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07.4.2013, PRESENTATION, The Revised Securities Market Law, Anthony Woolley


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07.4.2013, PRESENTATION, The Revised Securities Market Law, Anthony Woolley

  1. 1. Ulaanbaatar, 4 July 2013 The Revised Securities Market Law Anthony Woolley, Senior Associate Hogan Lovells
  2. 2. © Hogan Lovells 2013 Overview • Current regulatory framework • Key provisions/implications • Conclusion 2
  3. 3. © Hogan Lovells 2013 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. 3
  4. 4. © Hogan Lovells 2013 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 4
  5. 5. © Hogan Lovells 2013 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? 5
  6. 6. © Hogan Lovells 2013 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 6
  7. 7. © Hogan Lovells 2013 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) 7
  8. 8. © Hogan Lovells 2013 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) 8
  9. 9. © Hogan Lovells 2013 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 9
  10. 10. © Hogan Lovells 2013 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 10
  11. 11. © Hogan Lovells 2013 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 11
  12. 12. © Hogan Lovells 2013 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 12
  13. 13. © Hogan Lovells 2013 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 13
  14. 14. © Hogan Lovells 2013 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 14
  15. 15. © Hogan Lovells 2013 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 15
  16. 16. © Hogan Lovells 2013 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? 16
  17. 17. © Hogan Lovells 2013 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? 17
  18. 18. © Hogan Lovells 2013 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? 18
  19. 19. © Hogan Lovells 2013 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 19
  20. 20. © Hogan Lovells 2013 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 20
  21. 21. © Hogan Lovells 2013 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 21
  22. 22. Hogan Lovells has offices in: Abu Dhabi Alicante Amsterdam Baltimore Beijing Berlin Brussels Budapest* Caracas Colorado Springs Denver Dubai Dusseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Houston Jakarta* Jeddah* London Los Angeles Madrid Miami Milan Moscow Munich New York Northern Virginia Paris Philadelphia Prague Riyadh* Rome San Francisco Shanghai Silicon Valley Singapore Tokyo Ulaanbaatar Warsaw Washington DC Zagreb* "Hogan Lovells" or the "firm" is an international legal practice that includes Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses. The word "partner" is used to describe a partner or member of Hogan Lovells International LLP, Hogan Lovells US LLP or any of their affiliated entities or any employee or consultant with equivalent standing. Certain individuals, who are designated as partners, but who are not members of Hogan Lovells International LLP, do not hold qualifications equivalent to members. For more information about Hogan Lovells, the partners and their qualifications, see Where case studies are included, results achieved do not guarantee similar outcomes for other clients. Attorney Advertising. © Hogan Lovells 2013. All rights reserved. *Associated offices Anthony Woolley Senior Associate Direct: +976 7012 8904 Mobile: +976 9999 7031 Fax: +976 7012 8901 Email: