addressing those risks;
  - train staff, have information systems to assess effectiveness, review effectiveness at least once a year, and reassess risks at least once a year.
- No effective overall provisions to identify, prevent, or manage conflicts of interest comprehensively.
- No obligation to ensure appropriate segregation of duties where necessary to prevent unmanageable conflicts, undetected errors, or abuse.
- No general obligation to provide a written client agreement (except depositories) in an ensured form.
- No overall obligation to obtain sufficient client information to provide appropriate services and advice.
- No obligation on an investment manager to hold client funds in a segregated account (apart from general Civil Code obligations).
- No obligation to identify all clients and beneficial owners.
- No general requirement to give clients enough information to make informed investment decisions.
- No obligation to disclose fees and charges.

### Additional problematic arrangements (comments)
- Broker allowed to use client funds without limit (if permitted in agreement) presents major abuse risk; no requirement to disclose prominently nor specific safeguards or investor protection fund.
- Responsibility for legal/regulatory compliance placed on compliance officer rather than executive management—risk of evasion.
- Permitting a securities firm to accept a client where beneficial owner is unknown is inappropriate; firms should refuse to act if reasonable affordable measures fail to identify beneficial owner.
- Reconciliation frequency insufficient:
  - client money reconciliation monthly; assessors recommend daily;
  - client asset reconciliation quarterly—assessors recommend weekly for intensive trading clients, monthly for others, quarterly only if no trading for three months.
- Some improving provisions exist: Article 10.1.1 (Securities Law, July 2015) requires adequate internal controls and RM; Licensing Instruction 168 requires descriptions of internal controls and RM system—but supporting provisions are inadequate.

### Conflicts of interest: piecemeal coverage and enforcement concerns
- Provisions on conflicts of interest are included inconsistently across instruments (e.g., Regulation 44 of 1998, Regulation 3234-U, Regulation 3797 U), and CBR lacks a comprehensive, consistent view of these provisions.
- Conflicts provisions are not sufficiently comprehensive nor adequately enforced.
- Reliance on Civil Code provisions is insufficient to replace explicit Securities Law/regulation requirements (e.g., written agreements, segregation of client funds).

### Recommendations (CBR and legislative changes)
CBR should seek amendments to the Securities Law to impose the following obligations on securities firms, supported by detailed implementing provisions:
- Act with due care and diligence in the interests of a client, place client interests above their own, and have systems and controls ensuring integrity of dealing practices and fair, honest, professional treatment of clients.
- Management to have full responsibility for complying with legal and regulatory obligations.
- Management to undertake a RM of its business, devise policies and procedures addressing risks, train staff, have information systems for assessing effectiveness, review effectiveness at least once a year, and reassess 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 appropriate segregation of duties where necessary to prevent unmanageable 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 provide appropriate services and advice.
- All securities firms to refuse to accept clients where 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.
- Firms that hold client money to reconcile client money in bank accounts with internal records on a daily basis.
- Firms that hold client assets to have effective protection including segregation and reconciliation:
  - weekly for high intensely trading clients;
  - monthly for all other clients;
  - quarterly for clients who do not trade for three months.

CBR should amend regulations to impose the following obligations:
- Systems and controls to limit the use of client money in the firm’s own interests (only for temporary/minor shortfalls), prominence of this matter in client agreement, and explanation of risks to client.
- Identify all clients and beneficial owners.
- Provide clients with a written agreement with specified contents (e.g., fees and charges).
- Give clients enough information to make an informed investment decision.

