GENERAL OVERVIEW & CONTEXT

The Mongolian capital market is governed by the following primary laws and regulations:

The hierarchy of these regulations is as follows:

If an international treaty to which Mongolia is a party contains provisions that contradict national laws, the provisions of the international treaty shall prevail. (Article 2.2 of the Law on the Securities Market)

The Law on Securities Market is the primary law regulating the issuance, registration, trading, and other activities related to securities in Mongolia. It provides the fundamental framework for the capital market, while other laws and regulations complement and provide more specific guidelines for different aspects of the market.

The primary regulatory bodies responsible for overseeing the Mongolian capital market are:

The FRC is the main regulator for the non-bank financial sector, including capital markets. Its key responsibilities include:

The FRC was established in 2006 as an independent regulator. Its funding consists of funds allocated from the government budget, regulatory service fees collected from licensees and registered entities, and other income generated from legal activities. However, this partial reliance on government funding may compromise the FRC’s independence.

The Ministry of Finance is involved in capital market regulation as one of the primary regulatory institutions by formulating state policy for the securities market in collaboration with relevant state administrative bodies. This policy is aligned with broader investment and economic objectives. The Ministry also cooperates with and supports the functions of the FRC.

The MSE became a self-regulatory organization in 2015, allowing it to regulate its member securities companies and listed companies. The MSE has some self-regulatory functions:

The stated objectives of Mongolia’s capital market regulations include:

The Law on Securities Market, Article 1.1, states that one of its primary purposes is “to regulate the regulation and oversight of market participants’ activities, and the protection of the investor interests in the securities market.”

The Law on Securities Market, Article 1.2, emphasizes the “Principles of reducing systemic risks of the securities market and insuring its fairness, transparency and efficiency, shall be adhered to in implementation of the objectives of this law.”

The FRC has the objective to ensure national financial market stability.

These objectives demonstrate Mongolia’s commitment to creating a robust, fair, and growth-oriented capital market framework that aligns with international best practices while supporting the country’s economic development goals.

MARKET PARTICIPANTS & INSTRUMENTS

Based on the Law on Securities Market of Mongolia and the Law on Investment Funds, the following types of market participants are regulated:

Additionally, the Law on Securities Market regulates securities issuers (Article 7) and investors, although investors are not explicitly listed as a regulated entity.

Based on the Law on Securities Market of Mongolia, the licensing and registration requirements for market participants are as follows:

Regulated activities specified under II(i) shall be carried out on the basis of special permits (Article 24.2).

The FRC is responsible for issuing licenses (Article 28.1).

Applicants must submit documents listed in Article 27.2, including:

Upon receipt of accurate and complete documentation, the application shall be resolved within 10 business days.

Applicants shall meet the following requirements:

Legal persons providing auditing, appraisal, and legal services to securities market participants must register with the FRC (Article 24.3).

These service providers must have a fixed number of professionals (e.g. lawyers, appraisers, auditors) working under permanent employment contracts, having passed the relevant exams (e.g. bar exam) and obtained licenses for professional activities. In the case of a legal entity engaged in equity crowdfunding activities, it must have special software that meets the requirements set by the FRC.

Regulated persons must maintain membership with a self-regulatory organization (Article 69.3). They must comply with the principles for regulated operations (Article 25.1).

Based on Article 5 of the Law on Securities Market of Mongolia, the following types of securities and financial instruments are traded on the Mongolian capital market:

The rules governing the issuance of securities

Based on the Law on Securities Market of Mongolia, the rules governing the issuance of securities include:

1.   Disclosure Requirements

Issuers must provide a securities prospectus containing detailed information about the company, its finances, risks, and the securities being issued. The prospectus must include inter alia:

Issuers must immediately report any material changes or events that could impact investment decisions to the FRC.

2.   Prospectus Requirements

The prospectus must be prepared according to FRC instructions. It must be verified by an independent lawyer and auditor registered with the FRC. The prospectus must include expert assessments or conclusions, if any, along with information about the experts, and signed by the company’s Board Chairman, CEO, CFO, and independent experts.

3.   Listing Requirements

Securities must be registered with the FRC and approved for public offering. For listing on the Mongolian Stock Exchange (MSE), issuers must:

Issuers must not have significant tax or overdue liabilities. The company’s latest financial report must not be older than six months at the time of listing.

