Financial institutions

 

Financial Service Providers

۱.  Introduction

There are different types of financial service providers in Iran. Investment banks,

Investment advisors, portfolio managers, financial data processing companies are

financial service providers which are active under SEO’s surveillance. In this chapter we

are going to describe definition, purposes, activity areas, structure (bodies) of financial

service providers including, inter alia, Investment bank, investment advisor, portfolio

manager, financial data processing company.

۲. Definition

۲.۱. Investment bank

An Investment bank is a financial institution that assists individuals, corporations, and

governments in raising financial capital by underwriting or acting as the client’s agent in

the issuance of securities (or both). An investment bank may also assist companies

involved in mergers and acquisitions (M&A) and provide ancillary services like market

making. According to Security Market Act of Islamic Republic of Iran (2005) paragraph

۱۸ of article 1; Investment Bank means a company which is operating as an intermediary

between the securities issuer and all investors and may get involved in brokerage,

dealership, market-making, consulting, portfolio management, subscription, underwriting

and similar operations by obtaining a license from SEO.

۲.۲ Investment advisor

An investment advisor is a firm that is in the business of giving advice about securities to

clients. For instance, firms that receive compensation for giving advice on investing in

stocks, bonds, mutual funds, or exchange traded funds are investment advisors.

According to Securities Market Act of Islamic Republic of Iran (2005) paragraph 16 of

article 1; investment advisor means legal entity which, based on a particular contract,

renders advisory services to the investors relating to the sale and purchase of securities.

The purpose of forming the investment advisor is to organize the business and deepen the

analysis and at the same time to protect investors rights against misuse and fraud. The

investment advisor’s area of business activity include recommendation for the buy, sell or

hold of securities; comment on the price trend or offer and bid of securities in the future

and comment on the securities value (price).

۲.۳ Portfolio manager

According to Securities Market Act, under paragraph 17of article 1; Portfolio Manager

means a legal entity that, under a specific contract, engages in buying and selling

securities for investors so as to gain profit. This meaning is somehow more concise than

what is called asset manager, it should be important to know that portfolio manager is

only active in securities market and go through financial assets not the whole types of

real assets .The Portfolio Manager’s area of business activity include making decisions to

sell, buy or hold securities on behalf of a defined investors in the form of predefined

agreement, to make profit for that investor;

۲.۴ Financial Data Processing Company

Financial Data Processing Company is one of the financial institutions which fall under

paragraph 21 of article 1 of Security Market Act of Islamic Republic of Iran (2005).

Subject to approved constitution of such an entity, a Financial Data Processing Company

is legal entity which is collecting, processing financial data and selling them by issuing

via multimedia, board, electronic brochures, letter, or during speeches. Financial data

processing company sells the information of: security, the deal if securities, sell or buy

orders or the issuer, to other through adefined agreement to its clients

۲.۳ Rules and regulations

– Securities Market Act of the Islamic Republic of Iran (approved by parliament

on 2005)

– The Anti-Money Laundering Act (approved by parliament on 2008)

– Executive By-Law of the Anti-Money Laundering Act (approved by board of

ministers on 2009)

– The Regulations on the Surveillance of the Suspected Persons in the Capital

Market (approved by anti-money laundering unit on 2011)

۲۹

– The Regulations on the Retention and Destruction of Documents in the Capital

Market Concerning Money Laundering Combat (Anti-Money Laundering

Supreme Council on 2011)

– The Regulations Governing the Procedure of Sending Capital Market-Related

Records to the Customer’s Mailing/Postal Address (Anti-Money Laundering

Supreme Council on 2011)

– The law for fifth development plan (approved by parliament on 2011)

– Disciplinary Regulations Governing Non-Brokerage Financial Institutions

(approved by Board of directors of the Securities and Exchange Organization

on 2013 )

– The Law for Development of New Financial Instruments and Institutions

(approved by parliament on 2009)

– The rules governing the operations of investment bank (Approved by the

Securities and Exchange High Council on 2007)

– Regulations on the Record-Keeping and Reporting Requirements of

Information and Documents by the Regulated Persons/Entities (approved by

Board of directors of the Securities and Exchange Organization on 2005)

– The Regulations Governing the Establishment and Activity of the Investment

Advisor

– The Regulations Governing the Establishment and Activity of the portfolio

manager

– The Regulations Governing the Requirements for the Capital Adequacy of

Financial Institutions

The Regulations Governing the Establishment and Activity of the Financial

Data Processing company

– Approved sample of articles by SEO

– Furthermore, financial service providers shall comply with SEO issued

circulars. SEO has issued 1 circulars for financial service providers since the

beginning of 2012 and there has been issued more 6 circulars for all the

financial institutions including financial service providers

۲.۴. Purposes of Financial Service Providers

۲.۴.۱ Investment bank

According to the rules governing the operations of investment bank, the Investment bank

operates in the following areas:

۳۰

1. a) The main areas of activity include: subscription, underwriting, and

undertaking to purchase securities in the secondary offerings within its own

financial ability or through forming a syndicate with similar entities.

