Russian Federation: Recent Developments Of Russian Law

Last Updated: 14 March 2011
Article by Oleg Shvander

The Newsletter for this month contains several articles commenting on new legislation that has been or will be adopted by the Russian Parliament.

Dmitry Milyutin writes about the new law on clearing activities that was adopted in February of this year. The purpose of the law is to regulate the operations of clearing companies and create a competitive environment in this area.

Igor Orlov discusses the new law on courts of general jurisdiction which will become effective in March. Prior to that law Russian courts of general jurisdiction were governed by Soviet legislation dated 1981. The law contains some interesting provisions and introduces significant changes into stages of judicial process.

Finally, Yulia Babkina talks about some of the interesting provisions of the draft law on organisations for patent attorneys. This law, if adopted, will change the way in which patent attorneys become authorised to carry out their work. The law will also require patent attorneys to obtain professional indemnity insurance.

Federal Law No. 7-FZ dated 7 February 2011 "On clearing and clearing activities"

In February 2011 the President of the Russian Federation signed the Federal Law "On clearing and clearing activities" which had been adopted by the State Duma and approved by the Federation Council in accordance with the established procedure.

In its ordinary form, clearing is a system of settlements based on the set-off of mutual claims and obligations. Within the meaning of the Law, clearing is "identification of outstanding obligations which have arisen under contracts, including inter alia as a result ofnetting between obligations, and preparation of documents (information) which serve as a basis for termination and/or performance of such obligations". Netting is defined as "full or partial termination of obligations admitted for clearing, by means of set-off and/or otherwise as set out in the clearing rules."

The Law uses the term "clearing activities" generally to denote "activities involved in providing clearing services in accordance with the clearing rules approved by the entity and duly registered with the federal financial markets authority."

The Law sets out major requirements in respect of clearing procedures and requirements for clearing organisations, and lays the legal basis for governmental regulation of clearing.It is envisaged that a clearing organisation must be a company established in accordance with laws of the Russian Federation and its equity capital must be at least RUR 100million. The Law also imposes certain restrictions on founders/participants of a clearing organisation, its management bodies and employees, its equity capital, internal audit and supervision as well as "the clearing rules" that a clearing organisation must adopt as the main regulatory document governing the relationship between the parties involved in the clearing process.

The Law does not rule out the possibility of a clearing organisation carrying on other activities, including, in particular, some activities in the securities market. At the same time the Law expressly prohibits a clearing organisation from being active in production, trade and insurance sectors, and acting as a registrar of securities, as a fiduciary manager of an incorporated investment fund, unit investment fund or non-governmental pension fund, as a specialised custodian of an incorporated investment fund or a non-governmental pension fund and as a non-governmental pension fund. The Law imposes a number of other restrictions on combining clearing with other types of activities.

In particular, the Law permits a clearing company to form a so-called clearing pool (a set of obligations admitted for clearing) and permits and prescribes a clearing procedure involving a "central counterparty" (a legal person who is a party to all contracts the obligations out of which are included into the clearing pool). The Law also permits and prescribes a procedure for using special trading accounts (i.e. bank accounts, commodity accounts or securities accounts).

A significant portion of the Law is focused on ensuring the performance of obligations by entities involved in the clearing process and risk management of in the course of clearing operations. In particular, the Law sets out the requirements for providing individual and group clearing collateral. A clearing organisation has a duty to control the financial stability of participants in the clearing process and a duty to do the stress testing of the risk management systems.

The major public authority that is responsible for governmental regulation of clearing activities is a federal executive body with authority in the financial markets area which in particular has the power to issue applicable regulatory acts, licenses for clearing activities, approve clearing rules and other bylaws of clearing organisations.

In the opinion of the legislator, the Law is designed to create a competitive system of risk management for businesses. The objective of the Law is the establishment of clearing procedures, efficient legal regulation of clearing, increased protection of rights and interests of clearing participants and setting out the legislative framework for governmental regulation in the clearing sector.

