Decree of the President of the Russian Federation [The Federal Commission for the Securities Market]　B. Yeltsin　President of the Russian Federation　　Moscow, Kremlin　July 1, 1996　　 Note: This text is not to be considered an official translation of this decree. In order to realize a unified approach to the formation and development of a capital market in the Russian Federation that will serve the interests of the economic security of the state, attract investment into industry and protect the rights of citizens -- shareholders and investors -- and in accordance with Article 80 of the Constitution of the Russian Federation, it is resolved: To approve the enclosed Concept for the Development of the Capital Market in the Russian Federation ("the Concept"). To instruct the Government of the Russian Federation and the Central Bank of the Russian Federation to: Ensure implementation of the tasks provided for in the Concept; Within one month, coordinate their normative acts with the provisions of the Concept. To instruct the Administration of the President of the Russian Federation and the Federal Commission on the Capital Market to submit monthly progress reports to the President of the Russian Federation on the implementation of the Concept. This Decree shall take effect as of the date of signing. B. Yeltsin President of the Russian Federation Moscow, Kremlin July 1, 1996 No. 1008 APPROVED by Decree No. 1008 of the President of the Russian Federation, July 1, 1996 CONCEPT FOR THE DEVELOPMENT OF THE CAPITAL MARKET IN THE RUSSIAN FEDERATION CONTENTS Section I. Analysis of Capital Market Development Economic Reform and the Capital Market in 1991-1996 The Legal Basis for Capital Market Development Key Factors in Capital Market Development in 1991-1996 Principal Segments of the Capital Market in 1991-1996 Establishment and Development of Capital Market Structures Final Provisions and Conclusions Section II. The Government's Capital Market Policies Fundamentals of the Government's Capital Market Policies Key Principles of the Government's Capital Market Policies National Interests and the Capital Market The Principles and Structure of Government Regulation of the Capital Market Section III. The Government's Capital Market Development Strategy Goals and Objectives of the Government's Capital Market Policies The Government as a Borrower in the Capital Market The Government's Credit and Monetary Policies and the Capital Market Information Disclosure and Information Support for the Capital Market Taxation of Capital Market Transactions The Capital Market Model and Structure The Role of Self-Regulatory Organizations of Professional Market Participants Protection of the Interests of the State and Capital Market Participants Section IV. Development of a Legal Framework for the Capital Market Key Principles for the Development of a Legal Framework for the Capital Market Key Areas in the Development of a Legal Framework for the Capital Market SECTION I ANALYSIS OF CAPITAL MARKET DEVELOPMENT Economic Reform and the Capital Market in 1991-1996 As a result of profound institutional reforms, Russia has made significant progress in the formation of a market-type economy and the establishment of the basic elements of a three- tiered financial system: budget finance, bank credits and direct investment through capital market mechanisms. In terms of mobilizing financial resources, the fastest developing sectors have been the government securities market and the market for commercial bank securities, as well as (in 1991-94) the market for securities and surrogate securities issued by newly-founded companies, including unlicensed financial companies that raised funds from the public. In this way, the mobilization of financial resources through the capital market by the government, by banks, and, prior to 1995, by venture companies has played a dominant role. Furthermore, at the current stage of market development, the basic preconditions have been created for enterprises to directly enter the capital market to attract investment through securities issues. Enterprises have an enormous need for capital; at the same time the demand for corporate securities is rising. Foreign investors have to a considerable extent finalized their plans for investing in Russian corporate equities, and principles and approaches to the formation of collective investments vehicles to mobilize domestic savings have been defined. One result of the economic reform has been a rapid redirection of revenues that previously flowed into the government budget in favor of enterprises, and then from enterprises to the public. This redirection was an inevitable consequence of democratization of the economy. However, this has occurred in the context of inadequate investment incentives and inadequate mechanisms for the market-based creation and allocation of investment resources (the financial sector) -- even though the share of savings out of the incomes of both individual and legal entities remains high. For the most part, these savings are being converted into financial assets that are not involved in financing production -- that is, foreign-exchange cash held by the public; increased hidden foreign assets held by legal entities (flight capital); and, starting in 1994, increased investment in government securities -- the revenues of which are generally not related to the financing of production -- a situation which reflects the objective difficulties of the transition to a new economic system. From the point of view of creating a sectoral structure for the economy, the capital market in 1991-95 consisted primarily of mobilizing resources for development of the banking system. Issuers from other spheres of the economy (privatized enterprises) were still involved in institutional reform and had not yet begun to attract significant investment resources through capital market mechanisms. From the point of view of the territorial redistribution of financial resources, the growth of the capital market and the issuance of bank securities have intensified the concentration of financial resources in Moscow and several other major financial centers. By the beginning of 1996, the practice of using government financial instruments had become widespread in the following areas: Issues of government securities to finance the budget deficit: short-term T-bills (GKOs), federal loan bonds (OFZs), government savings bonds (OGSZs). Restructuring of the domestic hard currency debt through issues of domestic foreign- currency bonds (OVVZs) ("taiga bonds"). Attracting cash through cash privatization (investment tenders and competitions, loans-for- shares privatization). The Legal Basis for Capital Market Development In 1991-95, the capital market developed in a context where the federal laws that would have provided a regulatory structure for the capital market did not exist. There were no laws on joint-stock companies, on the securities market or on investment funds. Under these conditions, a legal framework for the capital market existed on the basis of presidential decrees, government regulations and normative acts issued by government agencies. One important feature having a negative effect on market liquidity during these period was taxation on securities transactions. By early 1996, joint efforts by the President of the Russian Federation, the houses of the Federal Assembly and