3. Securities accounts and account holders’ rights

1. Nominee holder’s duties

It seems that the creation of Securities Market Act 1996 was driven by the idea of protection of investors, excluding from abuses of nominee holders. And therefore the main principle is that “the nominee holder can exercise the rights granted by securities, only if an appropriate mandate is given from the client” (sub. 3 sec. 2 art. 8). In a situation where the depository activities are not well developed it might be a good legal decision. But nowadays in Russia the depositary services are relatively well developed and there are reliable and sufficiently capitalized depositaries on the market. So, it seems that the law could be changed to bring it closer to the standards offered by the Draft.

However, Securities Market Act 1996 stipulates the most important duties of the nominee holder. In part 7 sec. 2 art. 8 it provides that the nominee holder is obliged: (i) to perform all necessary actions to ensure receipt by that person of all payments, which are due under these securities; (ii) to dispose of the securities only pursuant to instructions of the client and an agreement between them; (iii) to record the clients’ securities in separate accounts and always hold a sufficient amount of securities for the purpose of settling claims of his clients. Above that, (iv) the nominee holder must prepare a list of clients and hand it over to the register holder at the latter’s request (sub. 9 sec. 2 art. 8).

Currently, the problems with the performance of rights provided by securities in accordance with the contract are that their realisation is not sufficiently governed, and this causes numerous problems in practice.

2. Appropriation of securities

The clients’ securities are segregated from the nominee holder’s securities by holding them on a special account called the “nominee holder account”, which is maintained by the register holder or by the depositary. Securities on the nominee holder account are considered as ownership of the clients and do not become the property of the nominee holder. Consequently, these securities are not subject to claims of the nominee holder’s general creditors (sub. 1, 5 sec. 2 art. 8). If the securities are not on that account, they would be recognised as the property of the nominee holder without any underlying effect for the benefit of the clients (in particular, there is no possibility for clients to seize such securities, including in the case of deficit of the securities underlying the clients’ account).

3. “Omnibus” account

The “omnibus” (collective) nominee holder account is not expressly referred to either in the legislation, or in other normative acts. But the nominee holder accounts could be subdivided into individual and collective in fact. According to part 6 sec. 2 art. 8 Securities Market Act 1996 “operations with securities between the clients of the same nominee holder are not reflected in the register or in depositary books, if the nominee holder is a client of such depositary”. Moreover, there is no choice for nominee holder to open in the register/depository an omnibus or an individual account (he can open only the “nominee holder account’). Therefore, if the nominee holder has securities of only one client, the nominee holder account is individual, and when he has securities from two or more clients, the nominee holder account is collective.

Probably, because of this factual situation there are no special rules for the rights of the clients in respect of the securities credited to a collective nominee holder account. It is impossible to give an answer to the following questions: Do clients have co-ownership in the securities or do they have contractual rights in them? What principle should be used in case of shortfall of securities on the collective nominee holder account (pro rata or another)?

Moreover, general rules on the irregular deposit (art. 890 CC)² and combining of securities in the fiduciary management (art. 1025 CC), which could be applied by analogy, do not contain any provisions on what rights arise with respect to mixed property. Based on the absence of another general rule for the arising of co-ownership in case of mixture of securities, the rights of the clients could be considered contractual in nature and as a result, bankruptcy protection for the nominee holder’s clients could became illusory. With a view to implementation of the future Convention and taking into account Russian legal traditions, in respect of securities in the collective account it would be more natural to use the concept of co-ownership as a basic model for qualification of investors’ rights.