1. b) The secondary areas of activity include:

۱- Providing consultancy in the areas such as:

۱-۱- The optimal method and proposed schedule for financing and the

amount of required funds as well;

۱-۲- The procedure and scheduled suggestion for securities offering;

۱-۳- The price of securities offered by the issuer;

۱-۴- The procedures of securities registration and obtaining a license for

offering them;

۱-۵- The process of securities transfer;

۱-۶- Listing of the issuer’s securities on any Exchange and accomplish all

procedures thereon on behalf of the issuer;

۱-۷- Merger, acquisition, organizational and financial restructuring of

entities;

۱-۸- Risk management affairs;

۱-۹- Preparing entities to be rated by rating agencies and performance of

all procedures thereon on behalf of them;

۱-۱۰- Investment affairs;

۱-۱۱- The services required by companies with respect to new

investments, development, completion, planning, budgeting and securities

valuation.

۲- Marketing and/or managing the process of securities transfer;

۳- Accomplishment of procedures on behalf of the issuer in respect of

securities registration and obtaining license for offering them;

۴- Providing services relating to design and issue of financial instruments

for companies;

۵- Providing assets management services;

۶- Providing services relating to mutual funds and managing such funds

and investment in them;

۷- Brokerage;

۸- Broker/dealership;

۹- Portfolio management;

۱۰- Market-making;

۳۱

۱۱- Investing the entity’s surplus resources in the investment deposits

accounts with banks and reputable credit and financial institutions and

securities guaranteed by the government and/or banks;

۱۲- Attracting the support of banks, insurances, credit and finance

institutions and financial institutions for the company in subscribing the

securities;

۱۳- Giving assistance to companies in providing the credit and financial

resources;

۱۴- Providing assistance towards issuance, confirmation and acceptance of

letters of guarantee.

۲.۴.۲. Investment advisor

According to the Regulations Governing the Establishment and Activity of the

Investment Advisor and the sample of article, The Investment Advisor shall be entitled to

engage in any of the following activities provided that it is granted a license/permit by the

Securities and Exchange Organization (the SEO) for any of its areas of activity:

1. A) Upon receipt of the license for investment advisory services, the company

shall, as per rules, be entitled to:

a-1- recommend to buy, sell and hold securities;

a-2- express an opinion on the price trends or securities offer and bid in

future;

a-3- express an opinion about the value (valuation) of securities;

a-4- provide advisory services in the area of risk management;

a-5- provide advisory services in the area of mergers, acquisition as well as

organizational and financial restructuring of companies;

a-6- provide advisory services in the area of design and formation of

financial institutions;

a-7- assume a position (responsibility) in the mutual funds apart from

managerial posts;

1. B) Upon receipt of the license for portfolio management, the company shall be

entitled to carry out the activities specified in the relevant rules.

1. C) Upon receipt of the license for offering or listing advisory services, the

company shall be entitled to carry out the activities specified in the relevant rules;

1. D) Upon receipt of the license for financial data processing, the company shall be

entitled to carry out the activities specified in the relevant rules;

۳۲

۲.۴.۳ Portfolio manager

According to the Regulations Governing the Establishment and Activity of the portfolio

manager and the sample of article, the portfolio manager shall be entitled to engage in

any of the following activities provided that it is granted a license/permit by the

Securities and Exchange Organization (the SEO) for any of its areas of activity:

1. a) Upon receipt of the license for portfolio manager services, the company shall,

as per rules, be entitled to:

a-1- making decision to sell, buy, or hold securities for an identified

investor by portfolio manager in the form of specified agreement, to gain

profit for the investor;

a-2- accept to be a body in mutual fund;

a-3- other activities which a portfolio manager can operate according to

SEO’s rules and regulations;

1. b) Upon receipt of the license for investment advisor, the company shall be

entitled to carry out the activities specified in the relevant rules.

