Introduction
In mid-2004, a summary article by Yuri Tuktarov, then a lawyer at a well-known Moscow law firm, was published in the "Market and Law" section of the "Securities Market" magazine. The article, titled "The Evolution of Stock Market Instruments" (SMI), was the first serious attempt to combine the civil and business legal expressions of the key category of the stock market—the security.
Below is a modern interpretation of that article. If its author did not actually intend the conclusions I have attributed to him here, then this interpretation can be regarded as my interpretation of the article's text as a treatise.
1. Security Properties
Yu. E. Tuktarov's article argues that the concept of a "security" includes two components: a document (simply a thing) and security properties: (1) facilitated legitimization of the authorized person through possession of the thing; (2) localization of the necessary information about the legal relationship, i.e., literality, in other words, the need to list the essential terms of the contractual obligation; (3) formalization, i.e., the obligation to use a specific description of the rights themselves; (4) autonomy, i.e., the transfer of the burden of objections regarding the invalidity of the rights certified by the security to the debtor; (5) abstractness, i.e., the release of the debtor from liability for performance by an improper person who has illegally taken possession of the security; (6) public certainty, i.e., equating the external appearance of the right under the security with the actual existence of the right (although it appears that this is simply the reverse side of autonomy).
The presence of security properties in an object of civil rights, in the author's opinion, represents the implementation of the "principles of security cost reduction" of economic agents, without which they would have to spend a socially irrational amount of time analyzing the acquired property. However, although Yuri Tuktarov concludes that "investment securities" emerged as a specific form of stock market instrument only at the stage of the invention of the securities' properties, this conclusion is nevertheless made in the wrong place (topos).
According to the author's own logic, the investment nature of the transferred rights historically emerged much earlier than the establishment of securities properties for this type of property in legal systems. Consequently, securities' properties are one thing, and investment instruments are quite another.
2. The "Instrument" Category
By virtue of Clause 1 of Article 147 of the Civil Code of the Russian Federation, the person transferring a documentary security is liable for the invalidity of the rights certified by the security, unless otherwise provided by law. Yuri Tuktarov, following the Russian legislator, attributed the main thrust of the article to the quality of transferability: anything transferable as a security is a security. However, throughout the text of the article, one can discern here and there what exactly is being transferred in reality. The following examples are provided: ... "the beginning of the paper representation of investments"; "paper credit turnover"; "investment trading"; "there was no turnover of contractual claims." Therefore, the American approach – "security" – more accurately conveys the meaning of what is happening. Otherwise, the category "instrument" would be meaningless – an instrument for the transfer of what? To this question, the Americans answer: an instrument for the transfer of various types of "securities," various "commodities." At the same time, they do not classify swaps, which they have decided to encompass all derivatives, as either the former or the latter.
It is easy to see that the establishment of an investment aspect within the category of "security" has not yet even begun at the level of civil law doctrine. There is only the interesting Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated March 13, 2001, No. 62, "Review of the Practice of Resolving Disputes Related to Major and Interested-Party Transactions by Business Entities," which states that in the context of an additional share placement, the issuer, underwriter, and buyer are parties to the share purchase and sale transaction concluded solely between the underwriter and the buyer.
This approach contradicts the genesis of investment banking, which involves the participation of the investment bank's own capital in the subscription of securities: "[The investment bank's participation] made it possible to overcome the frequent refusals of commercial banks to participate in the acquisition of issues whose credit quality they questioned."[1] The subscription and, consequently, the expenditure of the investment bank's own capital during the placement of securities imposes significant risk on it, which becomes a positive signal for other subscribers.
3. Rights or Securities
Clause 4 of Article 143 of the Civil Code of the Russian Federation stipulates that a registered security is one for which the person authorized to demand performance is the owner of the security, indicated as the rights holder in records maintained by the obligated person or by a person acting on its behalf and holding the appropriate license. This provision was introduced into the Code in 2013 as part of a comprehensive reform; its key aspect is the legislative confirmation of the fiction of ownership of rights.