4.   Registration Process

Issuers must submit an application, prospectus, and other required documents to the FRC. The FRC reviews the application within 20 working days, with a possible 15-day extension. Upon approval, the FRC registers the securities in the Registry of Securities Admitted to Public Offering. After FRC registration, the issuer must also apply for listing on the stock exchange.

1.   Client Protection

Brokers must:

Dealers must:

Investment funds are prohibited from:

2.   Conflicts of Interest

All regulated persons must:

Brokers must disclose conflicts of interest to clients (Article 36.6-36.7). Financial rating organizations are prohibited from performing services with conflicts of interest (Article 50.3)

3.   Market Manipulation and Insider Trading

The Stock Exchange must monitor trading to ensure it is conducted in accordance with applicable procedures (Article 49.1.5)

The FRC has the power to:

Market manipulation and insider trading are criminal offenses in Mongolia, as defined by the Criminal Code. Convictions for these crimes can lead to penalties such as fines (ranging from approximately $780 to $2,890 USD), restrictions on travel, and imprisonment for periods between six months and twelve years (Articles 18.8 & 18.9).

If market manipulation and insider trading do not meet the elements for these criminal offenses, they may still be subject to penalties under the Law on Infringement.  These penalties can include a fine of approximately $5,780 USD, forfeiture of any ill-gotten gains, and mandatory compensation for resulting damages (Article 11.10).

4.   Information Disclosure

Securities issuers must disclose material information to the public the following information (Article 56.1):

Regulated persons must provide the following information to clients (Article 57.1):

TRADING & MARKET INFRASTRUCTURE

Securities trading in Mongolia primarily takes place through the Mongolian Stock Exchange (MSE), which was established in 1991 and serves as the country’s main securities trading platform.

The MSE’s key trading systems include:

While an over-the-counter (OTC) market exists, it is smaller in scale and less strictly regulated. OTC trading is primarily conducted among institutional investors and by securities dealers meeting specific criteria.

Recently, a new trading platform developed by AND Systems LLC has gained attention. This platform aims to enhance trading security and transparency by utilizing blockchain technology. It is also expected to support new forms of fundraising, such as crowdfunding, thereby improving capital market accessibility for small and medium-sized enterprises.

The Financial Regulatory Commission (FRC) of Mongolia continuously monitors these trading systems and platforms to ensure compliance with relevant laws and regulations. When necessary, the FRC introduces new regulations to strengthen market stability and investor protection.

The Mongolian Stock Exchange (MSE) plays a crucial role in Mongolia’s capital market infrastructure. Established in January 1991, the MSE serves as the country’s sole stock exchange and has several key functions:

The MSE functions through its electronic trading system, which was modernized in 2012 with the implementation of the Millennium IT platform from the London Stock Exchange Group. This system allows for:

The exchange operates under the supervision of the FRC and collaborates with other regulatory bodies to ensure market stability and integrity. As of September 2022, the MSE had 180 listed companies with a combined market capitalization of approximately US$1.5 billion.

Recent developments include the introduction of new products, such as the trading of mining products and preparations for new offerings, demonstrating the MSE’s ongoing efforts to diversify and expand its market offerings.

Launched in December 2020, DAX is Mongolia’s first cryptocurrency and security token exchange. As of June 2022, it reported:

This platform allows users to trade ArdCoin, a blockchain-based loyalty reward program. The company estimates that one in three Mongolians own ArdCoin.

Several international online brokers and trading platforms are accessible to Mongolian investors, including Interactive Brokers, XTB, and IG, among others. These platforms offer access to global markets and a wider range of financial instruments.

The rules governing market surveillance and enforcement in Mongolia’s securities market, as well as the investigation and prosecution of market abuses, are primarily outlined in the Law on Securities Market and the Criminal Code. Key aspects include:

1.   Market Surveillance

The Financial Regulatory Commission (FRC) is responsible for:

The Mongolian Stock Exchange (MSE) is required to:

2.   Enforcement Mechanisms

The FRC has the power to:

The MSE, as a self-regulatory organization since October 13, 2015:

3.   Investigation of Market Abuses

The FRC is authorized to:

The prosecutor’s office supervises the investigation process, ensuring:

4.   Prosecution of Market Abuses

Market abuse is criminalized under the Criminal Code of Mongolia: Article 18.9 deals with “Abuse of securities market”

The FRC may refer cases to relevant authorities for criminal investigation and prosecution (Article 25 of the Law on FRC).