### Principle 32 — Failure of a market intermediary (description, assessment, recommendations)
- Insolvency Law includes a chapter on bankruptcy of financial organizations (starting at Article 180), including professional securities firms and management companies.
- Article 183 procedures:
  - Financial organization must take action when conditions met, include action plan sent to CBR within 15 days; plan to be completed no more than six months from date conditions met.
  - Conditions requiring action (Article 183.2): (i) refusal for a month to meet creditors’ claims; (ii) being 10 working days late with a payment; and (iii) inadequate funds to make a payment when due.
  - On receiving plan, CBR must decide whether to appoint an administrator within 30 days and conduct an inspection.
  - If no plan or plan inadequate/not implemented, CBR can appoint provisional administrator (Article 183.5); appointment must be announced.
  - Administrator’s purposes: restore solvency and safeguard property (Article 183.6); Article 185.2 obliges safeguarding client assets and ensuring special client accounts contain enough to meet liabilities to clients.
  - Article 185.5(3): property is distributed pro rata; unpaid pro-rata amount included as creditor claim.
  - Administrator may take measures to prevent bankruptcy; employees must follow administrator’s orders (Article 183.7); can apply to court to invalidate transactions; CBR can suspend management authority if management failed to report or implement plan (Article 183.9).
  - Administrator cannot be member of CBR (Article 183.6(7)(5)); CBR may send a representative to exercise control over administrator (Article 183.6(11)).
  - Administrator can decide to liquidate or go into receivership (Article 183.11, 183.13); administrator cannot operate for more than 9 months unless liquidation or receivership (Article 183.12).
- Article 19 of Law 46 on Investor Protection provides scope for an investor compensation fund, but no such fund exists.
- CBR has no contingency plan for dealing with the failure of a securities firm; no early warning systems beyond monthly and quarterly reports; no obligation for firms to report reductions in capital close to minimum.
- Assessment: Not Implemented — reasons:
  - No clearly documented plan for dealing with intermediary failure, no evidence of testing, no evidence CBR has practical ability to take action.
  - No procedure for cooperation with other domestic and foreign regulators within such a plan.
  - No early warning systems of potential default if capital deteriorates rapidly since last monthly/quarterly report.
  - CBR’s powers mostly deployable only once a firm is already in default.
- Recommendations:
  - Seek changes to Insolvency Law to enable appointment of provisional administrator where necessary to protect investors or safeguard market stability when imminent default is realistic.
  - Review provisional administrator powers to ensure ability to:
    - restrict intermediary activities;
    - move client accounts to another intermediary;
    - apply other measures to minimize customer, counterparty, and systemic risk (e.g., customer and settlement insurance schemes or guarantee funds).
  - CBR to draw up a detailed contingency plan specifying actions, decision-makers, contacts in other agencies, draft press releases and investor statements, legal check lists, required physical facilities, names of possible administrators; plan should be tested periodically.
  - Recommendation in Principle 29 regarding power to place a condition on a license is relevant for early action before administrator appointment.

### Secondary markets and exchange oversight (Principle 33 — summary)
- OT Law (Federal Law No. 325-FZ of November 21, 2011, On Organized Trading) governs establishment and operation of exchanges and trading systems.
- Since January 2013, CBR received 13 exchange license applications; licenses granted to nine organizations (one Crimean exchange for specific commodities, eight existing exchanges); four applications denied (all commodity trading).
- Moscow Exchange formed by merger of MICEX and RTS in December 2011; relicensing required under OT Law; holding company raised RUB 15 billion in February 2013 and group is listed on the exchange.
- Since September 2013, licensing authority is CBR.
- OT Law defines organized trading and requires registration as a legal entity; prohibits organized trading without a license; single license issued per exchange/trading system.
- Exchange licensing requirements include (among others):
  - fitness and properness of shareholders, especially those owning 5 percent or more of voting shares;
  - key personnel requirements (CEO, board members, head of internal supervision service, chief accountant, official responsible for RM system);
  - minimum capital of RUB 100 million (RUB 50 million for a non-exchange trading system), composition set by CBR rule varying by activity type;
  - detailed trading rules, procedures for monitoring and supervision of participants, listed companies, and compliance with relevant laws (e.g., Federal Law 224-FZ).
- CBR may impose conditions on an exchange (Article 26(2)) including trading rules, trade monitoring procedures, supervision of participants, and internal supervision aimed at risk reduction.
- For Moscow Exchange, special conditions applied recognizing near monopoly (e.g., free access for professional participants, composition of Exchange Council).
- Applicant exchanges submit substantial documentation; since January 1, 2016 a preliminary examination process introduced by License Instruction 169-I dated October 26, 2016.
- CBR Regulation No. 437-P (October 17, 2014) and related provisions set detailed suspension conditions and circuit breaker requirements (e.g., 20 percent price move within a 10-minute period).
- Exchanges must install automated monitoring systems for continuous tracking and to create an audit trail and must transmit daily data on all NSTs detected during previous trading day.
- Exchange obligations include supervising members, admitting securities that meet exchange requirements, and preventing illicit use of inside information or market manipulation.
- MOEX practices:
  - Department of Access to Trade evaluates membership and handles discipline; subject to CBR oversight.
  - Listing department oversees admission and compliance; monitors disclosure and issues notices to listed companies on non- or delayed-disclosures.
  - Disciplinary cases against members for rule breaches are infrequent; 2015: ten members disconnected from NCC clearing, one fine levied for breach of business ethics, no warnings issued.
  - Breaches of disclosure regime rarely subject to direct sanction; quality grades for equities reassessed quarterly with disclosure breaches taken into account.
- CBR exchange supervision:
  - Exchange supervisor team comprises six people, supported by Department for Combating Malpractice (40 staff).
  - Article 25.3 of OT Law gives CBR unrestricted access to exchange facilities and service providers’ records, including members’ trading records.
- Product approval: exchange decision to introduce new products; CBR requires exchanges take product design, market conditions, and law requirements into account.