the Government of the Russian Federation had brought about a qualitative change in the situation. The first and second parts of the Civil Code of the Russian Federation had come into effect and the federal laws "On Joint Stock Companies" and "On the Capital Market" had come into effect. Federal laws on investment funds and non-government pension funds are also likely to come into effect in 1996. The tax on securities transactions has been repealed. It is now possible to expect that the legislative framework for the capital market will be completed by the end of 1996. Key Factors in Capital Market Development in 1991-1996 The following are the key factors that shaped the development of the capital market in 1991-95: a) Large-scale privatization, including: The issuance of privatization vouchers as freely-circulating bearer securities; The issue and circulation of stock of privatized enterprises. b) Development of the practice of financing the federal budget deficit and deficits of subject entities of the Russian Federation through issues of securities, along with a restructuring of the domestic hard currency debt through a securities issue. c) The non-payments crisis and the emergence, in connection with the these deficits, of special financial instruments -- treasury bills, tax exemptions, and promissory notes. d) The issue of securities and surrogate securities by new commercial structures, including unlicensed financial companies. e) A gradual improvement in the accessibility of international capital markets to securities issued in the Russian Federation. Principal Segments of the Capital Market in 1991-1996 Formation of the GKO-OFZ market The years 1993-96 saw a rapid development of the market for government debt instruments. In addition to its positive impact on the budget process, the development of this market has also facilitated the attraction of funds from investors who previously directed their funds to securities and surrogate securities issued by new commercial structures. Due to GKOs' and OFZs' reliability and high yields that are not comparable with returns on any other financial instrument, this segment of the market currently dominates price dynamics. Lowering the yield on government debt instruments is a serious problem. Failure to resolve it will make it extremely difficult to attract funds for the development of enterprises. Securities of privatized enterprises Mass privatization of state enterprises has caused an enormous amount of new financial instruments -- shares in privatized enterprises -- to appear in the capital market. The rapid growth of both the market for privatized enterprises' equity and the supporting infrastructure, combined with the dynamic growth of the market for government and municipal securities, has contributed to high-risk and surrogate securities being forced off the market. There exists a huge potential for growth in the market for corporate equities, both through increases in the market prices of outstanding shares of large privatized companies and through the flow of shares of medium-sized and small companies into the market. New commercial structures, unlicensed financial companies and surrogate securities Issues of shares and other securities by new commercial structures have demonstrated the high level of public interest in investing in capital market financial instruments. However a significant number of the new commercial structures that aggressively distributed their securities during the initial stage of market development have failed to meet the expectations of their shareholders and investors. Early securities issues in 1991-92 were carried out in the context of an absolutely inadequate legal framework and an underdeveloped system of government market regulation. The situation in this segment of the market became critical when, in 1992-94, unlicensed financial companies began to aggressively raise funds from the public in exchange for securities and surrogate securities not backed by real assets. The process of attracting new funds from investors in such high risk structures was stopped in early 1995. Currently, the key question is how to protect the interests of people who invested in the new commercial structures (including unlicensed financial companies) before 1995. One specific feature of this segment of the capital market is the widespread use of promissory notes and other quasi-monetary instruments, the issue of which results from the issuers' efforts to avoid the legal limitations and government regulations that apply to issues of ordinary financial instruments. The negative developments of 1992-95, which are quite typical of all emerging capital markets, have had one positive effect -- the public's attitude to high-risk investments has changed. Today, only 4% of the public is willing to invest their savings in such financial instruments. The Establishment and Development of Capital Market Structures From 1992 through 1996, all types of capital market intermediaries developed rapidly. In terms of numbers and the level of specialization of such capital market structures, Russia can now compare to countries with developed capital markets. The principal types of professional capital market participants are as follows: Commercial banks; Brokerage firms; Various types of investment funds; Infrastructure organizations (registrars, depositories, settlement-and-clearing organizations, stock exchanges and other trading systems). Currently, the following objectives need to be accomplished: Strengthening and increasing the capitalization of virtually all capital market structures (only the banking sector is in a somewhat better position); Raising the standards for professional market activities; Raising the level of competence of capital market specialists; Developing and strengthening the system of regulation of and oversight over the activities of the professional capital market participants, including through self-regulation; Development of the system for collecting and disclosing information about professional capital market participants; Improving the competitiveness of Russian professional capital market participants relative to foreign financial institutions. Final Provisions and Conclusions By 1996, legal, the economic and organizational foundation for development of a national capital market had been formed, and included the following features: Federal laws have been passed creating a legal framework for the market. A number of presidential decrees and government regulations have been issued, promoting the rapid development of a regulatory framework for the market. A single agency for government regulation of the market has been created -- the Federal Commission on Securities and the Capital Market of the Russian Federation. In accordance with the federal law "On the Capital Market," this agency has been transformed into the Federal Commission on the Capital Market. A large number of experienced professional capital market participants have now emerged. Initial steps to create a market infrastructure have been completed. A basis for developing collective investment vehicles has been formed. A Comprehensive Program for Protecting Shareholders' and Investors' Rights has been developed. However a number of important issues remain unresolved, including the following: The low level of market capitalization and low liquidity of securities