1. c) Upon receipt of the license for financial data processing, the company shall be

entitled to carry out the activities specified in the relevant rules;

1. d) Upon receipt of the license for offering or listing advisory services, the

company shall be entitled to carry out the activities specified in the relevant rules;

1. e) The company shall, in line with the activities listed in this article and within the

context of the regulations of the present articles of association, be authorized to

receive loans (facilities) or acquire assets or make investments or establish an

independent legal entity or participate in the founding of other legal entities or

open banking letters of credit to engage in imports and exports of goods and

accomplish the relevant customs formalities. Such actions shall only be authorized

when they are essential to be carried out in line with the company’s areas of

activity and are not prohibited by law.

1. f) The Company shall be allowed to invest in securities with regard to the limits

set by the SEO.

۲.۴.۴. Financial Data Processing Company

According to the Regulations Governing the Establishment and Activity of the Financial

Data Processing Company and the sample of article, Financial Data Processing Company

shall be entitled to engage in any of the following activities provided that it is granted a

۳۳

license/permit by the Securities and Exchange Organization (the SEO) for any of its areas

of activity:

Upon receipt of the license for financial data processing, the company shall, as per rules,

be entitling to:

1. a) Main area of activities is as follows:

۱- Collect and process data and offer information to others or to issue it by

multimedia, board, electronic devices, letter, brochure or address;

۱-۱- information related to securities (including specifications and

characteristics of securities, specifications of issuer, specifications of

persons who are responsible in issuing securities’ process and name their

responsibilities and specifications of securities’ owner and their

ownership);

۱-۲ the information of securities trading (including price, specification of

transactions parties, time and date of deal, and the amount of securities

which in traded)

۱-۳ the information of securities orders (bid or ask) (including type of

order, fees, time and date of order)

۱-۴ the information of issuer (including financial and other information)

۲- Collect and process other financial, economic and commercial data to

offer to investors, researchers and other persons or to issue them by other

ways;

۳- Design, calculate and issue and selling different type of financial and

economical indices of Iran or other countries;

1. b) The secondary areas of activity are as follows:

۱- Upon receipt of the license for investment advisor, the company shall be

entitled to carry out the activities specified in the relevant rules.

۲- Upon receipt of the license for portfolio manager, the company shall be

entitled to carry out the activities specified in the relevant rules;

۳- Upon receipt of the license for offering or listing advisory services, the

company shall be entitled to carry out the activities specified in the relevant

rules;

۴- The company shall, in line with the activities listed in this article and

within the context of the regulations of the present articles of association,

be authorized to receive loans (facilities) or acquire assets or make

investments or establish an independent legal entity or participate in the

founding of other legal entities or open banking letters of credit to engage

۳۴

in imports and exports of goods and accomplish the relevant customs

formalities. Such actions shall only be authorized when they are essential to

be carried out in line with the company’s areas of activity and are not

prohibited by law.

۵- The Company shall be allowed to invest in securities with regard to the

limits set by the SEO.

۲.۵. Structure of Financial Service Providers

According to the articles of association for financial service providers, they have at least

one governing body and one supervisory body as any other joint stock firms.

Subsequently, functions and responsibilities of these bodies are defined in related

regulations and constitution. Generally there are three separate kinds of bodies including

decision making body (stock holders and Assembly), governing body (board of

managers) and supervising body (inspector). In addition there are some different

specialized committees which are considered in constitutions to provide some service for

different part of the company. It is necessary to mention that there is just one difference

between them and it is about portfolio manager’s body .It has an additional supervising

body and it is trustee. We will define some of its responsibilities.

۲.۵.۱. Stockholders

Stock holders have the power to control the company via different tools. All stock

holders should be approved before establishing an entity by high council (investment

bank) or SEO (other financial service providers). The stock holders indecency and

competency should be perceived by regulators.

۲.۵.۲. Assembly

The powers and functions of the company’s ordinary and extraordinary assembly (general

meetings) shall be the same powers and functions as prescribed in the Commercial Code

and in accordance with the rules and regulations which have been provided in the existing

articles of association for the assembly (ordinary and extraordinary general meetings) of

the private joint stock companies.