Yuri Tuktarov urged abandoning the idea of fiction by moving directly to securities, i.e., obligatory rights with security-like properties, but in the absence of a document. Thus, the model of securities rights proposed by Yuri Tuktarov did not find support among legislators and poses the challenge of doctrinal integration of contractual obligations with book-entry securities, the owner's details of which are contained, according to the terminology of the Russian Civil Code, "in accounting records."
Essentially, the financial market instruments of ultra-capitalist legal systems have today entered a new stage of their evolution, a distinctive feature of which is the turnover of stock trading positions and even stock trading strategies. To replicate this, legislators were forced to agree to the very use of the term "instrument": since 2010, securities and derivatives in the Russian Federation constitute financial instruments (Clause 22, Article 2 of the Federal Law "On the Securities Market"). For example, a forward contract, as a type of financial instrument, inherently includes a margin relative to current spot prices. However, from the perspective of the legal technique of describing future prices as somewhat uncertain, the initiator of the transaction is forced to consider a comprehensive plan for fixing this margin. In turn, in futures trading, where margin is known as "variation margin," margin is described by daily revaluation of the position: "Payment of the difference, however, will not be based on a comparison with the originally specified price when opening the position; rather, it is a comparison with the settlement price of the previous trading day, since the price is reconfirmed daily."[2]
Consequently, in Russian law, futures are considered financial instruments that, unlike in the United States, do not have security-like properties (in the terminology of Yuri Tuktarov). According to the American approach, a futures contract, if its subject is shares, is a "security," while a forward is a special case of a swap.
Furthermore, stock market instruments have recently begun to appear as structured products, i.e., both securities and derivatives. The relationship between them within a single instrument remains unclear under doctrine and judicial practice.
For our part, we note the following pattern. In traditional societies, the first phase of the production cycle is the packaging of a profit-extraction mechanism within securities (through the creation of appropriate legislation), i.e., a colonial administration regime. In ultra-capitalist societies, by contrast, the first phase is the contractual nature of incoming investments, i.e., the incoming cash flow resulting from contract execution is recognized as "security-for-money"—something similar in meaning to a system for protecting the funds transferred under a contract. As the song "In Our Eyes" by the band Kino sang, "What you need, choose!"
In Russian legislation, the second option is implemented in a very truncated form, since Clause 11 of Article 24 of the Federal Law "On the Securities Market" stipulates that when securities are placed by subscription, they may be credited to the account of the broker providing the issuer with placement services. According to the law, this is done "for their subsequent placement," and the corresponding account is opened by the broker at the depository and is not intended to record rights to securities.
As noted above, investment banking in the US, on the contrary, is based on the legal obligation to sell securities through the investment bank, which becomes their buyer and owner. There can be no talk of any "subsequent placement," even if such an acquisition lasts for a "legal second." All purchasers, except the investment bank, legally purchase the investment instrument not from the issuer. In this context, the provision of Article 5 of the Federal Law "On the Protection of the Rights and Legitimate Interests of Investors in the Securities Market" becomes clearer: it stipulates that persons who have signed the prospectus for the issue of securities bear joint and several liability for damages caused by the issuer to the investor as a result of false and/or misleading information contained in the prospectus. After all, if the investor and the issuer are separated from each other by the ownership of the investment bank, the investor has the opportunity to bring a tort claim against the issuer.
Conclusion
Yuri Tuktarov could not have imagined that, to a certain extent, he had anticipated the subsequent regulation of stock market instruments. However, the main advantage of "The Evolution of Stock Market Instruments" lies elsewhere: its timeliness. To this day, no one has been able to "enter the river" of the legal understanding of stock market securities (the doctrinal counter-term I propose to replace securities rights and/or IFRs) unless they do so from the point in time at which the state of affairs in the relevant industry existed at the time Yuri Tuktarov wrote his article.
[1] Philipp Hubbard. The Roots of International Investment Banking. // Harvard Business School. Working Paper 88-066. 1988, June. P. 16.
[2] Jeffrey Williams. The Economic Function of Futures Markets. Cambridge, 1986. P. 15.