of small and medium- sized issuers. The high cost of borrowing through the government debt market. Inadequacies in the development of market infrastructure, including information and telecommunications systems; a failure to take full advantage of available systems in this area; an inadequate level of infrastructure development in terms of its quality, risk reduction, and the range of available services. A low level of development of the legal framework and the establishment of liability for violations of laws in the market; insufficient authority for government regulators to prosecute individual and organizations that violate the laws of the Russian Federation and market regulations; inadequate development of cooperation between the regulatory authorities and law enforcement agencies and the courts. Incomplete work on eliminating "registrar risk" and violations of shareholders' rights by issuers. To solve these problems, it is necessary to pursue a vigorous government policy of promoting the development of an independent Russian capital market that is responsive to the national interests of Russia, integrated into the international capital market, and capable of ensuring a flow of investment into the Russian economy. SECTION II THE GOVERNMENT'S CAPITAL MARKET POLICIES Fundamentals of the Government's Capital Market Policies The continuation and deepening of economically and socially sound reforms constitute a general political objective of the state with respect to the capital market. Russia, without a doubt, occupies a unique position among transitional economies. Therefore, any reliance on the experience of other countries with emerging market economies requires thorough analysis of concepts that may be otherwise taken for granted. The formation of an effective capital market must be understood in the context of the socio- economic and political reforms that began in late 1991 and early 1992. The institutional reforms, which to a large decree have already been accomplished, cannot be considered completed until a competitive financial sector, capable of mobilizing investment resources and making them available for the reforming economy, has been created. Production and investment incentives, economic restructuring and raising economic efficiency are the key factors in establishing a market economy. In light of the large scale of the tasks to be achieved over the next decade, Russia clearly cannot rely solely on the budget system and the banking sector to finance economic restructuring. The key question with respect to the development of a Russian capital market is not whether the government should pursue an active policy in this respect, but how this should be done and what the priorities of such policies should be. Significant progress has already been made in developing the capital market. In a number of respects, the Russian capital market is similar to the more developed international markets. Examples include the following: There is a large number of functioning corporations whose shares can circulate in the market. There are a large number of active financial institutions operating in the market. The public is interested in investing in capital market instruments. The domestic market is very open. There is a diverse selection of instruments circulating in the market and a considerable concentration of intellectual resources employed to develop the market. The privatization of state-owned companies has led to the creation of a structure of ownership of financial assets that resembles the structure existing in countries with highly developed equity markets. One distinct feature of the Russian capital market is the importance of its social component. The people in Russia want to have diverse options for investing their savings and achieving personal financial security. Therefore, the government, in formulating its capital market polices, cannot focus solely on economic needs with respect to access to investment, but also must take into account the needs of the public in general. The social aspects of the development of the capital market have acquired a particular importance, due, in part, to the fact that the Russian public lost a considerable portion of its savings to inflation and to unlicensed financial companies in 1992-94. A key objective for the government is to create conditions for Russians and other prospective investors to have confidence in the capital market. This will require that the government's capital market policies be explained to the public so that private investors understand the economic concepts being implemented. It is also necessary to create an educational program, including in the secondary and higher education systems, to help investors use available market information to help them keep and increase their savings. Protection of private property as the foundation of the evolving socio-economic system. Private property is the foundation of the socio-economic system being formed in Russia. Promoting and protecting private property, using all means available to the state, is the cornerstone of the government's policy with respect to capital market development. Restoration of public confidence in the state as a guarantor of private property is a necessary precondition for social support for reform and the maintenance of social stability. Moreover, Russians have the right to feel certain that the government's capital market development policies will lead, not only to the maintenance, but also to an increase in their private property. The government must ensure that the revenues generated by Russia's capital market are accessible to Russian citizens. The functions of the state in the capital market. A special feature of the capital market is that securities constitute a set of rights and do not exist separately from the regulatory and legal foundation provided by the state and the law enforcement system. Therefore, the state carries out a system-forming function that necessarily undergoes continuous adjustment in accordance with national interests. The state will create a system of market regulation and will ensure that it functions effectively. The regulatory system will develop in the direction of more detailed and rigorous government control over capital market activities. Development of an enforcement system is a key element of the state's system-forming function, and will be a priority for government policy. The government acts as the largest borrower in the capital market and thus has a direct effect on its quantitative and qualitative characteristics. The government is the largest holder of securities of Russian companies and is the largest seller of corporate securities in the market. During the initial stages of capital market infrastructure development, the government will pursue an active policy of directly supporting infrastructure projects, including: Participation in financing the development of the market infrastructure; Participation in other forms of support for infrastructure projects, including through investments by international financial institutions. During the implementation of infrastructure projects, the government will expand its cooperation with organizations and professionals who support the government's policy in the area of capital market infrastructure development and development of the capital market itself. The government will not