The document summarizes key provisions and implications of Mongolia's revised Securities Market Law, which was approved in May 2013 and enters into force on January 1, 2014. Some of the major changes and implications include: (1) recognizing concepts like beneficial ownership that were previously not defined, (2) allowing for new financial instruments and structures like depositary receipts, (3) strengthening regulations around market participants, disclosure requirements, and prohibitions on insider trading and market abuse, and (4) aiming to develop the securities market and increase transparency through implementing international market standards. However, some provisions may be problematic, such as broad definitions and stringent disclosure timelines.

1. Ulaanbaatar, 4 July 2013
The Revised Securities Market Law
Anthony Woolley, Senior Associate
Hogan Lovells

2. © Hogan Lovells 2013
Overview
• Current regulatory framework
• Key provisions/implications
• Conclusion
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I. Current Regulatory Framework
• The Law of Mongolia on the Securities Market dated 12
December 2002 (which replaced the Securities Market Law
adopted in 1996) provides the general regulatory framework
for securities market operations.
• The Financial Regulatory Commission has authority to issue
implementing regulations applicable to listed companies as
well as securities market participants.
• Currently, there are over 300 listed companies on the
Mongolian Stock Exchange, however market capitalisation
and liquidity is minimal.
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Regulatory Gaps and Issues
• The existing Securities Market Law is considered to have a
number of shortcomings which inhibit the further
development of the securities market:
– no distinction between nominal and beneficial owners of
securities
– custodial or trustee arrangements not recognised
– depositary receipts not provided for
– equity instruments (i.e. options/futures) not provided for
– mandatory Mongolian legislation compliance obligation to
list securities in Mongolia
– general lack of transparency and reporting requirements
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Revised Securities Market Law
• Government proposals to revise the existing legislation since
2008 so as to make it consistent with international market
standards
• LSE/MSE strategic partnership agreement in April 2011
• Parliament approved the Revised Securities Market Law on
24 May 2013
• Officially published in the State Gazette on 24 June 2013
• Revised Securities Market Law enters into force on 1
January 2014
• Supporting amendments to several laws, including laws on
advertisements, corporate and personal income taxes,
licensing and the legal status of the FRC
• Pending amendments to the Company Law?
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II. Key Features
• General regulatory framework
• FRC, MSE and self-regulating bodies have authority to issue
implementing regulations and rules
• Important new features of the revised legislation include:
– provision for financial instruments, options, futures, convertible securities,
derivatives and depository receipts
– a distinction between nominal and beneficial ownership of securities
– the possibility for dual-listing by Mongolian-listed companies and
secondary listing of foreign companies on the MSE
– detailed regulations on IPOs with increased disclosure requirements and
extended liability for the offering prospectus
– increased disclosure requirements for issuers and greater transparency
in the securities market
– creation of a dispute resolution body within the FRC for disputes relating
to the securities market
– enhanced regime for sanctioning insider trading and market abuse
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Implications – Nominal/Beneficial Ownership
• Not recognized in Civil Code or Company Law
• Well established concept in common law jurisdictions
– beneficial interest in the economic benefit of property
– nominal/legal owner holds interest on trust for beneficial owner
– beneficial owner has right to income, and proceeds of sale
– beneficial owner has voting rights in shares
• Used for depositary receipts and nominee brokerage
transactions
• Reasons
– anonymity
– ease of administration (e.g. brokerage clients)
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Implications – Interaction with other laws
• Strategic Foreign Investment Law
– various concerns, but many issues with publicly-listed companies
– effectively ignores public companies or Mongolian companies
overseas
– Mongolian company issuing depositary receipts does not know its
shareholder base
– Significant limitation on liquidity:
• Cannot issue to foreign SOEs (even pension funds, sovereign wealth funds) in any
sector without government approval
• Wide range of private investor transactions subject to approval (e.g. any change in
shareholding of a foreign investor – does not work for listed companies)
• Company Law
– No concept of beneficial ownership
– Article 57 on takeover offers is unclear (pending amendments)
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Implications – Depositary Receipts ("DRs")
• Revised Securities Market Law expressly recognises DRs
• Two types are provided for:
(i) Mongolian DRs: issued in Mongolia based on underlying securities
issued in a foreign market
(ii) Global DRs: issued in a foreign market representing Mongolian-
listed underlying securities
• Subject to detailed enabling regulations from the FRC
• Should offer Mongolian companies increased access to
international capital markets through global DRs
• Seeks to improve liquidity on the MSE by providing for
foreign investors issues of Mongolian DRs on the MSE
• Subject to appropriate licensing of custodial banks in
Mongolia
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Implications – Market Participants
• More detailed and specific provisions for licensing requirements
and responsibilities of market participants
• At least 14 activities require licensing by the FRC, including
custodial and registrar services, rating agency services, and
securities nominee activities
• Sets out and distinguishes more clearly the responsibilities of
brokers, dealers and underwriters
• Sets out requirements for obtaining licences for individuals
participating in the securities market
• Enables and regulates the operations of self-regulating bodies
with membership consisting of market participants
• Further strengthens and broadens the FRC's authority in respect
of licensing and monitoring of securities market participants