The company’s general meetings shall convene in accordance with the provisions of the

Commercial Code as follows:

1. Ordinary general meeting: this general meeting shall convene at least once a

year so as to address the following issues:

۳۵

a- hearing the report given by directors as regards the annual performance of the

previous fiscal year;

b- hearing the report given by the inspector––auditor;

c- Examining and approving financial statements of the previous fiscal year;

d- Approving the amount of distributable profit;

e- Approving the amounts of bonus, attendance fees, salaries and benefits for the

board of directors;

f- Appointing the principal inspector/auditor and alternate inspector–auditor of

the company and their fees;

g- Selecting (a) mass-circulated newspaper (s) to publish the company’s notices;

h- Appointing directors/executives;

i- Issuing securities in the name of company exclusive of convertible or

exchangeable securities with company shares;

j- Other issues which are within the jurisdiction of the ordinary general meeting

in accordance with the Commercial Code.

2. The extraordinary general meeting: this general meeting shall convene at any

time to address the following issues:

a- modifications in the articles of association;

b- Change in the capital sum (increase or decrease);

c- Issuance of convertible or exchangeable securities with shares;

d- Premature dissolution of the company in compliance with the Commercial

Code and the Securities Market Act.

۲.۵.۳. Board of Directors;

The company is run by a board of directors comprising at least 3 and at most 7 principal

members who are elected by the ordinary general meeting from among the shareholders

for a term of two years. The number of board member’s normally ends in an odd number

and the majority of them are constituted of non-executive members. The reelection of

board members for subsequent office-terms shall meet no impediment. The professional

qualifications of board members, whether the principal member or the alternate member

as well as the representatives of the legal entities sitting on the board of directors shall

have to be approved by the Organization as per the procedures prescribed by this

Organization. If the board members, whether natural persons or legal entities, lose their

qualifications, the alternate members shall substitute them. Where the representative of

the legal entity lacks qualifications, the legal entity sitting as a board member shall,

۳۶

within the period of 15 days at the latest, introduce its substitute representative to the

Organization.

The board of directors shall have unlimited powers for any action taken in the name of

the company and for any activities and transactions relating to the company objectives

about which the decision-making is not within the competence of the general meetings.

Such powers are exercised as follows:

1. To act as the company’s representative before the shareholders, all

governmental and non-governmental departments, public institutes, law courts and

other natural persons and legal entities;

2. To approve in-house (internal) by-laws (rules) as proposed by the managing

director;

3. To enforce the approvals of general meetings and approved rules after they

have been communicated;

4. To appoint and remove the managing director and fix his salary and benefits;
5. To make resolutions in respect of establishment and dissolution of agencies

or branches at any location inside and outside the country (Iran);

6. To make all their efforts towards achieving the company objectives in the

most efficient and effective manner;

7. To approve the organizational structure, employment requirements and the

scale of salaries and wages;

8. To approve the annual budget as well as the long-term, medium-term and

short-term plans of the company;

9. To open any type of account with banks and other authorized institutions and

operate it (them) in the name of the company;

10. To fulfill the obligations undertaken by the company against other parties

and safeguard the rights and interests of the company against others;

11. To issue, endorse, accept, pay and protest against the commercial papers;
12. To conclude any type of contract, modify, cancel or revoke it as regards the

movable and immovable properties which are related to the company objectives

and conduct of all activities and transactions stated in article 2 of the present

articles of association as well as addressing all unilateral contracts/obligations;

13. To take decisions on the issues related to registering and transacting all

intellectual rights including any type of patent, trade name or trade mark and

industrial name, intellectual property, goodwill and all presumptive privileges;

14. To deposit in trust any type of documents, deeds, funds or securities

including their return, collection or recovery;

۳۷

15. To receive loans and facilities from banks, corporations and authorized

institutions pursuant to the rules provided in the present articles of association;

16. To mortgage the company assets whether movable or immovable, and release

(redeem) them from encumbrance even on frequent occasions;

17. To institute any civil proceeding or criminal case and defend any pending

case, whether civil or criminal, with any judicial authorities, law courts, public

prosecutor’s offices, special or public non-judicial authorities and Administrative

Justice Tribunal on behalf of the company; to defend the company against any

litigation (action) brought up versus the company, whether criminal or civil with

the judicial authorities or special or public non-judicial authorities and

Administrative Justice Tribunal; to appear in person at police departments and

exercise all the powers required in the course of proceedings from opening to

closing stages including appearance at hearing sessions, raising objection against

the court’s decree, lodging an appeal for revision (Court of Appeal), filing a

second appeal to the Supreme Court, making a protest and a request for rehearing;

to request for compromise and settlement, return of documents, records, dismissal

of the claim or the cause; to bring a claim of forgery, renunciation and, skepticism

about the counterparty’s evidence and return of exhibits and proof of the forger; to

sign the contracts containing the conditions for arbitration or arbitral agreement

and refer the claim or the case to arbitration and appoint and select the arbitrator