cooperate with any organizations or individuals whose activities or public statements are intended to oppose the reform or discredit the government's policies in this area. The functions related to direct involvement by the government in the creation of a capital market infrastructure are temporary. They will be gradually be transferred entirely to market participants. Key Principles of the Government's Capital Market Policies The following are the most important principles underlying the government's capital market policies: a) The principle that government regulation of the capital market must be based on the premise that the state, in fulfilling its universal duty to protect its citizens and their legitimate rights and interests, takes measures to protect the rights of capital market participants through licensing and regulation of all types of professional capital market activities. This principle will be implemented taking into account the need to minimize opportunities for conflicts of interest resulting from combining the function of a direct participant in market operations with the function of market regulator. b) The principle of uniformity in the regulatory and legal framework and in the processes and methods for regulating the market throughout the Russian Federation. c) The principle of minimal government interference and maximal self-regulation, meaning that the government regulates the activities of market entities only in those cases where it is absolutely necessary and delegates part of its regulatory and oversight functions to professional capital market participants organized into self-regulatory organizations. In implementing this principle, the government proceeds from the necessity to: Minimize federal budget expenditures for creating a market infrastructure; Avoid the practice of imposing centralized decisions during the creation of the market infrastructure; Ensure openness in legislative activities and provide for the participation of professional market participants in the creation of the legal framework for the market. d) The principle of equal opportunities, i.e.: Encouragement by the government of competition in the capital market by avoiding any preferential treatment for individual participants; Equal treatment of all market participants by regulatory agencies; Open and tender-based allocation of government support to various market projects; Avoidance of any privileges for state-owned enterprises over commercial entities functioning in the market; Prohibiting government agencies from giving public evaluations of any professional market participant; Avoidance of any government regulation of prices for the services of professional market participants (except registrars). This principle also means the following: If necessary, the government will control the level of competition in the market and may discontinue competition by declaring a market participant a monopoly; should the government make this decision, only a state-owned entity may be declared a monopoly. Recognizing that different groups of professional market participants have different initial capabilities and may enjoy certain advantages as a result of their involvement in other types of activities, the government will take measures to equalize the opportunities available to different groups of market participants: e) The principle of consistency in government capital market policies, including coordination of government policies and a sustained commitment to the capital market model evolving in Russia. f) The principle of using international experience and taking into account the globalization of financial markets, including following Group of Thirty recommendations for the purpose of creating a civilized and competitive capital market. This principle also provides for the elaboration of balanced policies with respect to foreign investors and foreign participants in the Russian capital market. National Interests and the Capital Market The national interests of Russia are understood as a set of macroeconomic and macropolitical objectives of the state. As applied to the capital market, these include: a) Reviving the production process and improving its efficiency through mobilization of domestic and foreign investment resources. b) Strengthening the social orientation of the economy and enhancing social stability, through: Protecting the financial security of individuals through the formation of long-term financial instruments for investment of the public's savings. Securing public access to high-yield financial instruments, primarily government securities. Securing public participation in the revenues generated by increases in the market value of securities during economic growth periods, through the development of all forms of collective investment. c) Strengthening the country's economic sovereignty, meaning: Creating an independent Russian financial center of international significance and concentrating operations with Russian securities inside the country, through accelerated development of the market infrastructure. Developing the domestic investment base, primarily through developing collective investment institutions. Diversifying foreign investment sources and encouraging competition among foreign investors in order to reduce dependence on certain groups of investors, to stabilize the market, and to reduce financing costs for Russian companies by making the market more open and transparent and also by creating effective mechanisms to prevent double taxation. Promoting cooperation with leading international financial institutions in order to attract conservative foreign investors interested in long-term investment. Eliminating the restrictions on investment in Russia imposed by government regulators in foreign countries. Encouraging issues of Russian securities on the international capital market, including through the use of depository receipts and global depository receipts. Joining international systems for securities settlement and clearing. Supporting portfolio investment by developing mechanisms to protect minority shareholders' rights. d) Increasing the capitalization of Russian companies and maintaining stable price dynamics in the Russian capital market. The capitalization of Russian companies should be increased in the following ways: Implementation of measures to increase the liquidity of the market, mainly by developing a system of protections for investor rights, including through improvements in government regulation and self-regulatory mechanism, while simultaneously reducing the costs of regulation and developing the market infrastructure. Infrastructure development should include optimizing market organization, reducing the costs and risks of the system of securities circulation and servicing, and providing for greater information transparency of the market. Enhancing the efficiency of companies. e) Protecting Russia's information security, including: Protecting informational sovereignty -- that is, policies should be formulated and implemented on the basis of Russia's national security interests. Promoting successful economic reform and strengthening the political stability of society. The Principles and Structure of Government Regulation of the Capital Market Specifics of government regulation of the capital market Capital markets are among the most highly-regulated markets in