INTRODUCTION TO

METHODOLOGY
FOR SUPERVISING
FINANCIAL INSTITUTIONS AND
ASSOCIATIONS

2015
DECEMBER

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 Contents

Preface 3
1. Mutual Funds 4
2. Financial Service Providers 27
3. Brokerage Firms 48
4. Investment and Holding Companies 62
5. Associations 67

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Preface
Iran has always been a pioneer and innovative in developing and introducing new
financial institutions, instruments and markets in the region. Tehran Stock Exchange was
first incorporated in 1967 and since then has always been one of the well diversified
capital markets that have made it appealing and attractive for investors. Although The
Law for the Establishment of the Stock Exchange was approved by the parliament in
1966, Securities Market Act codification in 2005 was a real turning point in our capital
market history. It separated money market from capital market and provided the
opportunity for several new participants to be created and developed in our market.
Subject to this law, three under surveillance of SEO’s entities were specified and
introduced to the market. This triangle is composed of financial institutions, associations
and issuers. The first two mentioned bodies are under this department supervision and
would be elaborated on in this context. Because of diffusion and diversifications of
financial institutions, they are categorized in four different classifications including
Mutual Funds, Financial Service Providers, Brokerage Firms and Investment and Holding
Companies. Eventually the three registered associations which actually play a pivotal role
in our market are elaborated on.

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1. Mutual Funds
1.1. 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.

1.2. 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’.

1.3. 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:

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 - 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.

1.4. 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

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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

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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:

1- In most Funds, if an investor redeems the fund units, the redemption would
be on the basis of redemption NAV.
2- Some mutual funds, majorly fixed income funds, distribute dividends on a
regular basis namely monthly and quarterly to their investors.
3- In charity funds, investors can allocate all or a portion of profits to charitable
activities in the manner described in the fund prospectus.

1.5. 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.

1.6. 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,

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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.

1.6.1. BODIES COMMON IN ALL KINDS OF MUTUAL FUNDS

1.6.1.1. 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.

1.6.1.2. 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:

1. Policy-making and formulation of the fund's investment policy and decision-

making 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;
2. 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,

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redemption and net assets value of each of the fund's investment units as per the
articles of association;
3. Other functions and powers delegated by the fund manager.
In addition, other functions and responsibilities of the manager are set out as
follows:
1. 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;
2. 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;
3. 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;
4. 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;
5. To appoint the fund's broker or brokers and supervise the optimum execution
of the fund's securities purchase and sale orders by them;
6. To notify the trustee of the fund's securities transfer among its brokers within
two business days at the latest after performance;
7. To inform the registrar concerning the monies paid to each one of the
investors within one business day at the latest after each payment;
8. 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;
9. 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;
10. To handle the common questions raised by investors;
11. To procure the required software and hardware and apply them towards
achievement of the fund's objectives;
12. To initiate a publicity campaign to introduce the fund to the public this is, if
necessary, exercised at his own discretion;
13. To act as the fund's representative with the investors, all governmental and
non-governmental departments, judicial authorities and other individuals and
entities;

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 14. 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.

1.6.1.3. 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.

1.6.1.4. 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.

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1.6.1.5. 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.

1.6.1.6. 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 fully-
authorized 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.

1.6.1.7. 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

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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.

1.6.2. 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.

1.6.2.1. 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.

1.6.2.2. 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

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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.

1.6.2.3. 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.

1.6.2.4. 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.

1.6.2.5. 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.

1.6.3. 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

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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.

1.6.3.1. 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.

1.7. 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.

1.7.1. 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

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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;

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 - 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.

1.7.2. 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

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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.

1.7.2.1. 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
20 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.

1.7.2.2. Supervising the proper enforcement of rules and regulations

1.7.2.2.1. 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
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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.

1.7.2.2.2. 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.

1.7.2.2.3. 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.

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1.7.2.2.4. 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.

1.7.2.2.5. 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.

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1.7.2.2.6. 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.

