3. Nominee holder

Only licensed depositaries may act as nominee holders. This situation became clear after Securities Commission’s explanatory Letter of 26.04.1999 which resolved the ambiguity caused by Securities Market Act 1996. The letter provided, in particular, that a broker could be registered on the book as the nominee holder of the securities in accordance with the agreement, on the basis of which it services the client. In the end, the last rule in reality does not work and the nominee holder is an orginisation with the depository license.

2. Scope of the convention

The Russian indirect holding system is based on the concept of proprietary rights. Securities Market Act 1996 recognised a client of nominee holder as the “owner” of securities and provides that “transfer of securities to nominee holder does not cause the transfer of any property rights to him” (par. 1 sec. 2 art. 8); the ownership in uncertificated securities evidenced by book-entries in securities account maintained by the registrar or in appropriate cases – by the depository (part 2 art. 28); “securities are not subject to execution for claims of the nominee holder’s creditors” (part 5 sec. 2 art. 8). All the other laws regarding securities of capital market are also based on the proprietary approach.

For the indirect holding pure proprietary approach is a negative factor for the market and needs “correction” in several aspects. From this point of view let us considers how negative it is and what should be done in Russia.

Traceability

According to art. 244 CC (sec. 4): “Co-ownership in separable things arises only in situations, provided for by law or contract”. There is no law that says that mixture of things is a ground for creating co-ownership. Thereon jurists tend to consider the mixture of goods as a ground for other legal consequences - termination of individual (solo) ownership and arising of unjust enrichment claim. This quite unique legal situation and common practice of fungible accounts essentially minimise the possibility to trace the securities in question. At least in that case, some good came out of the evil. Theoretically, tracing of securities could be possible where securities are transferred to non-fungible accounts or to accounts where there were no securities at the moment of the transfer and after such transfer. Both situations are infrequently met in practice. However, the position with the general “unfriendly” attitude to co-ownership is not stable and could be accidentally changed; obviously, it needs to take a clear rule on the limitation of traceability.

Upper tier attachment

In legal practice there are two kinds of cases, concerning “upper tier approach”. In the first case an entire nominee holder account was arrested¹ and the court recognized such arrest as invalid, referring to “violation of the rights of other clients of the nominee holder” (FAC CR judgment 10.07.2003 № A68-312/3-01). The second case concerned claim of “vindication” of the securities. In accordance with art. 301 CC a claim of “vindication” could be brought only to the person, who holds the asset (“the owner has the right to recover its property from another’s unlawful possession”). The courts held that “vindication” (restoration of the book entries) could not be brought against the nominee holder, because according to sec. 2 art. 8 of the Securities Market Act 1996 he does not have “ownership or other property right in securities” (judgment of FAC NWR 11.06.2003 № A05-7962/02-389/17).

Although the legal reasoning of the above mentioned cases do not contain reference to the risks associated with “upper tier attachment”, the result is the same. But the problem is that this result could be influenced by the particular circumstances and therefore quite case-specific and unpredictable for the market. There is a need to create a normative rule precluding “upper tier attachment”.

Loss of property

“Value papers” are named as a class of property (art. 128 CC) and following this logic jurists in respect of securities (either certificated or uncertificated) tend to apply res perit domino principle. The rule that depository (nominee holder) will bear liability for failure to perform its obligations by compensating damages correlate to the proprietary approach (part 11 art. 7 Securities Market Act 1996). Therefore in the event of shortfall of securities the intermediary will not be obliged to credit client’s account, but to pay damages.

Meanwhile, Securities Market Act 1996 in part 7 sec. 2 art. 8 provides that the nominee holder is obliged to “maintain sufficient amount of securities on separate out-of-balance account in the purpose of settlement of claims of the persons, in behalf of which he holds the securities”. That rule is not in the focus of lawyers, but what is more important it does not correspond to the appropriation of the clients’ securities on the so called “nominee holder account” and does not have a mechanism for realisation in practice.