(with or without the right to make settlement); to seek the enforcement of the

arbitrator’s final and absolute award; to request for issuance of an enforcement writ

along with follow-up actions; to receive the judgment debt and funds in trust and

chase them up; to appoint the assessor and appraiser; to appoint and remove the

attorney and representative with frequent rights of substitution; to make confession

on the nature of claim, to implead the third party and defend the impleader,

counterclaim and defend against the counterparties; to accept or reject

administration of oath; to seek security on the remedy sought; to recover the loss

arising from offences and other similar issues;

18. To establish the holders of authorized signature in the company and the terms

of reference (scope of powers and functions) of each one of them;

19. To establish the internal control system to ensure the compliance of all

operations towards the company goals and within the framework of laws,

regulations, constitutions and in-house by-laws;

20. To prepare the annual financial statements and the report on the performance

of the board of directors by presenting it to the inspector––auditor;

۳۸

21. To prepare the quarterly (mid-term) financial statements to be presented to

the inspector––auditor;

22. To invite the ordinary and extraordinary general meetings and set the

agendas thereto;

23. To propose any type of reserve/provision in additions to the statutory reserve;
24. To propose distribution of profit (dividend) among shareholders;
25. To monitor the activities and performance of company executives including

the managing director;

26. To propose modification of articles of association to the extraordinary

general meeting;

27. To cooperate with the Organization and the inspector––auditor in the

performance of their functions;

28. To acquire assets, investment, and establish or enter into partnership to

establish various companies and other entities towards performance of duties and

realization of company goals;

29. To open letters of credit (LCs) and accomplish all customs affairs to clear the

commodities which are required towards achievement of company objectives;

30. To cooperate with international communities/bodies and join the respective

regional and global organizations;

31. any powers and functions which, pursuant to the provisions of the Securities

Market Act and relevant rules, have been and shall be deemed to be within the

scope of the powers and functions of the board of directors.

۲.۵.۴. Inspector;

The inspector––auditor is entrusted with the following functions and responsibilities in

addition to the functions and responsibilities prescribed in the Commercial Code for the

joint-stock companies, the Securities Market Act, articles of association and other rules

and regulations in force:

۱) To make comments on the company’s annual financial statements in

compliance with the auditing standards and national accounting;

۲) To make comments on the accuracy of the information provided in any type of

report that the board of directors has presented to the general meeting;

۳) To present reports to the general meeting in respect of the adherence or nonadherence

to the rules and regulations by the company’s directors and staff

members during the fiscal year;

۳۹

۴) To examine the company’s internal control systems during each fiscal year and

prepare a report thereon including the comment on the efficiency of the internal

control system, cases of breach, suggested amendments and present them to the

board of directors and auditing committee.

۲.۵.۵. Trustee;

According to Article 18 of “The Regulations Governing the Establishment and Activity

of the portfolio manager”, In order to commence the portfolio managing activities, the

portfolio manager shall have to choose at least one legal person whose eligibility is

acceptable to the SEO as trustee and conclude a contract with it. The trustee’s functions

and responsibilities as well as its fee shall be established in the contract signed between

the portfolio manager and the trustee pursuant to the provisions herein. The portfolio

manager shall have to immediately deliver a copy of the contract to the trustee and

submit a copy of the same to the SEO for registration within two business days after the

contract has come into effect.

In addition, Article 21 of “The Regulations Governing the Establishment and Activity of

the portfolio manager” specifies: The trustee shall have to exercise regular control to

ensure that the portfolio manager:

1. Abides by the portfolio management contracts that the portfolio manager has

signed with its clients, whether or not the trustee’s position has been accepted in

such contracts;

2. Complies with the regulations on the establishment and activities of the

portfolio management firms;

3. Complies with the rules that the SEO has delegated its regulatory functions to

the trustee as a party to the contract with the portfolio manager;

Additionally, if the trustee detects any violation of the foregoing issues, it shall

have to report the matter to the SEO and shall simultaneously give notices

required for rectification to the portfolio.