the world. The complexity of market relations, the size of the market, its inherent risks and the security needs of market participants all require the adoption of detailed standards and operating rules, as well as involvement in regulation by various government agencies and self-regulatory organizations. In resolving questions of capital market regulation, the interests of market participants and the interests of the state coincide on many issues. This allows for the use of self-regulation as a mechanism to deal rapidly with issues as they arise. The interests of the state and those of market participants coincide in such areas as prevention and resolution of conflicts between participants, improvement of risk management, reducing the opportunities for fraud and other illegal activities, supporting market liquidity and stability and promoting the best professional practices. In its interaction with self-regulatory organizations, the government will seek to reduce the costs of regulation, including through reducing the time and financial resources expended by professional market participants in order to comply with regulatory requirements. The optimal level of regulation will be established on the basis of promoting market liquidity as a key indicator of the market's efficiency. The peculiar nature of the capital market rules out certain traditional regulatory approaches, such as those used to regulate banks. Taking in account these peculiarities, the government, in addition to encouraging self-regulation, will take a regulatory approach to the resolution of concrete problems that relies on forming joint working groups, including representatives of professional market participants. In this regard a key role will be played by the Expert Council of the Federal Commission on the Capital Market. Basic principles of government regulation of the capital market The following is a list of the basic principles underlying government regulation of the capital market: Functional regulation combined with institutional regulation of questions involving the organization of control and oversight over the activities of professional market participants. Use of self-regulatory mechanisms set up with the assistance of, and under the supervision of, the government. Division of regulatory authority between the Russian Federation and subject entities of the Russian Federation, and among various executive agencies. Priority protection for small investors and the public and for all types of collective investments. Priority development of infrastructure organizations. Minimization and diversification of risk. Encouragement of market competition. Prevention or partial prevention of conflicts of interests on the basis of regulating the combining of various types of professional activities. Distribution of duties among various government agencies and division of responsibility The mechanism for distributing responsibility for the results of regulating various aspects of market activity among government regulatory agencies will be established on the basis of the following principles: Securing a uniform and internally-consistent system of capital market regulation by requiring that all normative acts of executive agencies related to the regulatory activities of the Commission on the Capital Markets be approved by the Commission. Transferring authority to regulate the capital market only on the basis of responsibility for the results. Broad use of all forms of cooperation among executive agencies in the development and adoption of normative acts, including joint elaboration and harmonization, use of experts from various agencies in the drafting process and in making decisions pertaining to the development of the capital market. Functional regulation as the basis of effective regulation and specialization of government agencies with respect to capital market regulation. SECTION III THE GOVERNMENT'S CAPITAL MARKET DEVELOPMENT STRATEGY Goals and Objectives of the Government's Capital Market Policies The national interests of Russia as formulated in paragraph 3 of Section II of this Concept define the principal goals of the Government's capital market policies, including: Creation of, and ensuring the effective functioning of, mechanisms to attract investment into the private sector of the Russian economy, and especially into privatized companies. Financing of the federal budget deficit using capital market-related methods of non- inflationary financing for long-term projects. Creation of reliable mechanisms and financial instruments for investment by the public. Restructuring of the management systems of privatized companies and creation of "efficient owners;" enhancing the disciplinary effect of the capital market on Russian company managers. Protection of the rights of capital market participants, especially investors, in order to prevent social instability and conflicts that may arise as a result of capital market transactions. Creation of a civilized capital market and integration into the international financial markets, as well as achieving an independent place for the Russian market in the system of international capital markets. The struggle against surrogate securities and fraud and the termination of illegal activities in the capital market. Strategically, these goals have a complementary nature and should be achieved through a single set of measures, realized cooperatively by Government agencies and professional market participants. The Government as a Borrower in the Capital Market The Russian Federation in the person of the Finance Ministry is the largest borrower in the Russian capital market. Despite the rapid growth in government borrowing in 1993-96, the amount of public borrowing in the capital market as a percentage of GDP is still far less than in the developed economies. The government will continue to actively use the capital market to finance federal budget expenses for specific projects and long-term programs. Amounts and periods of borrowing The government's principal goals in terms of defining the amounts and terms for its borrowing in the capital market include: Expansion of the practice of borrowing in the capital market to cover the federal budget deficit for financing long-term programs and servicing the outstanding government debt. Stabilization of the mechanism for raising capital through government securities (that is, ensuring that proceeds are planned in the overall context of budget policy) and stabilization of the capital market. Making consistent efforts to reduce the cost of borrowing in the capital market. Achieving a functional division of government securities into money market instruments (short-term government securities) and capital market instruments (bonds with maturity periods longer than one year that are issued to finance specific projects and long-term programs). Issuing a broad range of financial instruments to satisfy the needs of various investor groups (the public, institutional investors, banks and other groups), issuing discount securities and coupon-bearing securities, issuing fixed and floating rate coupon-bearing securities. Gradual liberalization of access to the government debt market for non-residents. Supporting coordinated activities by federal agencies and governments of the constituent entities of the Russian Federation in their efforts to raise financing in the