Establishing Index Funds and mutual funds
Index funds and mutual funds are two important financial instruments.
Index funds provide market exposure by tracking the returns and characteristics of an index as closely as possible.
Mutual funds are investment strategies that allow investor to pool his/her money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on his/her own.
If you want to invest in Iran stock exchange funds, we can help and advise you to do your best.
There are some kinds of funds that each of them has its own benefits,constraints and regulations.
To make the best decision based on your criterion and preferences it’s highly recommended to use our consultation services. In these services we show you the investment perspective and the risks might affect that.
Mutual Funds
۱- Introduction
Mutual funds are modern financial institutions which are designed with aim of collecting
funds from armature investors and devoting them to variety of securities to create a
reasonable return. These funds are kinds of intermediary financial institutions which help
reintroducing and reconciling amateur investors to professional capital markets. The
purpose of forming the Fund is to pool money from investors. Then the money would be
invested in different subjects such as particular securities or building projects which are
specified in the fund prospectus. Securities can include stocks, different types of sukuk,
future contracts and banking deposits for which the issuance license has been granted by
the Central Bank of Iran (CBI) or Securities and Exchange Organization (SEO) and their
specifications have been described in the Funds’ prospectus. Funds can also use the
collected money to carry out a building project. Obviously most investors intend to gain a
profit but there are some investors who would like to help specific groups or activities.
There are charity funds in which these investors can reach their goal through capital
market. Collecting small amount of money from investors, mutual funds mitigate the
investment risks, exploit the economies of scale and protect the interests of investors.
۲- Definition
According to paragraph 20 of article 1 of Securities Market Act (2005), a mutual fund is
defined as a financial institution whose main area of activities are investing in securities
and their holders shall share in the fund’s profit and loss in proportion to their
investments. Later in 2008, expanding the definition of mutual funds, the Law for
Development of New Financial Instruments and Institutions amended the definition as ‘a
financial institution which invests in the financial resources derived from issuance of
investment units in its designated area of activity’.
۳- Rules and regulations
Mutual Funds operate under a lot of rules so they are considered financial institutions
with the most concise, organized and comprehensive supervision by SEO. The rules
include acts, laws, bylaws, regulations and circulars. Mutual funds have their origin in
Securities Market Act of the Islamic Republic of Iran and as mentioned above, the Law
for Development of New Financial Instruments and Institutions made some amendments
and facilitations to the mutual funds. The rest of rules governing on mutual funds are as
follows:
– Anti-Money Laundering Act;
– Executive By-Law of the Anti-Money Laundering Act;
– The Regulations on the Record-Keeping and Reporting Requirements of
Information and Documents by the Regulated Persons/Entities;
– Disciplinary Regulations Governing Non-Brokerage Financial Institutions;
– The Regulations on the Prevention of the Mutual Funds’ Abnormal
Transactions;
– The Regulations Governing the Proceedings for Violations Committed by
Persons Mentioned in the Article 35 of the Iran Securities Market Act;
– The Executive Regulations on Record-Keeping and Reporting Mutual Funds’
Financial Events;
– The Procedure of Subscription, Issuance and Redemption of Funds Units;
– The Regulations Governing the Requirements for the Capital Adequacy of
Financial Institutions;
– The Regulations Governing the Valuation Method of Securities Purchase and
Sale in the Mutual Funds;
– The Standards Governing the Establishment of Construction Funds;
– The Regulations Governing the Establishment of Construction Funds;
– Regulations Governing the Issuance of the Construction Funds Units;
– Regulations on the Method of Calculating the Net Asset Value (NAV) of the
Construction Fund Units;
– The Regulations Governing the Market-Making Activities of the Units of the
Construction Funds;
– The Regulations on the Procedures of Tender Documentation in the
Construction Funds;
– The guidelines on preparing the feasibility report of construction projects;
– Article of Association of the Mutual Funds;
– Prospectus of the Mutual Funds;
– The Procedure for forming and revising portfolio in Index Funds;
– Furthermore, Mutual Funds shall comply with circulars. SEO has issued 26
circulars for Mutual Funds since the beginning of 2012 and there has been
issued 6 circulars for all the financial institutions including Mutual Funds.
۴- Types of Mutual Funds
Although not a long history in Iranian capital market but surprisingly Mutual Funds were
very warm welcomed by Iranian investors society and it didn’t take a long time to get
acquainted with them. To categorize kinds of Mutual Funds, one classification could be
securities Mutual Funds (including; Stock Mutual Funds, Fixed Income Mutual Funds,
Mixed (Motley) Mutual Funds & Index Funds), Charity Funds, ETF, Construction Funds,
Currency Funds and Gold Funds (Regulations of the last two, will be prepared in near
future).