۲.۶. Supervision on Financial Service Providers;

۲.۶.۱. Supervision before Issuing Establishment/Business License

According to the rules and regulations governing the operations of financial service

providers there are 2 phase of supervision for every financial service providers. Phase one

is before receiving the business license. They are mostly similar in this phase. There are

۴۰

some delicate differences in the process of issuing license to investment banks that is

going to be clarified as below.

In order to establish an investment bank, the regulations governing the operations of

investment bank which is approved by the Securities and Exchange High Council on

۲۰۰۷ specifies: the founders shall first receive establishment license from SEO and they

have to fulfill some requirements and have some specifications. The founders shall first

submit their applications along with the following documents and information to the

Organization for the purpose of founding such entity:

۱- The proposed name covering the name of the “Investment Bank”;

۲- Type of the legal entity designated by the founders to establish the entity

which may be in “the form of Joint-Stock (Public or Private) or Public Joint-Stock

Cooperative with registered shares” as well;

۳- The entity’s draft articles of association;

۴- The entity’s capital and the method of funding which includes a timetable for

raising capital, forecasted composition of shareholders, the percentage of the

entity’s capital subscribed and paid by founders, percentages of cash and non-cash

funds by founders and details of non-cash fund;

۵- Full particulars of identities, domiciles and records of founders and their

representative;

۶- The entity’s business plan which includes objectives, strategies, the entity’s

plan for three years after establishment, a forecast balance sheet for one full fiscal

year and forecast profit and loss statement for two full fiscal periods after

establishment; “

The entity’s major shareholder shall have to be approved by the Organization

before its establishment. After the Council’s approval of the entity’s formation has

been communicated, the founders shall, within the specified time-limits below,

have to register the investment bank with the Companies Registration Authority.

Failure to do this will result in the revocation of the foundation license. If the

formation of the entity is subject to initial offering of the entity’s shares, nine

months after notifying the foundation license to founders. In cases other than item

six months after notifying the issuance of the foundation license to founders. Upon

convention of the founder’s general meeting of the investment bank, the founders

shall have to submit the required documentation to the Organization so as to issue

the entity business license if the following conditions have been fulfilled:

1. a) The conditions set out by the Council should have been met;

۴۱

1. b) The entity’s articles of association should have been approved by the

founder’s general meeting in conformity with the procedures adopted by the

Organization;

1. c) The Organization’s approval indicating that the first part of article 29 of the

Securities Market Law has been observed;

1. d) The entity’s paid-up or subscribed capital ensures that the requirement for

minimum capital of investment banks has been fulfilled;

1. e) The lease contract or ownership title deed of the entity’s domicile should

have been produced to the Organization.”

About other financial service providers it is necessary to mention that they pass their

establishment process totally under supervision of SEO and their request would not be

rendered to Securities and Exchange High Council.

The formation of any legal entity/person using for its name the two words which shows

they are operating as a financial service provider shall be subject to issuance of a license

by the SEO. Every founders of a financial service provider have to submit its application

to the SEO. Accordingly, engagement in the activities shall be subject to obtaining a

business license from the SEO under paragraph 1 of article 49 of the Securities Market

Act. The SEO shall, as per the article 52 of the Securities Market Act have to bring

prosecution against the persons that engage in such advisory activities without obtaining

the required license.

۲.۶.۱.۱. Requirements to Grant the Establishment License

In order to obtain a license to establish the financial service provider or to convert an

existing firm into the financial service provider, the applicant shall, as the case may be,

have to submit the following documents and information to the SEO for due

consideration:

1. a) For obtaining a license to establish the investment financial service provider:
2. The completed application form designed for issuance of a license to

establish;

2. The draft constitution with all pages signed by the applicant;
3. The business plan including the company’s objectives, strategies and plans

for three years after its formation as well as the balance sheet and statement of

profit (loss) forecast for one full solar year after its formation with all pages

signed by the applicant;

4. The completed questionnaire containing the particulars of the candidate

running for the managing director or membership in the board of directors of the

۴۲

company pursuant to the regulations governing the certification of the professional

qualifications of financial institutions’ directors.