In mid-2004, a summary article by Yuri Tuktarov, then a lawyer at a well-known Moscow law firm, was published in the "Market and Law" section of the "Securities Market" magazine. The article, titled "The Evolution of Stock Market Instruments" (SMI), was the first serious attempt to combine the civil and business legal expressions of the key category of the stock market—the security.
Below is a modern interpretation of that article. If its author did not actually intend the conclusions I have attributed to him here, then this interpretation can be regarded as my interpretation of the article's text as a treatise.
1. Security Properties
Yu. E. Tuktarov's article argues that the concept of a "security" includes two components: a document (simply a thing) and security properties: (1) facilitated legitimization of the authorized person through possession of the thing; (2) localization of the necessary information about the legal relationship, i.e., literality, in other words, the need to list the essential terms of the contractual obligation; (3) formalization, i.e., the obligation to use a specific description of the rights themselves; (4) autonomy, i.e., the transfer of the burden of objections regarding the invalidity of the rights certified by the security to the debtor; (5) abstractness, i.e., the release of the debtor from liability for performance by an improper person who has illegally taken possession of the security; (6) public certainty, i.e., equating the external appearance of the right under the security with the actual existence of the right (although it appears that this is simply the reverse side of autonomy).
The presence of security properties in an object of civil rights, in the author's opinion, represents the implementation of the "principles of security cost reduction" of economic agents, without which they would have to spend a socially irrational amount of time analyzing the acquired property. However, although Yuri Tuktarov concludes that "investment securities" emerged as a specific form of stock market instrument only at the stage of the invention of the securities' properties, this conclusion is nevertheless made in the wrong place (topos).
According to the author's own logic, the investment nature of the transferred rights historically emerged much earlier than the establishment of securities properties for this type of property in legal systems. Consequently, securities' properties are one thing, and investment instruments are quite another.
2. The "Instrument" Category
By virtue of Clause 1 of Article 147 of the Civil Code of the Russian Federation, the person transferring a documentary security is liable for the invalidity of the rights certified by the security, unless otherwise provided by law. Yuri Tuktarov, following the Russian legislator, attributed the main thrust of the article to the quality of transferability: anything transferable as a security is a security. However, throughout the text of the article, one can discern here and there what exactly is being transferred in reality. The following examples are provided: ... "the beginning of the paper representation of investments"; "paper credit turnover"; "investment trading"; "there was no turnover of contractual claims." Therefore, the American approach – "security" – more accurately conveys the meaning of what is happening. Otherwise, the category "instrument" would be meaningless – an instrument for the transfer of what? To this question, the Americans answer: an instrument for the transfer of various types of "securities," various "commodities." At the same time, they do not classify swaps, which they have decided to encompass all derivatives, as either the former or the latter.
It is easy to see that the establishment of an investment aspect within the category of "security" has not yet even begun at the level of civil law doctrine. There is only the interesting Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated March 13, 2001, No. 62, "Review of the Practice of Resolving Disputes Related to Major and Interested-Party Transactions by Business Entities," which states that in the context of an additional share placement, the issuer, underwriter, and buyer are parties to the share purchase and sale transaction concluded solely between the underwriter and the buyer.
This approach contradicts the genesis of investment banking, which involves the participation of the investment bank's own capital in the subscription of securities: "[The investment bank's participation] made it possible to overcome the frequent refusals of commercial banks to participate in the acquisition of issues whose credit quality they questioned."[1] The subscription and, consequently, the expenditure of the investment bank's own capital during the placement of securities imposes significant risk on it, which becomes a positive signal for other subscribers.
3. Rights or Securities
Clause 4 of Article 143 of the Civil Code of the Russian Federation stipulates that a registered security is one for which the person authorized to demand performance is the owner of the security, indicated as the rights holder in records maintained by the obligated person or by a person acting on its behalf and holding the appropriate license. This provision was introduced into the Code in 2013 as part of a comprehensive reform; its key aspect is the legislative confirmation of the fiction of ownership of rights.