_This summary is based solely on the content of: _cr16304 - Chapter VII of the internal control regulation sets procedures for the handling of complaints.__

### 1. The organizer must ensure free access to the information identified in this article for all

### 1. The organizer must ensure free access to the information identified in this article for all

### Summary
- "The organizer must ensure free access to the information identified in this article for all persons interested therein whatever the purpose for which such information is obtained."

### Obligation
- The organizer is required to provide free access to the specified information.

### Scope
- Access must be available to "all persons interested therein."
- There is no restriction based on "the purpose for which such information is obtained."

### Key statement
- Exact text: "The organizer must ensure free access to the information identified in this article for all persons interested therein whatever the purpose for which such information is obtained."

*Source: _cr16304 - 1. The organizer must ensure free access to the information identified in this article for all*

### 2. The organizer must ensure disclosure of the following information and documents:

### 2. The organizer must ensure disclosure of the following information and documents

### Required disclosures by the organizer
- its own constituent documents;
- rules of organized trading;
- Regulations of and decisions of the Exchange Council;
- annual reports of the exchange enclosing an audit opinion regarding the annual accounting (financial) reports contained in annual statements, and also with regard to the consolidated financial reporting contained in the annual statements;
- the amount of fees charged for services provided by the organizer of trading;
- the trading times; and
- other information that is to be disclosed under the law and regulatory acts of CBR.

### Trading system technology and market access
- CBR has expertise to examine trading algorithms and other aspects of trading technology and has done so for the MOEX foreign exchange market when volatility was a concern.
- MOEX offers various connection options with various speed at a range of prices.
- Performance statistics for MOEX are freely available.
- Co-location is offered.
- Direct Electronic Access can be offered to clients by exchange members.
- The exchange (using NCC) offers an automatic pre-trade clearance check based on individual client limits; members can use their own systems for risk control.
- The real time transparency offered by MOEX facilitates member-level risk-control options.

*Assessment: Fully Implemented*

*Comment: Licensing of the merged MICEX and RTS was thorough; however, applications to open new exchanges are rare and licensing procedures/staff experience may be limited.*

### Principle 34 — Ongoing regulatory supervision of exchanges and trading systems
- MOEX and other exchanges provide CBR with remote terminals delivering a real time feed of all entered orders and completed transactions.
- Exchanges provide a next day feed including all trades identified as NSTs using the exchange’s criteria; criteria include:
  - A set value of deviation of the order price from the closing price of the previous trading day;
  - A set value of deviation of the price of an order from the price of the last order;
  - A set value of deviation from the current price of a current order;
  - Unusual deviation in the main stock index; and
  - A set value of deviation in the volume of organized trading for a certain period.
- The exchange’s NST criteria are not disclosed to members; CBR applies different criteria for NSTs and compares results.
- Transactions data is also received in real time from depositories for OTC transactions.
- Department for Market Manipulation uses third-party software "Forecast: The Electronic Dossier"; as of February 2016 it had implemented a service pack with advanced visualization, automatic alerts, and related-accounts analysis.
- A situation room is being built to bring all transactions from all exchanges into a single database to address multi-screen limitations.
- CBR is empowered to use onsite inspections (routine and “for cause”) and offsite reviews; as of the report CBR had not yet carried out an onsite inspection of an exchange.
- CBR is augmenting inspectorate staff and plans a practice inspection of Moscow Energy Exchange before inspecting MICEX.
- All exchange rule changes must be approved by CBR; legally MOEX must give five days’ notice to members of proposed rule change (in practice longer).
- Exchanges must provide CBR quarterly financials and trading information, as well as information on new/departing members, all disciplinary cases, stress testing results, and technical malfunctions.
- Every two years MICEX must undergo an operational (IT) audit and share results with CBR.
- CBR has a range of sanctions under Article 25 of the Law, including identifying deficiencies with deadlines, administrative penalties, fines (historical example: MICEX fined by predecessor body), suspension of operations in full or in part, and revocation of license under Article 28.

*Assessment: Partly Implemented*

*Comments and reasons for downgrade:*
- Lack of an operational onsite inspection program for MOEX and other exchanges licensed by CBR; a program is in advanced planning with the first small-exchange inspection selected.
- Need to review MOEX’s record of disciplining members and listed companies; current approach contains elements relying on “caveat emptor” that are difficult to reconcile with international investor-protection practices.