Prosecutors have the power to:

The regulatory framework aims to ensure market integrity and investor protection through comprehensive surveillance, investigation, and enforcement mechanisms.

INVESTOR PROTECTION

Measures to protect investors in the Mongolian capital market

The Mongolian capital market has several measures in place to protect investors:

Securities issuers must provide a comprehensive prospectus containing detailed information about the company, its finances, risks, and the securities being issued (Article 10.3).

Issuers must immediately report any material changes or events that could impact investment decisions (Article 20.1.9).

Companies must disclose shareholders’ meeting resolutions and submit relevant information to the Financial Regulatory Commission (FRC) and the Exchange within three working days (Article 20.1.8).

The FRC has the authority to demand information from securities issuers and related persons if there are concerns about unlawful operations, fraud, or violations of investors’ interests (Article 21.1).

The FRC can submit claims to court against issuers or authorized persons on behalf of investors if unlawful actions or violations of investors’ interests are suspected (Article 21.2).

Securities issuers must comply with corporate governance principles endorsed by the FRC (Article 20.1.10).

The law prohibits the issuance of securities not registered in the registry of securities admitted for public offering (Article 11.10).

Issuers and their authorized persons are collectively liable for losses incurred due to incorrect, false, incomplete, or misleading information in the prospectus (Article 9.14).

The stock exchange is required to operate a fair, orderly, and transparent market (Article 49.1.6).

Issuers are prohibited from using funds raised from securities trading for purposes other than those stated in the securities prospectus (Article 12.9).

Protection of retail investors compared to institutional investors (in Korea)

In South Korea, there is a clear distinction between professional investors (including institutional investors) and retail investors. The Financial Investment Services and Capital Markets Act defines “Qualified Professional Investors”, which typically include financial institutions, pension funds, and other sophisticated investors.

Retail investors in Korea generally receive more regulatory protection compared to institutional investors. For example:

Institutional investors have broader access to various investment products compared to retail investors. For instance:

There are some tax advantages for retail investors engaging in direct foreign equity trading, such as basic capital gains deductions and the ability to offset capital losses.

While Mongolia’s current regulatory framework may not explicitly differentiate between retail and institutional investors to the same extent as South Korea, adopting some of these protective measures could be beneficial:

By adopting such measures, Mongolia could enhance investor protection while still allowing for market growth and sophistication, balancing the needs of both retail and institutional investors.

Based on the Law on Securities Market, the Company Law of Mongolia, and the Corporate Governance Code (2022), the key rules governing corporate governance of listed companies in Mongolia are as follows:

Public companies must have a Board of Directors with at least 9 members, one-third being independent (Company Law, Article 75.4). The roles of CEO and board chair must be separate (Corporate Governance Code).

Public companies, insurers, non-banking financial trust services, and investment management companies are mandated to comply with the Corporate Governance Code (FRC approval, March 23, 2022).

Companies must report on code implementation annually in their activity report and on their website.

The Board of Directors is the governing body between shareholders meetings (Company Law, Article 75.1). The board must define the company’s strategic development and supervise financial and operational activities (Corporate Governance Code).

Companies must establish an audit committee as a subcommittee of the board, composed of two-thirds independent directors (Corporate Governance Code)

The executive management shall manage daily activities of the company and represent the company without proxy (Corporate Governance Code).

Based on the Law on Securities Market of Mongolia, there are specific regulations addressing related party transactions and conflicts of interest:

“related persons” is defined in detail, including family members, as companies where the person is an authorized decision-maker, and entities where the person holds 10% or more of voting shares. “affiliation of legal persons” related to market participants. The Stock Exchange must disclose information about significant transactions and agreements with conflicts of interest made by securities issuers.

Regulated persons are required to avoid conflicts of interest with clients and other relevant persons, and inform clients immediately if a conflict of interest arises.

