The Federal Law [1] (hereinafter the “SRO Law”) regulating establishment and activity of self-regulatory organizations (hereinafter the “SROs”) in the financial market area entered into force at the beginning of 2016. Pursuant to the law, SROs on the financial market are engaged in developing standards for financial organizations and in performing control over compliance with the requirements of such standards. 

A non-commercial organization established in accordance with the Russian Civil Code and the law on non-commercial organizations [2] in form of an association or union, consolidating financial organizations – brokers, dealers, insurance organizations, depositaries, non-state pension funds, etc. can acquire SRO status. 

An SRO must meet the following requirements:

• It must include at least 26% of the total number of financial organizations engaged in the respective type of activity;
• It must have developed standards regulating the terms and conditions of membership, procedure for holding inspections, business reputation requirements, rules of professional ethics, as well as a system of sanctions for failure to meet the SRO’s requirements;
• It must have management bodies and special bodies (monitoring body, body for considering cases on imposing sanctions on SRO members, etc.);
• The person performing functions of a single-person executive body of the SRO must meet specific requirements. 

That provided, every financial organization must become join an SRO according to its type of activity within 180 days after the SRO is established, or after it ceases to be a member of another SRO. If a financial organization is already a member of an SRO according to its type of activity, it can become a member of another SRO of the same type as an associated member with the right of an advisory vote. 

It should be noted that SROs are given substantial powers, which include:

• Powers to collect and submit reports of its members to the Bank of Russia;
• Functions on control over its members’ activity, including by means of scheduled and unscheduled inspections;
• Powers to apply liability measures for failure to comply with the SRO’s standards;
• Consideration of letters and queries from individuals and legal entities concerning its members;
• Information exchange with the Bank of Russia on issues of withdrawing an SRO member’s license, violation of legal requirements, sending a plan of scheduled inspections of its members for the current year, sending information on its members;
• Creation of work groups with the Bank of Russia for joint work on draft regulatory acts. 

In the lawmakers’ opinion, introduction of this new institution that is mandatory for the financial markets is aimed at increasing the self-regulatory role in the activity of market participants at a time when their numbers are increasing and the market is growing more complex. The law on SROs on the financial market should in the future improve competition, form an integrated regulation system meeting the professional interests of participants and control requirements, and should also strengthen the protection of rights of financial service consumers. 

It appears that the law can create additional administrative barriers for new and already existing participants of the financial market, and can create a field for potential violations of the antitrust law by SROs and their members. The Competition Law also establishes a ban on agreements which can result in restricting competition, including agreements on setting terms and conditions for membership/participation in professional and other unions. 

There have already been cases in the practice of the antitrust authority when SROs, including those on the financial market, were recognized as organizations that violated the antitrust legislation. In particular, a group of insurance companies was deemed to have violated the Competition Law by concluding an agreement on establishing terms and conditions of membership in the National Union of Liability Insurers (‘NSSO’), a self-regulatory organization in the area of mandatory insurance. The violation, in the opinion of the antitrust body, was due to the situation where current members of NSSO adopted a version of the charter and internal documents, pursuant to which other members of the union did not have an opportunity to participate in the union management or in developing the standards and rules of professional activity. 

It should be noted that later the commercial arbitration courts cancelled this decision of the FAS of Russia. 

There are other similar precedents; in particular, the Commercial Arbitration Court of Kemerovo Region is now considering a claim filed by the Kuzbas self-regulatory organization of administrators on appealing the decision of the Kemerovo FAS of Russia. In this case, the antitrust authority recognized the SRO as an organization abusing its dominant position by creating barriers for accessing the goods market or exiting from the goods market for other business entities. 

It appears that the process of establishing an SRO will be rather complicated. For instance, controversies arose in the course of establishing the first SRO under the new law (on the market of non-state pension funds) among the market participants, which lead to a situation where part of funds with an alternative point of view were not included in the SRO. It should be taken into account that the process of establishing an SRO, as well as its further operation, must comply with the principles of fair competition, and the SRO management bodies must not allow discrimination of the market participants. 

Irina Akimova  Of Counsel, Head of Antitrust Practice                               Moscow   iakimova@cls.ru   Tel.: +7 (495) 970 1090

Dmitry Gavrilenko    Associate                Moscow    dgavrilenko@cls.ru    Tel.: +7 (495) 970 1090

Additional notes

Should any questions arise in connection with the above or if you need any additional materials, please contact Irina Akimova or Dmitry Gavrilenko, Moscow Office of Capital Legal Services.

This Information letter keeps the clients of Capital Legal Services and other interested parties abreast of information that may, to any extent, affect their activity or cater to their particular interests. The opinions and commentaries expressed in this information letter shall not be deemed as legal opinions and do not cancel the need to obtain legal advice or legal opinion on separate issues.