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

Ulaanbaatar, 4 July 2013

The Revised Securities Market Law

Anthony Woolley, Senior Associate Hogan Lovells

© 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

4


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)

8


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

10


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

13


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


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


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


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