capital market. Ensuring the reliability and accessibility of government securities for investors In order to ensure that government securities are reliable and accessible to investors, the Russian Federation, acting as a borrower, will: Create a government debt register on the basis of state-of-the-art computer technologies and allow for direct ownership of securities by any investor group. Refrain from forcing investors to assume third party risks associated with custody and servicing of government securities. Encourage the development of mechanisms, including collective investments, that provide access for the broadest possible pool of investors to the government securities market. The government will also actively promote the development and utilization of settlement, depository and clearing systems (including the use of the payment systems of the Central Bank of the Russian Federation and the Savings Bank of the Russian Federation). The Government's Credit and Monetary Policies and the Capital Market Federal executive agencies will expand their cooperation with the Central Bank of the Russian Federation in the area of using government securities to implement the credit and monetary policies of the government, on the basis of the following principles: Participation of the Central Bank in short-term government securities transactions in the open market will be limited to fulfilling the objective of monetary regulation through managing the liquidity of commercial banks, supporting market liquidity, and mitigating excessive volatility in the government securities market. The Government of the Russian Federation, jointly with the Central Bank, will actively use the practice of issuing of short-term securities in order to regulate liquidity. Absorption of short-term surplus liquidity of the banks by supplying short-term government securities will be used as a tool of credit and monetary policies. Gradual transition to a system of daily primary placement of short-term and very short- term securities as a mechanism of operational regulation of liquidity on the basis of direct bilateral transactions between the Central Bank and commercial banks. Lombard transactions and Lombard rates will be used as an additional financial tool of the government's credit policy and the primary mechanism for refinancing commercial banks and supporting them through temporary liquidity problems, and also as a mechanism for ensuring uninterrupted operation of the payment system. Should balances in the correspondent accounts of the banks in the settlement branches of the Central Bank prove insufficient to effect payments due on any business day and provided there is appropriate security, Lombard credits to finalize settlements will be extended on the same day without additional clearances. Lombard credits will be extended against the security of GKOs and OFZs. Subsequently, the list of government securities acceptable to secure credits of the Central Bank will be expanded. Information Disclosure and Information Support for the Capital Market Increasing information transparency at the capital market One of the key objectives for the government in developing the capital market is raising the level of information transparency in the market. The principle of information transparency should be implemented by ensuring that all interested parties are informed of the activities of professional capital market participants and their results. The following policies should be used to achieve this goal: Creation of a generally-accepted system of indicators for capital market analysis. Establishment of clear limitations on what information is considered to be a commercial secret and what type of information not considered to be a commercial secret or is subject to mandatory disclosure at the request of any individual or government agency. Mandatory publication of all facts about activities of issuers that could significantly affect the market value of their securities. Supporting the development of independent rating agencies and the introduction of recognized rating systems for issuers and securities. Supporting the development of specialized publications covering individual industries as investment objects. Supporting the creation of information disclosure centers. Strengthening penalties for providing inaccurate information. Requiring disclosure of information about the prices and volumes of securities transactions on trading systems. Information support for the activities of the Federal Commission on the Capital Market The Federal Commission on the Capital Market, with the support of other relevant federal executive agencies, shall: Create a system of information and telecommunications support for its activities. The system will handle prompt exchange of data bases on licensing and oversight of the activities of professional capital market participants among branches of the Federal Commission on the Capital Market, other federal executive agencies and self-regulatory organizations. The system will contain private information (confidential information on licensing and oversight) and also public information that is readily accessible to any interested party. Assist the State Foundation for Investor and Shareholder Protection in establishing an information and telecommunications support system for its activities. Information disclosure and development of the Government Information Initiative In light of the importance and complexity of the problem of information disclosure and information transparency in the capital market, the Federal Commission on the Capital Market, in cooperation with other interested federal executive agencies, securities issuers, and professional market participants, will prepare and implement a program of measures intended to raise standards for information disclosure and information transparency. The program will be called the Government Information Initiative and will include: Improvements in the legal framework for information disclosure by issuers and professional capital market participants. Creation of an effective system for collecting and distributing the information subject to disclosure. Cooperating with news agencies, the mass media, consulting firms and professional capital market participants on improving the provision of market information in general and also improving the provision of such information to specific groups of investors. Developing stronger sanctions against entities and individuals violating information disclosure requirements. Taxation of Capital Market Transactions The government will, as far as possible, use tax policy to encourage development of the Russian capital market. National tax policy will be structured on the following principles: Uniformity of the tax rates and taxation principles applied to financial and capital market instruments and professional market participants. Deduction as expenses for tax purposes of capital losses resulting from declines in the prices of securities purchased by market participants. Absence of any tax privileges for specific types of securities. Exemption from double taxation of all forms of collective investments. No double taxation for non-residents, investors and financial institutions acting as intermediaries in the Russian capital market, in cases where dual taxation treaties exist with the relevant countries. Establishment of preferential