Yuri Isayev, Deputy Head of the State Duma's Financial Markets Committee, commented earlier that the development of Russian clearing systems will establish new favourable conditions for the Russian financial and commodity markets to improve their competitive edge. Vladimir Milovidov, Head of the Federal Financial Markets Service (FFMS), in his turn, noted that the bill "On clearing and clearing activities" has been substantially developed since its first reading in 2009. According to him, all responses that were received have been taken on board to the fullest extent.

Federal Law "On clearing and clearing activities" will become effective on 1 January 2012.

New legislation on courts of general jurisdiction put in place

A new federal constitutional law of the Russian Federation was published on 11 February2011: "On courts of general jurisdiction in the Russian Federation" No. 1-FKZ dated 7February 2011. The law will become effective in March, at the end of the 30-day period following its publication, except for certain provisions for which a different effective date was set.

The Law defines the constitution procedure, the composition and jurisdiction of the Supreme Court of the Russian Federation, supreme courts of RF republics as well as regional courts, courts of federal cities, autonomous region and autonomous district courts, as well as district courts. This is a highly significant piece of legislation: in fact it is the first time that a separate law is made in modern Russia to regulate courts of general jurisdiction (in respect of civil, administrative and criminal proceedings). The new laws supersedes the prior law of the Russian Soviet Federative Socialist Republic (RSFSR)dated 8 July 1981 "On Judicature of RSFSR" and, accordingly, seeks to change the existing system that dates back to the soviet times.

Namely, the new law provides for appellate jurisdiction to be introduced in courts of different levels, which is the fundamental and the principal innovation in Russian law. It changes the former three-tier system of "first instance – cassation – supervision" proceedings which had received some criticism from the legal community (mainly due to certain aspects of the existing judicial decision making practices on the cassation stage). In particular, the significance and the nature of the second instance are changing: broadly speaking, the appeal stage (as opposed to cassation) is designed to review the court decision by reviewing the merits of the case rather than selected procedural issues. In the opinion of the legislator, the introduction of the appeal stage that follows a procedure largely similar to that of the first instance proceedings, will improve the quality of judicial process and reduce the number of complaints which are filed in respect of court decisions that have entered into legal force.

In particular, the new law provides that civil, administrative and criminal cases decided inthe first instance by the relevant Judicial Divisions of the RF Supreme Court, including the Military Division, will be heard on appeal by the Appellate Unit of the RF Supreme Court.The judicial divisions of supreme courts of RF republics, regional courts, courts of federal cities and autonomous region and autonomous district courts will have appellate jurisdiction in relation to those decisions which have been made by district courts in their capacity as first instance courts before they have taken effect, as well as in relation to interlocutory judgements in criminal proceedings issued by supreme courts of RF republics, regional courts, courts of federal cities, autonomous region courts or autonomous district courts in their capacity as a first instance courts.

A district court has jurisdiction to review appeals and challenges against magistrates' awards valid on the territory of the relevant district.

Until now, appellate proceedings have existed only within the arbitrazh (commercial) court system in Russia and as far as the general jurisdiction courts were concerned, only magistrates' decisions could be appealed against. Now the appeal stage is introduced in relation to all civil (from 1 January 2012) and criminal cases (from 1 January 2013). It must be noted that by separate law (Federal Constitutional Law No.2-FKZ dated 7 February2011 "On amending Federal Constitutional Law "On Military Courts of the Russian Federation") the appeal stage was also introduced in the Russian military justice system.

Notably, with the advent of the appeal proceedings, the supervision stage in the republican and regional courts will be eliminated and only the Presidium of the Supreme Court will retain the supervision jurisdiction.

In general it is expected that the new developments will be welcomed by the public at large and will have a favourable effect on the judicial practices in courts of general jurisdiction: in fact, legal practitioners have long been calling to have appellate proceedings introduced in courts of general jurisdiction. In the meantime there are some less optimistic judgements as well, mainly focussing on the fact that the law fails to separate the appeal function from the trial court which could be achieved e.g. by creating separate courts of appeal as it was done in the arbitrazh courts. It is not impossible however that the establishment of such separate courts is a matter for the next step in the judicial reform.