Although, major Mutual Funds are in the form of Stock and Fixed Income Mutual Funds
but there are two licensed construction funds now.
Construction Funds in Iran were approved as a Financial Institution, by the Securities &
Exchange High Council in Aug 2008. Having Young population, general attitude toward
investing in housing sector as a way to protect the purchasing power of money, growing
liquidity rate in recent years and good situation for speculators’ activities, have been
among the key factors to stimulate the demand curve in housing sector. On the other hand
the lack of proper capacity has prevented the supply side of this equation to grow
proportionately to the demand side and this has caused a price boom in real estate sector
especially in megacities. Construction Funds are newly founded funds which help
constructing the mass production of domiciles and afterward quenching the increasing
growth of demands engendered in the domicile sector. The philosophy behind that was to
diminish the dependence of housing industry on banking system and to facilitate
financing through capital market. Construction Fund is a financial institution, which is
authorized by SEO as an independent legal entity. Objective of a Construction Fund is to
collect macro and micro savings, devote them to build specified constructing project, sell
the construction and eventually distribute obtained benefits among investors. The rules
and the framework of activity of these Funds have been set up upon the results of the
SEO experts’ studies with cooperation of the construction sector experts. One of the most
important characteristics of these Funds is the possibility of trading their units in the
secondary market (including Exchanges or OTC markets). The pooled funds are intended
for certain construction project and then the returns coming from selling completed
apartments, will be divided among the investors. The executive and supervisory bodies
are designed to have the project completed in time with certain expenses prescribed in the
feasibility document. Construction funds have provided several privileges for the
investors, including: a) By investing in a construction fund, investors enjoy the profit of
constructing and selling of the buildings and also they highly protect their purchasing
power against the rising prices of real estate, especially in the area which the fund’s
project is located. B) Investors may sell their units to the market maker or others
whenever they wish. This would not be possible in direct investment in construction
projects, because selling a building (especially a part of building) would be much more
difficult than selling the Fund’s units. Market maker will announce daily quotes for
buying and selling of units, according to the rules and the fund articles of association.
However, listing units in an Exchange or an OTC market provides a strong market for
that kind of investment. C) Investors may access the information about the fund and
underlying construction project through the website of the fund. Information concerning
the progress of the project will be displayed monthly and financial statements and
performance report of the fund will be displayed every three months. D) Although
investment in these funds is not free of fraudulent risk, the mechanism for administration
is so designed to let the supervisory bodies (including supervisor, trustee and auditor)
have a great role in monitoring Fund operations, and this causes the fraudulent risk to
decrease. E) Qualifications of the Fund’s bodies would be examined by the SEO. The
project control and accounts maintaining software’s are also approved by the SEO.
Generally, there are different methods of profit allocation in mutual funds as follows:
۱- In most Funds, if an investor redeems the fund units, the redemption would
be on the basis of redemption NAV.
۲- Some mutual funds, majorly fixed income funds, distribute dividends on a
regular basis namely monthly and quarterly to their investors.
۳- In charity funds, investors can allocate all or a portion of profits to charitable
activities in the manner described in the fund prospectus.
۵- Purpose of Mutual Funds
The purpose of forming securities mutual funds is to pool resources or capital from
investors and invest such funds in the purchase of securities of all kinds mentioned in the
fund’s prospectus, or in the construction project outlined in the fund prospectus, so as to
mitigate the investment risks, exploit the economies of scale and protect the interests of
investors.
۶- Mutual Funds Bodies
According to the Law for Development of New Financial Instruments and Institutions,
Funds, by virtue of the arrangements provided in the articles of association, have at least
one governing body and one supervisory body acting in the capacity of the inspector or
auditor. Subsequently, their detailed functions and responsibilities of these bodies and
also required qualifications for granting Funds’ licenses were defined in related
regulations. Generally, there are three separate kinds of bodies including decision making
body (General Meeting), governing body (fund manager, liquidity guarantor, and
registrar) and supervising body (trusty and auditor) in Iranian Mutual Funds. In this part,
different bodies of mutual funds are described. The first step to implement supervision is
fulfilled by Mutual Funds qualified Bodies. It will significantly enhance the corporate
governance elements and framework in Mutual Funds.
۶-۱- BODIES COMMON IN ALL KINDS OF MUTUAL FUNDS
۶-۱-۱- General Meeting
The fund’s general meeting shall formally convene with the presence of the holders of the
half plus one of the fund’s top investment units with the rights to vote and has powers; to
appoint the fund manager, registrar, trustee and guarantor with SEO’s approval; to change
the fund’s manager, registrar, trustee and guarantor on the condition of selecting
substitutes for them with the SEO’s approval; upon the trustee’s recommendation, to
appoint and remove the fund’s auditor and specify his office term, fees and the manner of
its payment; to adopt the modifications made in the fund’s articles of association and in
the prospectus after the SEO’s approval; to take decisions on the fund dissolution; to
approve the fund’s annual financial statements; to hear the manager’s report on the fund’s
statement and performance during every fiscal year; to hear the auditor’s report and
opinion on the financial statements as well as his report on the fund’s statement and
performance; to select a mass-circulated newspaper for the fund; and finally to approve
the expenses required for establishing the fund and the costs for holding the fund’s
general meeting.
۶-۱-۲- Fund Manager
The fund manager shall be elected by the fund’s general meeting upon the SEO’s approval
and pursuant to the rules and provisions of the articles of association and is referred to as
“manager” in the present document.
The manager shall introduce at least three natural persons who are experts in the area of
investment in securities as the “group of investment managers” of the fund so as to
discharge the following duties on behalf of the manager and upon his own liability:
- Policy-making and formulation of the fund’s investment policy and decisionmaking
on the buy sell or hold the fund’s assets ownership within the framework
of the rules, articles of association and prospectus of the fund;
- fixing the purchase and sale price of the fund’s securities in compliance with
the procedures for establishing the securities purchase and sale price in the
investment funds approved by the SEO so as to calculate the price for issuance,
redemption and net assets value of each of the fund’s investment units as per the
articles of association;
- Other functions and powers delegated by the fund manager.
In addition, other functions and responsibilities of the manager are set out as
follows:
- To allocate at least 40 square meters of proper space for administration with
the required facilities and equipment to discharge the fund’s current affairs;
- To participate in the fund implemental stages such as subscription, issuance
and redemption of the investment units pursuant to the provisions of articles of
association;
- To record and keep track of each investor’s account including the amounts
paid and received, the number of investment units issued and redeemed and the
number of investment units owned by him;
- To designate the holders of authorized signature for the fund and the scope of
functions and responsibilities of each of them and inform the matter to the trustee,
registrar, guarantor and auditor;
- To appoint the fund’s broker or brokers and supervise the optimum execution
of the fund’s securities purchase and sale orders by them;
- To notify the trustee of the fund’s securities transfer among its brokers within
two business days at the latest after performance;
- To inform the registrar concerning the monies paid to each one of the
investors within one business day at the latest after each payment;
- To collect and retain all positive documents relating to the fund’s financial
events, record the fund’s financial events in accordance with the accounting
principles and procedures and prepare the required reports as per the rules in the
articles of association;
- To introduce the group of investment managers and specify the procedure of
their service compensation which should be commensurate with the management
fee or the fund’s performance;
- To handle the common questions raised by investors;
- To procure the required software and hardware and apply them towards
achievement of the fund’s objectives;
- To initiate a publicity campaign to introduce the fund to the public this is, if
necessary, exercised at his own discretion;
- To act as the fund’s representative with the investors, all governmental and
non-governmental departments, judicial authorities and other individuals and
entities;
- To institute any type of legal proceedings and criminal cases on behalf of the
fund and defend the pending cases versus the fund at any law-courts, public and
special tribunals and Administrative Justice Tribunal, being vested with all powers
prescribed in the Civil Code Procedures, Criminal Code Procedures, the law and
regulations of Administrative Justice Tribunal.
۶-۱-۳- Registrar
The person charged with the registration affairs of the fund’s investment units shall be
appointed by the fund’s general meeting in accordance with the rules and provisions of
the articles of association and is referred to as the “registrar” in this instrument.
Main functions and responsibilities of the registrar are; to designate at least 5 branches so
as to deal with the issuance and redemption of investment units; to designate and
introduce one of his trusted staff as the fully-authorized representative and holder of the
authorized signature on behalf of the registrar to act for the fund’s affairs; to receive and
enter the identification data of each investor or his agent and particulars of each investor’s
bank account and transmit such information to the manager and the trustee; to participate
in subscription, issuance and redemption of investment units pursuant to the articles of
association and appendices; and finally to enter and keep records of each investor’s
account containing the amounts paid and received, the number of investment units issued
in his name, the number of investment units redeemed at his request and the number of
investment units owned by him in accordance with the accounting principles as well as
preparing the required reports as per the provisions of the articles of association.
۶-۱-۴- Liquidity Guarantor
The liquidity guarantor mainly plays its roles in circumstances that the Fund does not
have sufficient cash to make any payment out of its liquidity to investors. At this moment
the manager shall have to convert the fund’s assets into cash in a timely manner so as to
provide sufficient cash in the fund banking accounts for such payments. If, during the two
business days before the due date for payment, the manager predicts that sufficient cash
shall not be provided in the fund banking accounts on the due date for such payments, he
shall, by the end of the same day, has to inform the liquidity guarantor of the cash
shortage. In such case, the liquidity guarantor shall, by the end of the following day at the
latest, have to credit the shortage of the given cash to the fund account and submit the
application for issuance of investment units out of such cash to the manager so that the
investment units in a number proportionate to the paid cash will be issued in the
guarantor’s name.
۶-۱-۵- Profitability Guarantor
The fund profitability guarantor shall be elected by the fund’s general meeting in
accordance with regulations and as per the rules in the articles of association. The
guarantor shall have to accept his position in writing and assume his responsibilities and
functions pursuant to the articles of association and send a copy of his acceptance to the
SEO, manager, trustee and auditor each. The profitability guarantor has the
responsibilities for cash payment to investors under particular circumstances to
compensate for their return up to the amount fixed in the fund prospectus.
۶-۱-۶- Fund Trustee
To enhance internal controls procedures in operational affairs to be performed
conveniently, this pillar was designed in Funds’ structure. The fund trustee shall be
elected by the fund’s general meeting as per the regulations and pursuant to the provisions
of articles of association. Some of the more important functions and responsibilities
would be illustrated as; designating and introducing one of his trusted staff as the fullyauthorized
representative and holder of the authorized signature on behalf of the trustee
to act for the fund’s affairs; examining and confirming the amounts receivable and
payable; receiving and keeping the identification data and bank account information of
each investor so as to carry out all operations of receipts and payments between the
investor and the fund; keeping records of each investor’s account containing the amounts
paid and received, the number of investment units issued in his name, the number of
investment units redeemed at his request and the number of investment units owned by
him; receiving information on the fund’s daily transactions at the end of each business
day and monitoring the fund’s balance of accounts with the fund brokers; and finally the
last and most important one examining and approving the manager’s application to open
bank accounts in the name of the fund. All payments by the fund from the fund’s banking
accounts shall be made upon the order given by the manager and the trustee’s approval.
The trustee shall endorse the payment order before payment and after obtaining assurance
about the conformity of the payment order with the related provisions. This last
mentioned function can tremendously mitigate the risk of misusing Mutual Funds’
accessible funds.
۶-۱-۷- Auditor
The second designated supervisory body of a Fund is the auditor that some of its most
important functions and responsibilities are; to examine the principles and procedures of
internal control exercised by the manager or the trustee in the discharge of the duties
prescribed in regulations; to conduct an investigation to ensure that the principles and
procedures of internal control designed for the discharge of manager’s and trustee’s
duties are applied in practice; to examine and express his opinion on the Fund’s
semiannual and annual financial statements in accordance with auditing standards and
national accounting standards and also the accuracy of the performance reports; to
examine and express the accuracy of calculating the market net asset value, statistical
value, the issuance and redemption price of investment units through a sample survey in
accordance with auditing standards.
The fund auditor shall be recommended by the trustee from among the auditing firms
trusted by the SEO to be approved by the fund’s general meeting. The auditor’s fee shall
be proposed by the trustee and approved by the fund’s general meeting. The term of the
auditor’s office shall be appointed by the fund’s general meeting.
۶-۲- BODIES JUST IN CONSTRUCTION FUNDS
Construction funds’ operations are different from securities mutual funds. The person
who is in charge of carrying out the construction project as well as the person in charge
of supervising the construction procedure should be well aware of and specialist in
construction. So Constructor and Supervisor are two bodies of just construction funds.
Similarly, due to the different operations of construction funds, you can find three other
new bodies in their structure namely Board of Directors, Underwriter and Market maker.
These specific bodies of construction funds are described in this part.
۶-۲-۱- Constructor
Constructor is a legal entity with at least 5 years of effective experience in management
of large construction projects that can be changed after the approval of SEO. Constructor
has the responsibility of performing the project. He can do it independently or delegate
implementing the project to other qualified contractors. At each step, he presents physical
and financial progress reports of the project to supervisor and fund manager accordingly.
Through the project, bodies such as supervisor, trustee and judicial experts will need
some information on the project. So constructor cooperates with them to visit the project
and access any necessary information.
۶-۲-۲- Supervisor
Supervisor is a legal entity (usually consultant engineering institutions) that according to
construction law and related regulations has the first class operation permission. It can be
changed after the approval of SEO. He performs the tasks mentioned in the national
construction standards and regulations.
According to the article of association of the fund, supervisor should approve the
business plan of project including maps and steps of construction. He also supervises the
implementing the project to assure that it complies with business plan and national
construction standards and regulations. Besides, the physical progress reports prepared by
the constructor need the approval of supervisor who prepares periodic progress reports of
project accordingly.
۶-۲-۳- Board of Directors
Board of directors consists of five namely fund manager, trustee and three people
appointed by the General Meeting. The members’ qualification must be approved by
SEO. The amount of capital raising, qualification of constructor and its nominated
contractors should be approved by board of directors. Board of directors also determines
selling approach and confirms the procedure of selling and up front selling of
construction. If there is any delay in project implement, board of directors has the
authority to make decision whether the fund would take the responsibility for or not.
Furthermore, in exceptional conditions, board of directors can change costs or time
schedule of project implement.
۶-۲-۴- Underwriter
Underwriter is a legal entity that can be changed after the approval of SEO. Underwriter
is obliged to buy the unsold units of fund in any IPOs (either when establishing the fund
or raising capital) and provide the deficit in liquidation procedure.
۶-۲-۵- Market Maker
Market maker is a legal entity that can be changed after the approval of SEO. He is
obliged to make market of fund units (except those of the fund bodies) until the end of
fund’s operation period. He will do it with a limitation on quote range that falls between a
price limit.
۶-۳- BODIES JUST IN CHARITY FUNDS
As the name conveys, some part of assets in a charity funds are supposed to be allocated
to some specific area. Obviously, one cannot control and manage the expenses unless he
knows about the specific area outlined in the prospectus of the charity fund. That’s why
there is a different body in charity funds’ structure called Executive Manager. It’s
described in more details in the following part.
۶-۳-۱- Executive Manager
Executive manager is a legal entity (usually charity and welfare agencies) whose
professional competency and qualification shall be approved by SEO and it shall be
selected by the fund’s General Meeting in compliance with regulations and the fund’s
article of association. The manager shall have record on the charitable affairs mentioned
in the fund’s prospectus or shall have the ability to carry out that affairs.
۷- Supervision on Mutual Funds
Enacting the Securities Market Act of the Islamic Republic of Iran (2005) was a turning
point that caused considerable transformations in Iran’s capital market. According to the
article 7 of the mentioned act, SEO shall adopt the necessary measures to prevent the
occurrence of violations in the securities market. In order to get such a target, SEO owns
different tools and one of the important ones is the power to grant business and activity
licenses. So it can assess qualifications of applicants for establishing financial institutions
and their plans. Also, according to the same article, SEO has the duty to report such types
of violations in the securities market whereby the reporting task has been entrusted to
SEO to the appropriate authorities. This duty has had SEO to conduct a consistent
supervision on capital market participants. Due to the importance of financial institutions
among other capital market participants, there is a separate deputy in SEO called ‘Deputy
of Supervision on Financial Institutions’ which is responsible for granting
establishment/activity licenses and continuous supervising activities of financial
institutions. This part describes how financial institutions are supervised.
۷-۱- SUPERVISION BEFORE ISSUING BUSINESS/ACTIVITY
LICENSES
As mentioned above, SEO has the authority to grant establishment/activity licenses. This
is a very preventive tool because many important items are examined and assessed
through the establishment process. Since the financial institutions have different
structures, different requirements are considered for business/activity licenses that are
described in this part by the kind of financial institutions.
In order to establish a mutual fund, generally there are two groups of items considered by
SEO. First of all, the fund structure should be determined by the applicants. The kind of
fund, its size, including the minimum and maximum number of fund units, their base
value and restrictions/requirements for owning them should be determined. Besides, it
should be specified what portion of expenses is supposed to be paid by the fund and what
portion by investors. When it comes to the construction funds, the applicants should
introduce the characteristics of land such as its address and dimensions, the
characteristics of its owner and the records of changing in the ownership. Furthermore,
estimations about construction plan and the costs of the project and estimated cash-flow
should be presented.