1. b) for obtaining a license to convert the existing firm into the financial service

provider:

1. the completed application form designed for conversion of an existing firm

into the financial service provider;

2. the constitution or memorandum of partnership of the applicant company;
3. copies of the documents proving that the applicant company has been

incorporated with the Companies Registration Authority (including the

establishment notice published in the State Gazette);

4. the copy of the notice published by the State Official Gazette relating to the

last company’s directors, holders of authorized signature and their scope of

powers;

5. the audited financial statements for the recent two years of the applicant

company containing the auditor’s opinion;

6. the business plan and blueprints of the applicant company for three years

after its conversion into financial service provider company as per the forms

prescribed by the SEO as well as the balance sheet and the statement of profit

(loss) forecast for one year after conversion;

7. The completed questionnaire containing the particulars of the candidates

running for the positions of company directors after its conversion into one of the

financial service provider companies (pursuant to the regulations governing the

certification of the professional qualifications of financial institutions’ directors).

Requirements for agreement with the formation of a financial service provider company:

1. The draft constitution shall be presented as per the form approved by the SEO;
2. The capital which is to be paid up at the time of establishing the company shall

be equivalent to or above 20 billion Rials;

3. the founders and their related parties shall not, severally or jointly, be regarded

as a founder or a major partner in another legal entity engaged in the same

activities (unless by stating the reasons and with the approval of the SEO’s board

of directors) and the composition of founders or major partners shall be framed in

a manner that the company shall pursue the goals set for the company;

4. Subject to the documents available with the SEO, the company founders

should not have committed any effective criminal records or wrongdoing;

۴۳

5. The candidates nominated for managing director or membership in the

company board of directors shall be appropriately eligible for such positions under

the prevailing rules;

6. If it has been decided that a portion of the company’s capital be raised in the

form of non-cash, the non-cash capital shall be used in line with the company

objectives and accordingly shall be forecast in the company business plan and

appraised at a reasonable and fair market value;

7. The business plan, objectives, blueprints and projected financial statements

should have been reasonably prepared and appropriately covered the areas of that

activity;

8. The proposed name of the company shall indicate the proper designation and

shall not resemble any other registered names and should not have been chosen in

a misleading manner;

Within a maximum period of 20 business days after formation of the company and its

incorporation with the Companies Registration Authority or after the required changes

made in the existing firm to convert it into the company and filing such changes with the

Companies Registration Authority, the company shall have to deliver the following

documents to the SEO so that it shall, where the conditions set down in the establishment

or conversion license have been fulfilled, register its name with the SEO and shall act to

obtain the business license:

1. The company’s constitution/articles of association;
2. The copy of the notice containing the particulars of directors and holders of

authorized signature in the company and their scope of powers published in the

State Gazette (official newspaper);

3. The registered name, date of registration, place of registration and registration

number with the Companies Registration Authority;

4. The copy of the establishment notice or changes in the company as published

in the State Gazette (official newspaper);

5. The amount of registered capital, the list of partners and the amount of paid-up

capital and the subscribed capital for each (partner);

6. Other documents in support of fulfilling the conditions laid down in the

appropriate license.

۴۴

۲.۶.۲.۲. The Requirements to Issue the Business License

The formation of company or conversion of the existing firm into a financial service

provider company as per the license granted by the SEO in conjunction with its

registration with SEO shall not be regarded as the business license designed for financial

service provider. Thus it shall be required to obtain another separate license from the

SEO to allow for engagement in the financial service provider activities. The legal

entities may, upon completion of the appropriate form, apply for issuance of the financial

service provider license in satisfaction of the obligations set forth below:

1. the applicant has already obtained a license(s) from the Organization to

establish one of financial service providers companies (which is not the one

requested for that now) or a license for conversion into one of such financial

institutions and has been incorporated as a legal entity with the Companies

Registration Authority with the Organization’s approval and does not engage in

any other main activity outside its/their own areas of activity;

2. the applicant has already required manpower and has allocated the space,

proper office equipment and computer software;

3. if the applicant intends to engage merely in the investment advisory tasks, his

registered and paid-up capital shall be equivalent to or above 20 billion rials or, at

the SEO’s discretion, the revaluation of the assets used in the financial service

provider activities shall result in the appreciation of shareholders’ equity for an

amount exceeding 20 billion rials;

4. in the event that the applicant engages in another/other type(s) of activity (ies)

and his total shareholders’ equity, based on the financial statements of the latest

fiscal period and the trial balance of his accounts at the time of applying for

business license, is less than 50 billion rials , his capital shall at least equal the

total capital referred to in paragraph 3 above and the given capital for the said

activity (ies) or, at the SEO’s discretion, the revaluation of the assets used in the

investment advisory services shall result in the appreciation of the shareholders’

equity for an amount exceeding20 billion rials plus the minimum given capital for

the said activity(ies).