Amended rules on charter capital reduction

Matters related to legal protection of intellectual property and means of proprietary identification, as well as the acquisition of intellectual property in the Russian Federation fall within the remit of the Federal Service for Intellectual Property, Patents and TradeMarks (Rospatent).

It follows from Article 1247(2) of the Russian Civil Code that a foreign legal person or an individual who has permanent residence outside of the Russian Federation must use a patent attorney by to represent them before Rospatent.

A patent attorney interacts with the federal executive authority in the sphere of intellectual property (Rospatent) on the basis of an instruction from an applicant, a rights holder or another interested party (including legal and natural persons) in connection with the protection of intellectual property and means of proprietary identification, and acquisition of intellectual property rights.

Currently the professional activities of patent attorneys are governed by Federal LawNo.316-FZ "On Patent Attorneys" dated 30 December 2008 which authorises Rospatent to conduct attestation and registration of patent attorneys and to exercise supervisory functions in respect of patent attorneys.

Currently the regulation of entrepreneurial or professional activity in Russia is based on the general principle whereby a special legal capacity is obtained by means of obtaining a license or membership in a self-regulatory organisation (SRO). In the course of the ongoing administrative reform the government has declared that the number of licensed activities should be brought down by transferring the relevant functions to SROs.

In connection with the above, on 24 February the Property Committee of the Russian State Duma reviewed the bill "On amending selected legislative acts of the Russian Federation in relation to self-regulation of patent attorneys' activities" which proposes to expand sel regulationin Russia by establishing SROs of patent attorneys.

The bill governs the issues of SRO formation and operations and the key functions which include: (1) preparation and approval of patent attorneys' professional standards and rules;(2) rules of business and professional ethics; (3) development and approval of rules and conditions of admission to the patent attorneys' SRO; (4) additional requirements to the procedure of ensuring liability of SRO members; (5) representing SRO members in dealing with Russian authorities and international professional organisations of patent attorneys; and (6) supervision over patent attorneys' activities.

Primarily the bill aims to provide legal framework for the transition from recognising the status of a patent attorney by means of their registration by an authorized governmental authority (Rospatent) to recognising the status of a patent attorney by means of membership in a SRO, which has fundamental significance for ensuring a patent attorney's independence from governmental authorities.

The bill governs the relationships arising in connection with attaining a patent attorney's status, withdrawal of that status, supervision over professional activities, ensuring liability protection of patent attorneys, including by means of professional indemnity insurance.

The law has redefined the eligibility of a person to practice as a patent attorney. The prerequisites for practicing as a patent attorney in Russia are (1) is a member of a patent attorneys' SRO and (2) the patent attorney has an insurance contract for his professional indemnity. It must be noted that introducing a requirement of professional indemnity for patent attorneys will facilitate the compensation of damage, including moral damage, caused by a patent attorney which is impossible today as current laws provide only for administrative liability of a patent attorney.

The bill also defines the responsibilities and powers of federal executive authorities in relation to the attestation of those seeking the status of a patent attorney, the maintenance of a register of patent attorneys, the expert review of applications filed by patent attorneys, the monitoring patent attorneys' SROs for compliance with federal legislation; and legal proceedings brought to exclude an SRO of patent attorneys from the uniform register of patent attorneys' SROs.

However it is the opinion of experts from the Patent Bar that the passing of this bill may cause a reduction in the numbers of patent attorneys in private practice as well as small and medium enterprises in this sector. According to experts only larger companies would remain on the market of patent attorneys' services which would cause an increase in the patent attorneys' fees and make their services unaffordable for private inventors.

MPs on the Property Committee of the Russian State Duma have fully endorsed the concept of the bill and recommended it for passage in the first reading.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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