In another step, the mutual fund’s bodies are assessed by SEO. Several bodies in a
securities fund includes: fund manager, investment managers, registrar, fund trustee and
auditor. In some of mutual funds there are also bodies as liquidity and/or profitability
guarantor. In construction funds, there are other bodies namely constructor, supervisor,
underwriter and market maker while executive manager is a body that is laid just in
charity funds’ structure. Since all these bodies are legal persons, the applicant should
present SEO some specific information about them through an application form. In the
form, they present each body’s paid capital level and the identity of board members and
major shareholders, as well as human resources. They have to present their last audited
financial statements as well. Besides, a group of investment managers for large mutual
funds or an investment manager should be introduced by the fund manager. So their
educations, certificates and professional records can be assessed by SEO. When the
structure of the fund and the professional competency of executive and supervisory
bodies are approved by SEO, the applicants would be informed about SEO’s initial
approval for the fund establishment through a letter. If there need any other documents to
grant subscription permission, they are announced through the same letter.
To receive subscription permission, applicant has to present SEO the several documents,
some of which are as follows:
– The fund’s article of association and its prospectus consistent with the sample
one of SEO. They should be signed and sealed by all the fund bodies;
– The acceptance of positions by the fund bodies;
– a copy of the last gazette announcements of each bodies and the founders
about the condition of signing binding documents;
– Fund’s bank accounts number;
– The bank’s certification as regards the payment of the base value of the
preferred investment units (at least 20% of the minimum capital of fund);
– A copy of contract for subscribing and accessing a fund software along with a
letter of commitment of the fund manager to fulfill the requirements of the
fund’s article of association and prospectus and other regulations of SEO
through that software;
– A certificate that shows passing at least 15 hours of a training course on the
fund software;
– Announcement about the launching the fund’s website;
– introducing the delegate of the fund trustee for the fund affairs;
– Letters approving that the founders are not governmental;
If all the documents are provided the fund would be registered with SEO and in order to
collect the mandatory minimum capital, the permission for initial underwriting and public
offer of investment units at the base price would be issued for a specified period. The
applicant has to disseminate the initial subscription date through the fund’s website and
newspaper.
After a successful underwriting and receiving a confirmation from the bank, a registry
permission letter is given to the founder or his legal representative along with other
documents.
When the mutual fund is registered with the Company Registry General Office and the
fund’s article of association is sealed by the Office, the applicant present the supporting
documents along with an application for mutual fund activity license. Then the activity
license would be issued by SEO and if the fund can receive a Trading Code from Central
Securities Depository of Iran can trade share for the fund.
Renewing an activity license needs SEO’s agreement and the retention of all the
requirements that have been considered at time of activity license issuance.
۷-۲- SUPERVISION AFTER ISSUING BUSINESS/ACTIVITY LICENSES
Subject to article 2 of Securities Market Act of the Islamic Republic of Iran, SEO along
with Securities High Council are formed in order to protect the investors’ rights, maintain
and develop a transparent, fair and efficient market of securities and supervise the proper
enforcement of this law. In order to have a transparent, fair and efficient market of
securities, SEO launched an online database called ‘Comprehensive Database of All
Listed Companies (CODAL) late in 2006. At the beginning, different information which
could affect investors and other participants of capital market such as annual and
quarterly financial statements of just listed companies were published through CODAL.
But later, SEO issued a circular whereby mutual funds, as new financial institutions, have
to publish some financial information through CODAL. It would be described in more
detail later in this part.
In regard to financial institutions, it’s Deputy for Supervision on Financial Institutions
that is in charge of mentioned objectives. So, specific plans are scheduled on an annual
basis and of course, achieving those objectives needs tools that vary from a kind of
financial institution to another. In this part, we describe what the plans are and how the
mentioned objectives are achieved for each kind of financial institutions.
۷-۲-۱- Transparency, fairness and efficiency
The first step toward having a transparent, fair and efficient market of securities in regard
to mutual funds is timely publishing of financial information about funds. Since 2013,
mutual funds have to publish some financial information through CODAL. The most
important financial information of a mutual fund includes the fund’s financial statements,
its performance report and auditor report on them. According to one of SEO circulars, a
fund manager should publish the fund’s annual and quarterly financial statements and
performance report through CODAL within 20 days from the end of reports’ date.
Besides, the mutual fund’s auditor should publish his opinion about the fund’s annual and
semi-annual financial statements and performance report directly through CODAL within
۲۰ days from receiving the reports. All the mentioned reports have to be published
through mutual fund’s website too by fund managers. Timely publishing by fund
managers are examined regularly in SEO.