The Law prohibits regulated persons from promoting self-interest over client interests or utilizing information obtained during service provision for self-benefit; obliges brokers to inform clients about any existing conflicts of interest before entering into a service agreement and to immediately inform clients if conflicts arise later; holds brokers liable for material damage incurred by clients due to failure to inform about conflicts of interest; and prohibits financial rating organizations from performing services with conflicts of interest.

CROSS-BORDER ISSUES

Foreign investors can invest freely in most sectors and industries in Mongolia, except where prohibited or restricted by law.

Foreign investors must register their investments with the state in accordance with the Company Law, Law on State Registration of Legal Entities, and other relevant laws and regulations.

Foreign investors are granted certain rights, including:

Foreign state-owned entities (SOEs) face additional restrictions:

Specific sectors requiring approval for foreign state-owned legal entities holding 33% or more equity:

The Law on Minerals restricts ownership of strategic mineral deposits to a maximum of 34%, whether held by a single entity or a group of related entities.  This limit can be exceeded only if an investment agreement with the Government specifically allows for a higher percentage (Articles 5.7, 5.8).

Cross-border transactions in Mongolia are regulated through various laws and mechanisms:

Foreign investors in a Business Entity with Foreign Investment must inject a minimum capital of USD 100,000, either in cash or in-kind.

Foreign investors in Mongolian banks are subject to prior review and approval by the Central Bank of Mongolia. Transactions involving over 5% of shares in a Mongolian commercial bank require regulatory approval.

The FRC oversees cross-border transactions in the capital markets. New regulations are expected to establish frameworks for corporate bond products and fintech innovations.

Mongolia has several bilateral and multilateral agreements related to capital market cooperation:

As of September 10, 2024, South Korea and Mongolia launched the third round of talks for a comprehensive economic partnership agreement. This four-day negotiation in Ulaanbaatar focused on:

ENFORCEMENT & SANCTIONS

Based on the Law on the Legal Status of Financial Regulatory Commission and other relevant legislation, the enforcement powers of regulatory authorities and types of sanctions for violations of capital market regulations in Mongolia are as follows:

1.   Enforcement Powers

2.   Types of Sanctions

3.   Criminal Penalties:

While not directly imposed by the regulatory authorities, serious violations can lead to criminal charges, including imprisonment for up to 12 years for abuse of the securities market and insider trading.

The regulatory framework aims to provide comprehensive enforcement powers and a range of sanctions to ensure compliance with capital market regulations and maintain market integrity.

COMPARATIVE ANALYSIS

Mongolia’s capital market regulations have been evolving to align more closely with international standards. However, there are still significant differences and areas for improvement.

The Mongolian capital market is relatively young and less developed compared to South Korea’s. While Mongolia has been making efforts to modernize its regulatory framework, South Korea’s capital market regulations are more sophisticated and comprehensive. For instance, South Korea has a more robust self-regulatory system, with organizations like the Korea Exchange and the Korea Financial Investment Association playing crucial roles in market supervision.

One key difference is in the financing structure. Mongolian companies still rely heavily on bank financing, similar to the German model. In contrast, South Korean companies have a more balanced approach, with a significant portion of capital raised through the stock market. This suggests that Mongolia could benefit from policies encouraging greater use of equity financing to diversify funding sources for businesses.

Mongolia has recently taken steps to enhance its capital market connectivity, as evidenced by the “Mongolian Capital Market Connectivity 2024: Korea” event. This initiative aims to attract South Korean investments and facilitate cross-listing of companies, indicating Mongolia’s recognition of the need to learn from and integrate with more developed markets.

In terms of corporate governance, Mongolia has made progress by adopting and revising its Corporate Governance Code, with the latest version in 2022 extending its application beyond listed companies to include insurers, trust service providers, and investment management companies. However, the implementation and enforcement of these governance standards remain challenges. South Korea, on the other hand, has a longer history of corporate governance reforms and stronger enforcement mechanisms.

Mongolia could learn several lessons from South Korea’s experience:

References:

For further information, please contact V. Bolormaa, GRATA International Law Firm Partner at [email protected] or +976 70155031.

GRATA International in Mongolia is part of the global law firm, which has offices in 20 other nations. This legal material is not a thorough examination of any particular problems; rather, it is meant to provide general knowledge. Before making any decisions, the reader should consult a professional for advice that is suitable to their situation (s). Any consequences or damages resulting from the use of this legal information are not our responsibility.