Supervision on Financial Service Providers

 

 

 

Supervision on Financial Service Providers

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

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;

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.

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

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;

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.

۶-۱-۲- 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).

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.

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.

۶-۲-۲-  Supervising the proper enforcement of rules and regulations

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

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.

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.

۶-۲-۲-۳- 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.

۶-۲-۲-۴- 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.