1.7.2.2.7. 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.

1.7.2.2.8. 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

20
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.

1.7.2.2.8. 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
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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.

1.8. Mutual Funds in Charts

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2. Financial Service Providers
2.1. 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.

2.2 Definition

2.2.1. 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
18 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.

2.2.2 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

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hold of securities; comment on the price trend or offer and bid of securities in the future
and comment on the securities value (price).

2.2.3 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;

2.2.4 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 a defined agreement to its clients.

2.3 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)

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 - 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

2.4. Purposes of Financial Service Providers

2.4.1 Investment bank

According to the rules governing the operations of investment bank, the Investment bank
operates in the following areas:

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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.
b) The secondary areas of activity include:
1- Providing consultancy in the areas such as:
1-1- The optimal method and proposed schedule for financing and the
amount of required funds as well;
1-2- The procedure and scheduled suggestion for securities offering;
1-3- The price of securities offered by the issuer;
1-4- The procedures of securities registration and obtaining a license for
offering them;
1-5- The process of securities transfer;
1-6- Listing of the issuer's securities on any Exchange and accomplish all
procedures thereon on behalf of the issuer;
1-7- Merger, acquisition, organizational and financial restructuring of
entities;
1-8- Risk management affairs;
1-9- Preparing entities to be rated by rating agencies and performance of
all procedures thereon on behalf of them;
1-10- Investment affairs;
1-11- The services required by companies with respect to new
investments, development, completion, planning, budgeting and securities
valuation.
2- Marketing and/or managing the process of securities transfer;
3- Accomplishment of procedures on behalf of the issuer in respect of
securities registration and obtaining license for offering them;
4- Providing services relating to design and issue of financial instruments
for companies;
5- Providing assets management services;
6- Providing services relating to mutual funds and managing such funds
and investment in them;
7- Brokerage;
8- Broker/dealership;
9- Portfolio management;
10- Market-making;

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 11- 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;
12- Attracting the support of banks, insurances, credit and finance
institutions and financial institutions for the company in subscribing the
securities;
13- Giving assistance to companies in providing the credit and financial
resources;
14- Providing assistance towards issuance, confirmation and acceptance of
letters of guarantee.

2.4.2. 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:

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;
B) Upon receipt of the license for portfolio management, the company shall be
entitled to carry out the activities specified in the relevant rules.
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;
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;

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2.4.3 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:
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;
b) Upon receipt of the license for investment advisor, the company shall be
entitled to carry out the activities specified in the relevant rules.
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;
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;
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.
f) The Company shall be allowed to invest in securities with regard to the limits
set by the SEO.

2.4.4. 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

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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:

a) Main area of activities is as follows:

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

multimedia, board, electronic devices, letter, brochure or address;
1-1- 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);
1-2 the information of securities trading (including price, specification of
transactions parties, time and date of deal, and the amount of securities
which in traded)
1-3 the information of securities orders (bid or ask) (including type of
order, fees, time and date of order)
1-4 the information of issuer (including financial and other information)
2- Collect and process other financial, economic and commercial data to
offer to investors, researchers and other persons or to issue them by other
ways;
3- Design, calculate and issue and selling different type of financial and
economical indices of Iran or other countries;
b) The secondary areas of activity are as follows:
1- Upon receipt of the license for investment advisor, the company shall be
entitled to carry out the activities specified in the relevant rules.
2- Upon receipt of the license for portfolio manager, the company shall be
entitled to carry out the activities specified in the relevant rules;
3- 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;
4- 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
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 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.
5- The Company shall be allowed to invest in securities with regard to the
limits set by the SEO.

2.5. 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.

2.5.1. 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.

2.5.2. 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:
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 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.

2.5.3. 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,

35
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;

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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;

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 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.

2.5.4. 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:
1) To make comments on the company's annual financial statements in
compliance with the auditing standards and national accounting;
2) 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;
3) To present reports to the general meeting in respect of the adherence or non-
adherence to the rules and regulations by the company's directors and staff
members during the fiscal year;

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 4) 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.