۷-۲-۲- Supervising the proper enforcement of rules and regulations
۷-۲-۲-۱ Book-keeping
In order to have consistency of record-keeping in mutual funds, SEO has issued ‘The
Executive Regulations on the Record-Keeping and Reporting Mutual Funds’ Financial
Events’. One the powerful tools that SEO use to ensure that the regulations are complied
with mutual funds are the fund’s software. SEO has a full access to the same software in
which financial events of funds are recorded. So, SEO can examine online the accuracy
of fund’s records. But there are lots of things to check too often. To solve such a problem,
companies which provide mutual funds with software services are coordinated with SEO.
So, a considerable part of accounting records in software is made automatically. In this
way, the risk of manipulation in accounting records by funds’ software operators is
۱۸ constrained in a great deal. For instance, when some shares are sold or bought by the
fund, there is a predetermined accounting article with specific accounts that gets
complete with the number and sell/buy price of shares and forms an accounting article. In
the article, items such as transaction fees and sale tax are calculated automatically. As far
as the accounting articles in mutual funds can be predetermined and a sample article
makes sense, they are programmed in funds software and any further extension,
improvement or even tiny changes in the software will occur with SEO permission.
۷-۲-۲-۲ Fund’s reporting
Funds reports include: financial statements, performance report and auditory report.
Financial statements and performance report are quarterly, for instance they are prepared
for 3, 6 and 9-month and annual periods. Fund’s auditor should examine the biannual
financial statements and performance report and express his opinion of them. This is the
first supervision tool that ensures the regulations and standards compliance. On the other
hand, the first page of financial statements should be signed by the fund manager and the
fund trustee. Although the fund trustee supervises the fund activities on a consistent basis
but approving the fund’s financial statements by signing it imposes him more
responsibility to ensure the accuracy of the statements. This is not the end and fund’s
financial statements, performance report and auditory report on them are examined
through specific checklists in SEO. This way there will be enough confidence in accuracy
of the funds’ reports.
۷-۲-۲-۳ Investment restrictions
There are three different kinds of securities funds by their investment restrictions, namely
stock funds, fixed-income funds and mixed funds. Each kind of funds has specific
restrictions on their investment that are outlined in the fund prospectus. For example, a
stock fund has to invest at least 70% of its assets in stocks and is not permitted to invest
more than 30% of its assets in one industry. The restrictions on investment vary from a
kind of mutual fund to another. On the other hand, pursuant to a SEO circular, investment
managers in mutual funds have to prepare an Investment Policy Statement (IPS) and
publish it through the fund’s website. In the IPS, they determine what the investment
objectives, policies and strategies are in the mutual fund for short, medium and long term
among other items. Compliance with investment restrictions outlined in the prospectus
and applying IPS by the investment managers are examined regularly through funds
software. Some special reports in the funds software shows the investments levels for
each item mentioned in prospectus, so it can be checked easily.
۱۹
۷-۲-۲-۴ Market Maker of ETFs
One of the important bodies in an Exchange-traded Fund (ETF) is the market maker. The
fund’s market-maker will help facilitate the trading of the investment units and will
additionally provide an opportunity for the investors to sell their investment units against
cash at a fair price any time they wish to do so. The market-maker has to carry out the
market-making activities for ordinary investment units under the provisions of the article
of association and the prospectus and subject to the regulations on the market-making
operations. For this purpose, the market-maker will, during the course of all trading days,
be engaged in buying and selling the ordinary investment units. The quotation range of
the broker’s sales and purchase (spread between the buying price in the purchase order
and the selling price) are determined in the articles of association. This spread can be
examined partially through a public website of securities transactions (www.
tsetmc.com). Also, there is a minimum for accumulated order and daily transactions
made by the market-maker. These items are examined through the fund software in which
there are special reports on the orders and transactions of fund units.
۷-۲-۲-۵ On-site inspection
According to funds article of association, SEO is the authority charged with investigating
all violations of regulations, fund’s articles of association and prospectus by the manager,
registrar, guarantor, trustee, auditor and brokers. The supervising mutual funds are not
restricted to online inspection or examining funds software and their report but in some
cases, on-site inspections are carried out. For example, when a probable violation of rules
and regulations are partially discovered anyway and needs more information on the event
to get clear, a delegate or a group of delegates go to carry out an on-site inspection. So,
SEO can inspect items that normally cannot be examined online. Filing documents,
procedures to trade securities, completely filling out different forms and efficiency of
equipment and human recourse of a fund are inspected on-site. This kind of inspection is
more effective for a construction fund where physical progress of construction project is
of a great importance.