۴۵

۲.۶.۲. SUPERVISION AFTER ISSUING BUSINESS/ACTIVITY LICENSES

According to article 2 of Securities Market Act of the Islamic Republic of Iran, SEO

along with Securities and Exchange 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 Securities Market Act and related

laws and regulations. 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.

Later, SEO issued a circular whereby all the financial service providers, have to render

and submit financial information through CODAL with SEO. It would be described in

more detail later in this part.

With regard to financial institutions, it’s Deputy for Supervision on Financial Institutions

that is in charge of implementing mentioned objectives. So, specific plans are scheduled

on an annual and periodic 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.

۲.۶.۲.۱. Transparency, fairness and efficiency

The first step toward having a transparent, fair and efficient market of securities in

respect of financial service providers is timely presenting of financial reports to SEO.

Financial service providers have to present their annual and semiannual financial reports

through CODAL just for the use of SEO but if they are issuer or affiliated by an issuer,

their reports would be divulged to the public at the same time.

۲.۶.۲.۲. Supervising the proper enforcement of rules and regulations

۲.۶.۲.۲.۱. On-site inspection

SEO has the authority of visiting financial service providers’ offices and in case they

have lost the required conditions it would be considered violation and would be pursued.

There are some requirements, as mentioned above, that must be observed at the whole

۴۶

life of financial service providers including minimum capital, staff, space and equipment.

In some situations when financial service providers take new licenses have to upgrade

their standards in order to comply with new requirements.

۲.۶.۲.۲.۲. Capital Adequacy Control

That group of the financial institutions which are authorized to undertake the following

obligations shall have to calculate the adjusted current ratio and the adjusted liabilities/

debt ratio as described in The Regulations Governing the Requirements for the Capital

Adequacy of Financial Institutions, before they undertake obligations:

1. Subscription or underwriting to buy securities of any type including the grant

of put option to other party in non-organized markets;

2. To guarantee the refund of principal amount of or the minimum profit from

investment;

3. To launch market- making with a guarantee of securities liquidity;
4. To grant any type of call option to other party in the non-organized markets;
5. To guarantee or undertake to pay or meet the debt or obligation of other party

including the contingent debt or obligation of other party before third parties the

amount of which shall, on the basis of the last audited financial statements

(whether annual or periodic/interim) be higher than one percent of the total assets

of the financial institution or higher than ten billion rials, whichever is lower;

6. Any type of obligation or debt the amount of which shall, on the basis of the

last audited financial statements (whether annual or periodic/interim) be higher

than one (1%) percent of the total assets of the financial institution or higher than

ten billion rials, whichever is lower.

The mentioned commitments are usually taken by investment banks. Because the risks

accepted by them must be controlled, they are obliged to send their monthly trial balance

and list of commitments in detail including market making and underwriting to SEO.

These documents have been signed by the CEO of the entity and confirmed by auditing

committee beforehand. SEO then work out the argued ratios and in case of facing any

infringement necessary actions would be taken.

۲.۶.۲.۲.۱. On-Line inspection

Because the Assets under Management (AUM) Portfolio managers may be altered and

fluctuated continuously, the inspection process must be timely and appropriate. Portfolio

managers AUM is monitored through approved software and main issues which are

specified in regulation and contract would be recognized and controlled resultantly. The

issues such as fee and loads, returns (MWRR and TWRR), portfolio combination and

buying and selling actions are illuminated through software and being accountable would

significantly prevent any probable violation.

۲.۶.۲.۲.۷. 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 financial service provider bodies. The financial

service providers’ auditor/inspector has to announce any detected violation to SEO as

soon as getting aware.

. If a probable violation of rules and regulations is suspected in a financial service

provider, regardless of how it is discovered, the Deputy for Supervision on Financial

Institutions is in charge of following it up. The first step in following up is to ask the

violator to be accountable for the issue. Since the inspector has the responsibility to carry

out a consistent supervising for rules compliance by the financial service providers, he’s

usually asked for the response too. The responses received by the Deputy for Supervision

on Financial Institutions get due diligenced 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 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. SEO has the capability of fining 250

million Rials the appropriate violators, in case of infringing the articles of associations.

From April 2014 to April 2015, the Deputy for Supervision on Financial Institutions has

reported 9 violation cases to the Deputy for Offence Prosecution and 13 written cautions

have been issued by SEO.