tax treatment for non-profit organizations acting as part of the infrastructure of the Russian capital market. Absence of any types of taxes or tariffs on the circulation of securities. The Capital Market Model and Structure Prerequisites for choosing a capital market model A capital market model should be selected for Russia on the basis of the following principles: Russia is a large, mainly self-sufficient economic system which is clearly not gravitating towards any major international financial center. Instead, it will interact and use opportunities to interact with all existing financial centers. Russia is seeking to emerge as an independent financial center and will use only those elements of foreign financial markets that help to maximize its competitiveness as an emerging independent financial center. Russia will develop its own model of the capital market on the basis of its national interests and traditions. This model may incorporate trading systems currently in use at various stock exchanges and in various market segments, but it should be structured on the basis of a single informational space and information transparency of the market. Various models for government, corporate and municipal securities should not be ruled out. The model for market development should provide for: Maximal liquidity of outstanding securities; Division of responsibility and an effective risk management system; Informational transparency of the market; A capability to accelerate development without significant structural changes in the model; Technological compatibility of the Russian capital market with foreign markets. Information support for the Russian capital market model Formation of a Russian capital market model and improvement of the mechanisms for interaction among its elements will, to a considerable extent, depend on progress in the technology and equipment supporting the information infrastructure of capital markets. The model should be structured in a way that takes into account domestic achievements in the area of technological, software and mathematical systems that can be used in setting up a market information infrastructure. The capital market and its information infrastructure should constitute an environment for effective implementation of the investment process in Russia. The information infrastructure will have two levels, inter-regional and intra-regional: The inter-regional level brings together regional market structures and is intended to support interaction among professional capital market participants. The intra-regional level supports relationships between customers and professional capital market participants who provide services to customers. This level provides the basis for interactions among capital market participants. The following goals need to be accomplished at the inter-regional level: Market pricing of company shares; Primary distribution of securities; Creation of an all-Russian secondary capital market; Formation of controlling blocks of shares; Fragmentation of blocks of shares. The following should be performed at the intra-regional level: Securing the accessibility of amassed and current information on changes in the market values of securities, pricing, demand and supply, exchange rates, and other economic information; Utilization of the information environment to create stability in the market; Effecting of cash payments for securities transactions; Automation of statistical and accounting records; Depository activities and maintenance of shareholders' registers; Regulation of changes in the market values of securities; Cash and securities account management; Customer participation in securities trading; Commercial transactions; Work with expert systems. To accomplish these goals, it will be necessary to establish an adequate information structure allowing capital market participants to engage, mostly through automated mechanisms, in the following types of entrepreneurial activities: a) Securities transactions (sales or purchases) in one's own name and on one's own account by publicly quoting buying and selling prices of securities and making firm commitments to purchase and/or sell such securities at quoted prices (dealer activities); b) Provision of services supporting the making of securities sale/purchase transactions by professional capital market participants, including the operation of stock exchanges (organization of securities trading); c) Determination of mutual obligations to deliver (transfer) cash with respect to securities transactions (cash clearing and settlement activities); d) Determination of mutual obligations to deliver (transfer) securities by parties to securities transactions (securities clearing and settlement activities); e) Custody of securities and registration of rights to securities (depository activities); f) Maintenance and safe-keeping of shareholder registers (registrar activities); g) Effecting of authorized securities transactions on the basis of contracts (broker activities); h) Effecting transactions with promissory notes; i) Circulation of pledged and mortgaged securities. Creation of an information infrastructure for the Russian capital market will require the introduction of modern technologies for the creation of data bases and secure telecommunications networks integrated with banking systems. International experience and choosing the optimal capital market model The need to build a Russian capital market model requires research into and critical analysis of the many existing markets, especially the developed markets. The experience obtained by them over long periods of operation will help avert mistakes that would not be immediately obvious given the current level of development of the Russian market, but may manifest themselves later. Certain features are vital to an effective capital market and these need to be emphasized when choosing a capital market model. The most important such features are: Interaction between the banking system and the capital market; Achievement of an optimal balance between government regulation and self-regulation; Forms and methods of growth and recapitalization of capital market structures. The Role of Self-Regulatory Organizations In order to enhance the efficiency of the system of capital market regulation, better control the activities of professional market participants and reduce government expenditures on capital market regulation and oversight, the Government will help to set up self-regulatory organizations of professional capital market participants. Self-regulatory organizations should be organized on the basis of decisions made at conferences of professional capital market participants convened by the Federal Commission on the Capital Market of Russia. Subsequently, they should become a basic part of a unified market regulatory mechanism (following the appropriate distribution of authority within this mechanism). They should be formed for all the main types of professional capital market activities. Membership in self-regulatory organizations will be a requirement for all professional market participants engaging in activities regulated by an appropriate self-regulatory organization. The self-regulatory organizations will be funded by the professional market participants. Nominations to official positions in self-regulatory organizations, as approved at their