New rules in regulating the status of qualified and non-qualified investors

Securities for qualified investors

The Bank of Russia has expanded the list of securities and derivatives available only to qualified investorsDirective of the Bank of Russia No. 6885-U dated 1 October 2024 (“Directive No. 6885”). The new rules will enter into force on 1 January 2025.

Securities intended for qualified investors will include:

• securities of foreign issuers, except for issuers registered in the EAEUThe EAEU is the Eurasian Economic Union. As at the date of this communication, the EAEU Member States are: Republic of Armenia, Republic of Belarus, Republic of Kazakhstan, Kyrgyz Republic and the Russian Federation.;
• government securities of a foreign state, except for EAEU member states;
• securities of international financial organisations, except for securities, the centralised registration of rights to which (or the register of holders of which) is carried out in the EAEU; as well as
• Russian depositary receipts certifying the rights to the abovementioned securities.

The expansion of the list of securities intended for qualified investors, accordingly, means the expansion of the list of derivative financial instruments (“DFI”), the underlying assets of which are the abovementioned securitiesClause 3 of Directive No. 6885.

We remind you that today securities for qualified investors are securities and DFI, the underlying asset of which are such securities, which are in one way or another related to “unfriendly” states included in the list of foreign states and territoriesDirective of the Government of the Russian Federation No. 430 dated 5 March 2022 that commit unfriendly actions against the Russian Federation, Russian legal entities and individuals, or organisations registered in such statesDirective of the Bank of Russia No. 6347-U dated 9 January 2023 (“Directive No. 6347”).

For example, at the moment, securities are available only to qualified investors, even if the issuer of such securities is a person of a “friendly” jurisdiction, but the centralised accounting of rights to them is carried out by an organisation registered in a “unfriendly” stateClause 1.7 of Directive No. 6347. However, if there is no “unfriendly” element in the structure of the securities registration and circulation, non-qualified investors have access to such securities.

With the entry into force of Directive No. 6885, non-qualified investors are effectively barred from investing in any foreign securities, regardless of whether the issuer of the securities is “friendly” or not. The only option left for them will be to purchase securities and DFIs that are linked to EEAU member states. The approach chosen by the regulator is most likely related to the desire to protect non-qualified investors from the risks associated with the blocking of securities and payments on them due to compliance with foreign sanctions restrictions by persons of certain “friendly” jurisdictions.

Draft law to change the status of qualified investors

In November 2023, a draft lawDraft Law No. 496225-8 (“Draft Law”) was introduced in the State Duma reforming the investor qualification system and aimed at expanding investor access to a number of securities and other financial instruments, in particular to (i) floating rate corporate bonds (“Floaters”) and (ii) units of closed mutual investment funds (“CMIF”) without testing.

Comprehensive reform of the investor qualification system

The reform is aimed at eliminating investor qualification based on formal criteria and increasing the importance of investment knowledge and experience. Therefore, as a result of the reform:

• a floating minimum annual income threshold is established. The amount of the required annual income of an investor will depend on a number of criteria, namely education, a degree or examination-proven knowledge. Confirmation of the investor’s knowledge may be conducted by a broker, manager, forex dealer, dealer or mutual fund management company. The minimum threshold as well as the procedure for calculating the final amount of the required annual income of a qualified investor will be established by regulations of the Bank of Russia;
• there is an opportunity to reduce the length of service required for a person to be recognised as a qualified investor. The current regulation stipulates that a person must have at least two years of work experience. In addition to working for an organisation with the status of a qualified investor, the length of work experience may be influenced by education or an academic degree;
• the criterion of experience in transactions with securities and financial instruments will be supplemented by the possibility to take into account contracts with a forex dealer;
• investors will be able to obtain the status of a qualified investor by passing a special examination and obtaining a certificate, the list of which will be established by the Bank of Russia, regardless of other formal criteria;
• the status of a qualified investor, as a rule, will be universal, giving the investor access to all relevant securities and financial instrumentsSecurities and financial instruments intended for qualified investors, rather than to specific categories thereof;

Access to Floaters for non-qualified investors

A floater is a type of bond, the coupon income on which is not fixed, but is linked to a certain external interest rate (for example, the key rate of the Central Bank of Russia or the RUONIA rate). Usually, a Floater’s coupon is equal to such weighted average rate for a certain period of time or such rate as at a certain date increased by a premium.

Currently, a non-qualified investor may, after passing a special test, purchase only those Floaters whose yield is linked to the average value of the money market indicator published by the Bank of Russia for the relevant coupon periodFor example, the RUONIA indicator published by the Bank of Russia (https://www.cbr.ru/key-indicators/)..

The draft law also allows non-qualified investors to conduct transactions with those Floaters whose coupon yield is linked to the value of the money market indicator as at a specific date:

• the date of the beginning of the coupon period; or
• a date no more than five business days prior to the start of the coupon period.

However, in order to be accessible to non-qualified investors, such Floaters must meet a number of requirements:

• the coupon thereon shall be paid at least once for each calendar year from the date of the commencement of the offer to their maturity date;
• the amount of their yield is equal to the value of certain financial indicators (e.g., inflation in the Russian Federation for a period ending at least three months prior to the date of payment of the yield);
• Floaters must have a credit rating of at least AA-.

Access to units of CMIFs for non-qualified investors

Non-qualified investors will be granted access to investment units of CMIFs without the need to have a positive test result if such CMIFs meet certain requirements of the Bank of Russia. Such requirements have not yet been determined.

Currently, a positive test result is not required if (i) investment units are registered at the stock exchange or (ii) investment units are acquired in connection with the exercise of the pre-emptive right of the owner of investment units.

Increasing the limit of investors’ “right of last resort”

Current legislation gives an investor who has not passed the test to gain access to transactions in complex financial instruments the right to perform such transactions for an amount not exceeding a certain limit (i.e. has the so-called “right of last resort”).

In accordance with the Draft Law, such limit will be increased from RUB100,000 to RUB300,000. The new limit will apply to several transactions within a calendar year, and it will not be necessary to pass a test before each transaction. If an investor wishes to exercise the “right of last resort,” he/she will have to confirm that he/she understands and assumes all risks and consequences.

Expanding the list of securities for which testing is required

Under the current regulation, non-qualified investors are required to undergo testing in order to confirm a sufficient level of investment awareness for transactions with complex financial instruments.

The Draft Law proposes to expand the list of securities and other financial instruments for which such testing is required. It will include, in particular, bonds secured by monetary claims. Exception — mortgage-backed debt securities or bonds issued by a specialised project finance company owned by VEB.RF or DOM.RF.

Repeated testing for complex financial instruments

Investors will be required to retest on certain complex financial instruments five years after taking the test or since the last transaction. For those who passed the test earlier, the five-year period will be counted from the date the law enters into force.