### Principle 35 — Transparency of trading
- Required pre- and post-trade transaction details mandated by paragraph 1 of Appendix 4 to the Regulations of CBR No 437-P from October 17, 2014 “On activities for the organized trading”.
- MICEX operates markets in shares, government and corporate bonds, derivatives, foreign exchange, and repos; it displays trades from its limit order book and separately displays bilateral large-order trades so the market can distinguish price-formation contributions.
- The exchange is required to publish bids and offers (price and size) up to the twenty 20 best bids and offers for each security on the limit order book in real time to members.
- Clients can get real time prices for a fee; retail investors can see trade prices on the exchange’s website for free with a 10-minute delay.
- No dark pools in Russia; partially dark orders limited to iceberg orders that follow standard regulatory requirements.
- MOEX attempted a dark pool experiment that did not attract support.
- MOEX’s trading rules are publicly accessible via its website.
- OTC trades not executed on the exchange must be reported to the exchange within 15 minutes of execution for publication or, if at the end of the day, at least one hour before the exchange opens the next day; very large OTC trades can be subject to delayed publication for up to 30 days.
- CBR has full access to all order and trade data via real-time remote terminals.

*Assessment: Fully Implemented*

*Comments:*
- No obvious omissions in transparency on MOEX-operated markets. The presence of more transparent trading in markets typically OTC elsewhere (corporate bonds, foreign exchange, repos) is notable.
- HFT is significant in equity trading.

### Principle 36 — Detecting and deterring manipulation and unfair trading
- Insider trading and market manipulation governed by Federal Law No. 224-FZ of July 22, 2010 (“IT Law”).
- Criminal liability introduced later; to prove criminal offense, intent must be shown; for administrative offenses intent is not necessary.
- Article highlights:
  - Article 5 lists examples of market manipulation (e.g., trading to maintain an artificial price, “pump and dump”, dissemination of misleading information).
  - Article 6.2 prohibits market manipulation.
  - Article 5.3 provides exemptions for “stabilization” of new issues and maintaining price to facilitate share buybacks.
  - Regulation No. 11-2/pz-n, 2011 of the FFMS provides further detail on maintaining price/demand/supply/volume.
  - Article 2.1 defines inside information; Article 3 lists deemed inside information; Article 4 lists persons deemed insiders; Article 6.1 prohibits use of inside information and “tipping off”.
- Front running is an offense; CBR expresses concern about difficulties proving front running at an administrative level.
- Article 185.6 of the Criminal Code (effective July 30, 2013) establishes criminal liability for unlawful use of inside information and market manipulation.
- Penalties under Article 185.3 for market manipulation:
  - Loss/profit threshold and penalties:
    - Loss/profit in excess of RUB 2.5 million (US$37,000): fine from RUB 300,000 to RUB 500,000 or one to three years’ salary or imprisonment up to four years with a fine up to RUB 50,000 (or up to three months’ salary) with subsequent restrictions on professional activities for up to three years.
    - Particularly serious cases (in excess of RUB 10 million): fine from RUB 500,000 to RUB 1,000,000 or two–five years’ salary or imprisonment for two to seven years with a fine up to RUB 100,000 (or up to two years’ salary) with subsequent restrictions on professional activities for up to five years.
- Administrative sanctions when criminal liability cannot be established:
  - Individuals: fines ranging from RUB 3,000–RUB 50,000 under Articles 15.30 and 15.21 Code of Administrative Offenses.
  - Legal entities: administrative fines subject to a minimum of RUB 700,000.
- Detection and enforcement processes:
  - Department for Market Manipulation (35 staff) uses exchange data and third-party software to identify suspicious trading; as of February 2016 advanced analytics implemented.
  - Investigation process: departmental review → report to first deputy governor → full investigation if agreed → use of CBR powers to obtain information from “any person”; phone taps/communications access require law enforcement court order (not yet used).
  - Post-investigation actions: report to first deputy governor naming individuals and recommending actions; sanctions include removing qualification certificates, cancelling licenses, penalties, and orders.
  - Matters may be referred to the Ministry of Interior (MoI) Department for Fighting Against Economic Crimes (Division F) when estimated profits exceed RUB 2.5 million; Division F collects evidence with CBR support; Investigative Committee of Russia decides on referral to prosecuting authorities.
- Enforcement outcomes (since September 2013):
  - The department has made 70 investigations (57 market manipulation; 13 insider dealing).
  - Sanctions include license revocations and withdrawal of professional qualification certificates.
  - Two referrals to Division F, but as of February 2016 no criminal prosecutions; first prosecution may go to court in the summer of 2016.
  - Case details and sanctions published on the CBR website; at least one case involved passing information to an overseas securities regulator.
- Cross-market monitoring possible via exchange terminals and IOSCO MMoU for co‑listed stocks.