Also, SEO delegates participate in the annual general meeting of almost all the mutual
funds. In a general meeting, SEO delegate can discuss different issues with preferred
fund unit holders, auditor and fund trustee. The SEO’s delegate is a supervisor in
governing body combination and helps making decisions within the framework of
regulations and if needed usually warns them about the subsequent if probable violations.
In case of lack of inviting the said delegates, the general meeting is deemed void.
۷-۲-۲-۶ On-Line inspection
There are different sophisticated software that help SEO make sure all the processes are
being performed in comply with codified rules and regulations. Major functions including
calculating NAV (Net Asset Value) process, issuing and redeeming investment unites and
inflow and out flow of Funds are all fulfilled by intelligent and approved software
automatically and subsequently reflected in Funds general ledgers simultaneously. The
manual vouchers are reduced to least possible amount and all the mentioned functions are
spied by regulator during the day.
۷-۲-۲-۷ Self-control mechanism
According to the funds article of association, if any of the fund bodies is informed of the
negligence in the discharge of duties or violation of the rules and articles of association
by other bodies, it (they) have to report the matter to the trustee or the SEO as practically
as possible. This commitment of bodies helps ensure the accuracy of each fund bodies’
activities.
۷-۲-۲-۸ Pursuing violations
As discussed earlier in this part, there are several supervising methods some of which are
carried out by SEO and some by the fund bodies. The fund auditor might send a especial
report on the mutual fund, proposing the risks, probable violations, professional
misconduct etc. Similarly and more often, the fund trustee due to his duties outlined in
regulations, reports different actual or possible problems of a fund to SEO. If a probable
violation of rules and regulations is suspected in a mutual fund, regardless of how it is
discovered, through the fund trustee or its auditor, the Deputy for Supervision on
Financial Institutions is in charge to follow it up. The first step in following up is to ask
the fund manager or other responsible bodies about the possible violation and request
their response. Since the fund trustee has the responsibility to carry out a consistent
supervising for rules compliance by the fund, he’s usually asked for his response. The
responses received by the Deputy for Supervision on Financial Institutions get examined
and scrutinized and if they are not acceptable and reasonable, the violation is reported to
Deputy for Offence Prosecution which is in charge of prosecuting any violations of rules
committed by financial institutions. Usually the defendants are invited to SEO to present
their responses and defenses verbally and then the related committee in Deputy for
Offence Prosecution judges the defendant. If the violation is proved, there will be
different orders. For example, sometimes a warning notice would be sent to the defendant
and it would be filed in his history.
From April 2014 to April 2015, the Deputy for Supervision on Financial Institutions has
reported 15 violation cases to the Deputy for Offence Prosecution and there has been
issued the same number of written cautions for financial entities.
۷-۲-۲-۹ Liquidation and Settlement
Since the liquidation of a mutual fund is a crucial point in fund business cycle, all the
settlement process of a mutual fund is set out in the fund’s article of association. Due its
importance, especially for investors, the settlement steps are monitored by SEO through
specific checklists whenever a fund liquidates.
According to the funds article of association, during the fund’s primary liquidation
period, receipt of the application for issuance of investment units by the registrar should
be stopped and at the end of the liquidation period, purchase of assets in the name of the
fund and sale of the fund’s assets shall be stopped. Also, the day after the end of the
primary liquidation period, the manager should, upon the trustee’s confirmation, pay all
the fund’s matured debts out of the fund’s cash apart from the fees claimed by the
manager, registrar, trustee and guarantor. All these activities are monitored through the
fund’s software and website.
Afterward, the manager has to prepare the fund’s financial statements, performance report
as well as a report on fund’s unsold assets. Then the auditor has to present his opinion on
them to SEO and some of fund bodies. SEO examines the reports through a checklist to
make sure the regulations are complied.
Then if the auditor expresses a clean opinion as to the fund’s financial statements and
unsold-assets report and where the fund’s general meeting approves the financial
statements, thereafter the manager have to settle with investors on the basis of redemption
price of investment units at the end of the fund’s primary liquidation period. This step is
monitored through the fund’s software where the financial transactions are recorded.
Then all of the fund’s investment certificates should become invalidated. The manager
immediately has to publish a notice on the fund website for the information of investors
in this respect which is monitored by SEO.
Except for the fund’s debts to the guarantor, the fund’s remaining debts should be paid out
of the fund’s cash. Finally, the minutes for the fund’s liquidation should be drawn up
bearing the signatures of the manager and the trustee whereby a copy of it, should be kept
in records by the manager and a copy of it, should be transmitted to the SEO. The receipt
of the minutes by SEO shows the end of the fund’s liquidation procedure.