conferences, shall be subject to approval by the Federal Commission on the Capital Market of Russia. Between such conferences, executive positions in self-regulatory organizations will be filled in coordination with the Federal Commission on the Capital Market of Russia. Protection of the Interests of the State and Capital Market Participants General Protection of the interests of the state and participants in the capital market will be provided along the following lines: Development and improvement of the normative basis of the capital market as part of legal reform underway in Russia; Greater informational transparency and openness of the market; Development of a more effective court system as part of legal reform; Improvements in the system of prevention and investigation into capital market crimes, including law-enforcement agencies and the judicial system, and possibly involving self- regulatory organizations of professional capital market participants; Strengthening government control over the activities and financial reporting of professional capital market participants through the introduction of a system of auditors authorized by the Federal Commission on the Capital Market to inspect the activities and audit the financial records of professional market participants; Extending the role of the government in resolving crisis situations in the capital market, including granting the Federal Commission on the Capital Market authority to establish liquidation commissions to close down entities whose activities in the capital market have been terminated due to legal violations or financial insolvency and to coordinate with the Federal Commission on the Capital Market the interim balance sheets of entities undergoing liquidation; Supporting the development of voluntary risk insurance by professional capital market participants. The government will not assume responsibility for compensating uninsured risks. Protection of investors' rights Protection of investors' rights, defined primarily as protection for private, public and other types of property, is to be provided, with due regard for the specific characteristics of individual investor groups, their preparedness, and their social status. Government policy in the area of investor rights protection will be implemented on a differentiated basis for the following types of investors: The public; Collective investors; Commercial banks; Insurance companies; The state; Foreign investors (non-residents); Other investors. Various forms and methods of protection will apply to these types of investors, including: Regulation of services provided by professional market participants to various types of investors; Support for various forms of investment insurance and the creation of guarantee funds for the various types of investors; Regulation of investments in various types of securities. Protection of issuers' rights Issuers' rights will be protected in the following ways: Establishment of limits on the liability of issuers with respect to investors and professional capital market participants; Regulation of purchases of large and controlling blocks of shares, as well as mergers and acquisitions; Disclosure of information about investors. Policies protecting issuers' interests will be applied on a differential basis to the following types of issuers: Defense production; Companies in strategic industries; Monopoly-holding companies; Insurance companies and commercial banks. SECTION IV DEVELOPMENT OF A LEGAL FRAMEWORK FOR THE CAPITAL MARKET Key Principles for the Development of a Legal framework for the Capital Market The following are key principles that will underlie the development of a legal framework for the capital market: Development of the legal framework for the capital market as part of the broader legal reform underway in Russia. Continuity in developing a legal framework for the market, taking into account the evolutionary nature of the process. Announcement of policies to improve the legal framework, in order to inform market participants of planned changes in the legal environment. Use of civil law as the basis for creating the legal framework for the capital market, combined with the creation of new legal institutions promoting the establishment and development of the market. Comprehensive protection for the legitimate rights and interests of investors; termination of illegal activities in the market; enhanced liability of professional capital market participants and issuers for the consequences of their activities; introduction of administrative and criminal liability for the more serious capital market violations; and improvement of private law-based methods of protecting the rights and interests of professional capital market participants. Creation of various forms of compensation, guarantee funds and insurance systems in the capital market in order to reduce the risks involved in securities investment and increase investor confidence in the capital market. Provision to investors of complete and reliable information on securities and their issuers, as well as promotion of nongovernmental and public forms of control over the reliability of such information. Stronger government control over compliance with the terms of licensing during the performance of professional capital market activities; stricter requirements for licensing professional capital market participants to ensure a high level of professional skill, adequacy of ownership capital, and adherence to high standards of good faith and openness in professional capital market activities. Creation of equal opportunities and competition in the capital market; creation of a system of independent public control over market activities; promotion of public initiatives and enhancement of the role of investors' associations and associations of professional market participants in forming a market that meets the requirements of modern society. Key Areas in the Development of a Legal framework for the Capital Market1 The legal framework for the capital market will be created primarily through: Stricter capitalization requirements for professional market participants. Stricter requirements for the professional qualifications of individuals in executive positions in entities operating professionally in the market; a broader and more demanding system of qualifying examinations for such individuals. Development and inclusion in legislative and other regulatory documents of the principle of functional regulation based on a division of responsibilities among government regulators. Development and strengthening of the legal framework for regulating the issue and circulation of derivative securities. Introduction of new licensing procedures and mechanisms for oversight over the activities of organizers of securities trading. Introduction of incentives to encourage securities trading in organized markets. Improvements in the system of administrative and criminal penalties for violations in the capital market. Gradual opening up of the market to foreign investors and financial institutions. Introduction of a system of special requirements and oversight over the activities of professional market participants rendering services to individuals. Stricter requirements for professional market participants servicing all forms of collective investments. Introduction of investment consultant certification procedures.