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Implications – Securities Issues and Trading
• Revised Securities Law covers public offerings of:
– shares of open joint stock companies
– debt instruments issued by private or public entities
– other financial instruments approved by FRC
• Permits:
– domestic and overseas issues
– private placements alongside public offers
– trading of foreign-listed companies
• Catches:
– offers to 50 or more investors – clarify whether this should be in
Mongolia
• Requires:
– public offers to be underwritten
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Implications – Securities Issues and Trading
• Scope of disclosure in prospectus is wider but still limited
• FRC can require additional disclosure
• Potentially long offer period (with updating obligation)
• Requires opinion from auditors and legal counsel that
information is valid and accurate
• Liability:
– issuer and its competent officials liable for false, falsified, incomplete,
misleading, contradictory or incorrect information
– all who participated in preparation of prospectus and associated
documents liable "to the extent of their involvement"
– potential criminal offence
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Implications – Insider Trading
• Prohibition on insider trading
• "insider information": any information not publicly available
that might have an impact on the price of a security
• Holders of "insider information" are deemed to be:
– influential shareholders, governing persons, employees of
the issuer, and their affiliated parties
– persons acquiring insider information in the course of
fulfilling official duties, or entering into a contract or
transaction, and their related parties
• Problematic for influential shareholders to trade in securities
• Employees and affiliated parties "deemed" to be an insider,
whether or not they have inside information
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Implications – Insider Trading
• Prohibited activities in respect of "insider trading":
– participating in trading of securities where price and trading
volume will be affected due to "insider information"
– recommending and proposing to others to participate in
trading of securities
– disclosing "insider information" in circumstances other than
required for employment/professional responsibilities
• Treatment of commercial negotiations for transactions may be
problematic, e.g. commercial discussions that terminate
without impact on issuer's financial position
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Implications – Market Abuse
• Prohibition on "market abuse"
• Market abuse:
– fraudulent trading in the securities market
– creating artificial prices
– misleading clients in order to induce/prevent trading
• Fraudulent trade
– transaction giving appearance of actively trade, without transfer of
ownership rights; or
– placing orders at similar prices (acting in concert).
• Misleading clients:
– issuing or publishing incorrect, misleading, or false information
– misleading a counterparty to a transaction by giving false information
in relation to actual events or documents or by using certain methods
or equipment
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Sanctions for Insider Trading and Market Abuse
• compensation for any damage/losses
• confiscation of income or profits
• administrative sanctions in form of monetary penalties
ranging from MNT 19 – 23 million
• potential criminal liability?
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Implications – disclosure obligations
• Article 20.1.9 disclosure obligations: immediately inform public in the
event of circumstances that might "appreciably influence" price/volume
– Immediacy problematic
– Definition of "appreciably influence" – no materiality threshold
• Article 22.8 – public takeover disclosure
– Offeror obliged to notify all "interested parties" of the target, including
its board of directors
– Offeror must issue simultaneous public notice re. takeover
• Article 40.2 – Nominees
– Nominee obliged to notify clients of any conflict of interest between
them
– Unlikely that a nominee aware of all aspects of its client's business
– Too broad?
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Implications – disclosure obligations
• Article 56.1 – Onerous Disclosure Obligations
– Disclosure regarding changes to organisational structure of Influential
Shareholders and its interests in other legal entities within 1 business
day - impossible to comply with?
– Organisational changes to group companies of the issuer –
necessary?
– Any information that may influence the market price of securities – no
materiality threshold
• Article 57 – Obligations on Market Participants
– To notify clients of circumstances that adversely affect their interests
– Overly broad?
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Implications – miscellaneous provisions
• "Influential Shareholder"
– 5% threshold - low
– difficulty of an issuer being able to comply with disclosure
obligations relating to Influential Shareholder
– concept of "acting in concert" not defined
• "Affiliated Persons"
– inclusion of employees is very broad – difficult to control
employees?
– shareholding threshold of 10% too low (customarily 20%)
– subjective nature of FRC-determined catch-all provision
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Conclusions and challenges
• The Revised Securities Market Law is a welcome framework
for future regulation to international standards
• A number of important matters require enabling regulations
from MSE/FRC:
– registration of debt issues
– dual listings
– depository receipts
– issuance and trading of derivative securities
– inside information
– takeover and mandatory offer procedures
– custodian and nominee activities
– self-regulating bodies and professional participants
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Conclusions and challenges
• Importance of proper consultation with market participants
and other professionals in developing and improving
enabling regulations
• New concepts will require amending legislation across the
existing body of legislation, e.g. beneficial ownership
• Challenge for FRC in terms of coherent development of
regulations and supervision of the securities market
• Interaction of the Securities Law with the Strategic Foreign
Investment Law
• Gaining confidence of international exchanges regarding the
implementation of the Securities Market Law to enhance
prospects for Mongolian companies to raise finance
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Anthony Woolley
Senior Associate
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