2.5.5. 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.

2.6. Supervision on Financial Service Providers;

2.6.1. 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

39
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
2007 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:
1- The proposed name covering the name of the "Investment Bank";
2- 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;
3- The entity's draft articles of association;
4- 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;
5- Full particulars of identities, domiciles and records of founders and their
representative;
6- 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:
a) The conditions set out by the Council should have been met;

40
 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;
c) The Organization's approval indicating that the first part of article 29 of the
Securities Market Law has been observed;
d) The entity's paid-up or subscribed capital ensures that the requirement for
minimum capital of investment banks has been fulfilled;
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.

2.6.1.1. 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:
a) For obtaining a license to establish the investment financial service provider:
1. 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

41
 company pursuant to the regulations governing the certification of the professional
qualifications of financial institutions' directors.
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;

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 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.

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2.6.2.2. 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).

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2.6.2. 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.

2.6.2.1. 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.

2.6.2.2. Supervising the proper enforcement of rules and regulations

2.6.2.2.1. 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

45
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.

2.6.2.2.2. 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.

2.6.2.2.1. On-Line inspection

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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.

2.6.2.2.7. 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.

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3. Brokers
3.1. Introduction
Brokers are legal entities that buy and sell securities, commodities or securities based on
commodities for customers and provide other services related to capital market. Doing
brokerage activities requires not only getting establishing and activity license from SEO
but also registering with Securities and Exchange Brokers Association and related
Exchanges. Brokers can do their best to buy and sell securities and commodities for
customers in Stock Exchange and OTC markets because of their predomination on rules
and conditions. Because of the importance of brokerage companies’ activities and the fact
that investors do buying and selling through brokerage companies, there are some
restrictions and rules for controlling conflict of interests of managers and clerks of
brokerage companies. SEO examines the scientific, experimental, general and
educational competence of all brokerage companies' CEO and board of directors.

All brokerage companies’ transactions are fulfilled by means of traders. The traders are
supposed to have professional certificates that these certificates show the domination on
required scientific issues and rules. Professional and sophisticated investors such as
experts who are experienced and familiar with financial issues like economic conditions,
Securities market and different commodities markets can use on-line trading systems
provided by Brokers and do transactions on their own accounts.

3.2. DEFINITION
According to paragraph 13 of article 1 of Securities Market Act a broker is defined as a
legal entity that engages in the securities transactions in the name of other persons and for
their account.

3.3. Rules and regulations

There are different acts, laws and regulations which determines the activity framework of
Brokers as follows:

1. Security Market Act of Islamic Republic of Iran

2. the Law for Development of New Financial Instruments and Institutions
3. The Regulations Governing the Internal Controls of Brokerage Firms
4. The Regulations Governing The Rating of Tehran Stock Exchange Brokers

48
 5. Regulations Governing the Establishment License and Operations of Brokerage
Firms on the Exchange
6. The Regulations Governing the Rating of Iran Commodity Exchange Brokers
7. The Disciplinary Regulations Governing The Brokers
8. The Regulations Governing the Functions and Powers of Iran Commodity
Exchange Company Regarding the Member Brokerage Firms
9. The Regulations Governing the Requirements for the Capital Adequacy of
Financial Institutions
10. The Regulations Governing the Functions and Powers of Tehran Stock Exchange
Company Regarding the Member Brokerage Firms
11. The Requirements for the Brokers' Activities on the Iran Commodity Exchange
12. The Bylaw on the Broker's Licensing and Operations (as a Legal Entity)
13. The Regulations Governing Advertisements by the Brokerage Firms
14. Furthermore, Brokers shall comply with circulars. SEO has issued 36 circulars for
brokers since the beginning of 2012 and there has been issued more 6 circulars for
all the financial institutions including brokers.

