New Tactics on Securities

Last week Russian securities regulation took a turn that is likely to determine the shape of the securities market for the remainder of the decade.


Although legislation adopted by the State Duma can in theory override President Boris Yeltsin's decree on securities market regulation, which he signed last week, in practice many a lawyer in Moscow has turned grey waiting for an appropriate law to be passed by parliament.


Hence, one can confidently say the legislative vacuum as filled by Yeltsin's decree will hold sway, in the beginning, by reason of the paralysis that afflicts the Russian parliament and, in the end, because the practice to be developed under the decree will create "facts on the ground" not easily uprooted by any future law.


The boldest provision of the decree is to introduce the two principal aspects that distinguish American securities regulation from the European model. First, the decree establishes a Securities and Exchange Commission as a regulatory body separate from general company registers and vests in the commission the full powers of securities market regulation previously exercised by the Finance Ministry.


Second, the decree signals the emergence in Russia of self-regulatory organizations consisting of licensed member-brokers and dealers authorized to discipline one another and to establish criteria for the admission of new members.


The last point is based on a hard-boiled view of Russian life. Namely, that securities regulation is a tricky business, requiring thoughtful and honest government regulators. The salaries that the Russian government can afford to pay to its securities regulators, however, are likely to attract few such people and many more fools or bribe-takers. The incorporation of self-regulatory organizations into the regulatory process should remove anxiety over corruption and simple-mindedness that would otherwise cloud the development of market regulation.


Perhaps no less important than the powers formally vested in the commission is the appointment of Anatoly Chubais, the former chairman of the State Property Committee, as the head of the Securities and Exchange Commission.


No one who has seen privatization begin in Russia from a trickle of shops in Nizhny Novgorod in the spring of 1992 and progress to near total privatization in almost all industries by the winter of 1994 can doubt the ability of Chubais do get things done.


One of the reasons for the success of the privatization program was Chubais' ability to rely on a countrywide network of regional and municipal state property committees subordinate directly to the State Property Committee.


Yeltsin's decree contemplates a similar network of regional securities and exchange commissions directly subordinate to the federal committee. If Chubais succeeds in establishing this network, the commission will have powers unmatched by other federal agencies to enforce its regulations nationwide.


One substantive provision of the decree aims to prohibit MMM-type schemes from coming into existence. So stay tuned to Russian television: If the number of colorful babushkas hawking investments on television drops, then you will know the decree has taken root.


Leonid Rozhetskin is a graduate of the Harvard Law School and a native of St. Petersburg, now in private practice in Moscow.