*Assessment: Broadly Implemented*

*Comments and recommendations:*
- Fines may be insufficiently dissuasive, but prison sentences can have high deterrent effect if detection and conviction risk becomes credible; to date no criminal prosecutions had occurred as of February 2016.
- Consider developing an MoU between the Department for Market Manipulation and Division F to clarify responsibilities and expectations as workload increases.
- Review regulatory treatment of price stabilization of new issues and share buybacks (exemptions in IT Law) to consider imposing constraints similar to other jurisdictions to better protect investors.

### Principle 37 — Management of large exposures, default risk and market disruption
- Monitoring of large exposures:
  - Within CBR, FSD monitors large exposures using multiple data feeds.
  - NCC (central counterparty) is the front-line monitor; it has 99 percent of the market and processes OTC derivatives (currently small).
  - NCC provides FSD daily (in real time) data on all open positions ranked by size against the relevant entity.
  - FSD uses software to compare position size with an entity’s own funds; concerned when an exposure equals or exceeds 100 percent of an entity’s own funds.
  - FSD sends reports to banking supervision on bank-to-bank and bank-to-nonbank exposures.
  - FSD receives daily data from trade repositories (derivatives and repo, on-exchange and OTC) and from depositories; MOEX member trades feed provides further analysis data.
  - Standardized client IDs enable tracking of client business via NCC members.
  - NCC can reduce exposure (e.g., raise margin requirements); failure to meet a margin call is immediately notified to CBR.
  - NCC rules/procedures are publicly available and NCC is in regular consultation with CBR.
  - 2015 amendments to Federal Law No.7-FZ “On Clearing and Clearing Activities” empowered NCC to effectively segregate member positions from client positions.
  - Legal structure meets requirements for close-out netting under ISDA master agreements and the global master repo agreement of ICMA.

- Short selling on equity markets:
  - Short selling permitted in liquid stocks on MOEX.
  - As of Februar 15, 2016 short selling was not permitted in 1,539 securities out of 2,766 served by the NCC.
  - NCC can require a sale only when it is 100 percent pre-deposited by the clearing member; compliance enforced automatically by NCC.
  - NCC can set different initial margin rates for buying and selling assets to control short-selling exposure.
  - Brokers are responsible for ensuring clients comply with the 5 percent price limit rule.
  - Short sales do not have to be declared to the exchange before or after the sale.
  - NCC minimizes failed trades (settlement T+2) via an automatic borrowing facility from holdings of large institutional investors; broker provides cash collateral and pays a penalty rate.
  - NCC has no obligation to notify MOEX of the borrowing; brokers can arrange bilateral borrowing, leaving NCC unaware that the sale was short.
  - Unauthorized shorts can remain for up to three days; after that NCC will close out the position if known.
  - Information about a short selling ban is provided to the clearing participant and CBR and published on the NCC website (http://nkcbank.ru/fondMarketRates.do).
  - No information provided to the market or CBR on amounts of short selling in individual securities.
  - No exemptions for market making or other practices.

*Assessment: Partly Implemented*

*Comments and recommendations:*
- Monitoring of large exposures is comprehensive and uses near real-time multiple data sources, but FSD’s threshold for concern—an exposure equal to or exceeding 100 percent of an entity’s own funds—is considered too high and should be reduced, possibly to a maximum of 25 percent.
- Recent legal changes on bankruptcy and clearing are positive.
- Downgrade due to lack of effective controls on short selling on MOEX:
  - Absence of a surveillance regime by MOEX for short selling.
  - Lack of arrangements to provide information on short selling to market participants.
  - Recommendation: CBR should work with MOEX to research good practice in other markets and adopt measures suited to the Russian market.
  - Note: NCC takes effective measures to protect itself from naked short selling by MOEX members and clients, but this alone is insufficient for a higher implementation rating.

*Assessment summaries cited in text:*
- Principle 34: Partly Implemented
- Principle 35: Fully Implemented
- Principle 36: Broadly Implemented
- Principle 37: Partly Implemented

*Italicized source: IMF staff report excerpt (_cr16304) — sections on organizer disclosure, Principles 34–37*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16304.pdf_