3.4. Purpose of brokers

The Brokers shall be permitted to engage in any one of the following activities provided
that it is licensed by the Organization for any one of such areas :
The brokerage, broker/dealership and market-making services which include : trading in
securities such as shares, stocks, participation bonds, preemption rights, options and
futures contracts for others and on their account or in the name and on the account of its
(his) own ;transactions on listed commodities for others, on their behalf and on their
account ;market-making of securities and listed commodities. Financial and advisory
services which include : managing investment funds ; representing the issuer for
registering securities and receiving offering license; marketing to sell securities;
securities management portfolio; providing advisory services and performing all office
procedures for listing securities or commodity on any of the exchanges or OTC markets
on behalf of the issuer or offerer of commodities ; advisory services in the areas
hereunder : securities valuation; sales method and securities offering ; design of
securities ; purchase, sale or storing of securities; investment; risk management; merger,
acquisition, organizational and financial restructuring of companies ; design and
formation of financial institutions.

3.5. Brokers Structure

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The brokerage firms are one of the oldest kinds of financial institutions which have been
operating in Iran’s capital market since 1967 and the oldness of some of them ages more
than 48 years. Because of this rich background they have always been pioneer in our
market. At the moment they have received related permissions for being active in for
different Iranians Exchanges including Tehran Stock Exchange, Farabourse Stock
Exchange, Iran Commodity Exchange and Energy Exchange. All the transacted securities
containing spot and future market instruments and physical goods are handled through
brokerage transactions system either by setting orders or by means of on line transactions
and consequently settled and reimbursed by them.

3.5.1. Shareholders and Shares Transfer

Any type of shares transfer or new shares subscription by the buyer or his representative
shall be notified to SEO beforehand and approved by it.

3.5.2. General Meetings

General meetings in brokerage firms play an important role in controlling and supervising
the entity including chief executive manager, staffs and other executive and supervisory
bodies. The powers and functions of the company's general meetings are mentioned as
follows:

1. Functions and powers of the ordinary general meeting:

a- Hearing the report given by directors as regards the annual performance of
the company;
b- Hearing the report given by the inspector––auditor;
c- Decision-making on the annual financial statements of the company;
d- Decision-making on the amount of distributable profit;
e- Decision-making on 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- Approving the company annual budget and short-term, mid-term and long
term plans;
h- Appointing directors/executives;
i- Decision-making on issuing securities in the name of the company
exclusive of convertible or exchangeable securities into/with the company
shares;

50
 j- Selecting (a) mass-circulated newspaper (s) to publish the company's
notices;
k- Other issues which are within the competency of the ordinary general
meeting in accordance with the Commercial Code.

2. Functions and powers of the extraordinary general meeting:

a- Modifications in the articles of association with endorsement or approval of

the Organization;
b- Change in the capital sum (increase or decrease) as per the rules;
c- Decision-making on issuing convertible or exchangeable securities
into/with the company shares;
d- Premature dissolution of the company in compliance with the Commercial
Code and the Securities Market Act.

3.5.3. 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 is normally an odd number. The
reelection of board members for subsequent office-terms shall meet no impediment. If the
number of company shareholders exceeds 50 persons, the ordinary general meeting shall
have to elect at least two alternate members for the board of directors so that in the case
of death, resignation or dismissal of each one of the principal members, they can be
replaced by the alternate member in the manner determined by the ordinary general
meeting. The office-term of the substituted alternate members shall be equal to the term
remained for each individual member of the board who has been replaced by the alternate
member.

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

51
Any of the board members shall have to own the number of company's (which normally
differs from 1 to 10.000 shares) during his entire office-term and shall deposit them with
the company fund as a security to guarantee the compensation for the loss that the
company may incur due to the negligence of its directors severally and jointly. Such
shares are registered and non-transferable and as long as a director has not received his
settlement receipt (quittance) for his office-term in the company, the given shares shall
remain as security in the company fund. The shares as used for security purpose shall not
prevent the shareholders from voting at the general meetings and payment of the
dividends thereon to them.