Yuri Tuktarov urged abandoning the idea of fiction by moving directly to securities, i.e., obligatory rights with security-like properties, but in the absence of a document. Thus, the model of securities rights proposed by Yuri Tuktarov did not find support among legislators and poses the challenge of doctrinal integration of contractual obligations with book-entry securities, the owner's details of which are contained, according to the terminology of the Russian Civil Code, "in accounting records."
Essentially, the financial market instruments of ultra-capitalist legal systems have today entered a new stage of their evolution, a distinctive feature of which is the turnover of stock trading positions and even stock trading strategies. To replicate this, legislators were forced to agree to the very use of the term "instrument": since 2010, securities and derivatives in the Russian Federation constitute financial instruments (Clause 22, Article 2 of the Federal Law "On the Securities Market"). For example, a forward contract, as a type of financial instrument, inherently includes a margin relative to current spot prices. However, from the perspective of the legal technique of describing future prices as somewhat uncertain, the initiator of the transaction is forced to consider a comprehensive plan for fixing this margin. In turn, in futures trading, where margin is known as "variation margin," margin is described by daily revaluation of the position: "Payment of the difference, however, will not be based on a comparison with the originally specified price when opening the position; rather, it is a comparison with the settlement price of the previous trading day, since the price is reconfirmed daily."[2]
Consequently, in Russian law, futures are considered financial instruments that, unlike in the United States, do not have security-like properties (in the terminology of Yuri Tuktarov). According to the American approach, a futures contract, if its subject is shares, is a "security," while a forward is a special case of a swap.
Furthermore, stock market instruments have recently begun to appear as structured products, i.e., both securities and derivatives. The relationship between them within a single instrument remains unclear under doctrine and judicial practice.
For our part, we note the following pattern. In traditional societies, the first phase of the production cycle is the packaging of a profit-extraction mechanism within securities (through the creation of appropriate legislation), i.e., a colonial administration regime. In ultra-capitalist societies, by contrast, the first phase is the contractual nature of incoming investments, i.e., the incoming cash flow resulting from contract execution is recognized as "security-for-money"—something similar in meaning to a system for protecting the funds transferred under a contract. As the song "In Our Eyes" by the band Kino sang, "What you need, choose!"
In Russian legislation, the second option is implemented in a very truncated form, since Clause 11 of Article 24 of the Federal Law "On the Securities Market" stipulates that when securities are placed by subscription, they may be credited to the account of the broker providing the issuer with placement services. According to the law, this is done "for their subsequent placement," and the corresponding account is opened by the broker at the depository and is not intended to record rights to securities.
As noted above, investment banking in the US, on the contrary, is based on the legal obligation to sell securities through the investment bank, which becomes their buyer and owner. There can be no talk of any "subsequent placement," even if such an acquisition lasts for a "legal second." All purchasers, except the investment bank, legally purchase the investment instrument not from the issuer. In this context, the provision of Article 5 of the Federal Law "On the Protection of the Rights and Legitimate Interests of Investors in the Securities Market" becomes clearer: it stipulates that persons who have signed the prospectus for the issue of securities bear joint and several liability for damages caused by the issuer to the investor as a result of false and/or misleading information contained in the prospectus. After all, if the investor and the issuer are separated from each other by the ownership of the investment bank, the investor has the opportunity to bring a tort claim against the issuer.
Conclusion
Yuri Tuktarov could not have imagined that, to a certain extent, he had anticipated the subsequent regulation of stock market instruments. However, the main advantage of "The Evolution of Stock Market Instruments" lies elsewhere: its timeliness. To this day, no one has been able to "enter the river" of the legal understanding of stock market securities (the doctrinal counter-term I propose to replace securities rights and/or IFRs) unless they do so from the point in time at which the state of affairs in the relevant industry existed at the time Yuri Tuktarov wrote his article.
[1] Philipp Hubbard. The Roots of International Investment Banking. // Harvard Business School. Working Paper 88-066. 1988, June. P. 16.
[2] Jeffrey Williams. The Economic Function of Futures Markets. Cambridge, 1986. P. 15.