The board of directors shall establish the procedures for holding their meetings. The
board of directors shall hold meetings at the times deemed proper when the intervals do
not exceed one month at the written invitation of the chairperson or vice-chairperson
and/or two board members, and, where necessary, at the managing director's invitation as
well. There shall be a reasonable interval between the date of sending invitations and the
time of holding the board meeting. If, at any of the board meetings, the date of the next
meeting is set and recorded in the minutes, it shall not be required to send invitations to
the directors who have attended the same meeting. The board meetings shall be held at
the company's headquarters or at any other location which has been indicated in the
letters of invitation.
Some powers and functions exercised by the board of directors are 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;

52
7. to approve the organizational structure, employment requirements and the
scale of salaries and wages;
8. to prepare 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 before 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;
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, lawcourts,
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

53
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;
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 addition 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 with the inspector––auditor;

54
 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
the company objectives;
30. 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.

3.5.4. Inspector/Auditor
The ordinary general meeting shall have to elect a principal inspector––auditor and an
alternate inspector––auditor each year from among the auditing firms trusted by the SEO
so that it (he) could, upon assumption of the post, perform the functions prescribed in the
relevant laws and regulations as well as in the articles of association. It is mandatory to
abide by the rules for reelection and removal of the inspector––auditor. 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:
1) To make comments on the company's annual financial statements in
compliance with the auditing standards and national accounting;
2) 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;
3) To present reports to the general meeting in respect of the adherence or non-
adherence to the rules and regulations by the company's directors and staff
members during the fiscal year;
4) 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;
5) To prepare special reports on the company as demanded by the Organization.

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3.6. Supervision on Brokers

3.6.1. Supervision before issuance of business license

There are some requirements for interested applicants of brokerage licenses which are
mainly extracted by article 29 of Securities Market Act. Specifically, SEO is liable for
exercising qualifications of board members, area of activity of articles of associations,
minimum capital, financial reporting and special auditing report.

The Securities and Exchange Organization (SEO) shall determine the number of issuable
licenses for the purpose of establishing brokerage firms or type of activity and shall, in an
application call, invite the applicants for establishing brokerage firms or obtaining the
business license on the appropriate Exchange to submit their information and documents.
The range of services to be rendered, the appropriate Exchange and other conditions shall
be included in such call. The time-limits for establishment of the brokerage firms,
obtaining eligibility requirements to start activities and practical commencement of
operations to start activities and practical commencement of operations as per the issued
license shall be four months as of the priority service date.

The scores of applicants, shall, in respect of the total scores, be based on the following
factors:
A) Capital: For cash capital one point for each one billion Rials with a
maximum of 30 points on the condition that the applicant obtains at least 20
scores from this factor.
B) Founder's Characteristics: The scores of founder's characteristics shall be
the total scores for natural and legal founders where each one is calculated as
follows:
B-1) Legal Founder: The maximum scores of brokerage firm founders that
enjoy legal entity shall total 35 scores. The scores allocated for each one
of the founders shall be calculated on the basis of appendix 1 herein.
B-2) Natural Founder: The maximum scores of brokerage firm founders
who enjoy natural personality shall total 35 scores.

By the way, the strategic shareholders in brokerage firms who obtain the establishment
license shall not be authorized to transfer their shares in the brokerage firm to another
party for the period of three years as of the establishment date. The transfer of their
shares in the emergency state shall be subject to the Organization's agreement.

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Applicants shall, within the time-limits specified above shall have to take action to
provide the required facilities, personnel and systems endorsed by SEO as described
below for issuance of their business licenses on the appropriate exchange and, if not, their
licenses shall be automatically rendered void.
a) To locate a headquarters for the brokerage firm with a proper surface area
allocated for business or administrative purposes in the name of the
brokerage firm or rented by it.
b) To create a department to receive the clients' orders and recruit and train at
least one specialist for this department in accordance with the prevalent
rules.
c) To create a department for transactions and recruitment of a specialist to act
as administrator of the transactions and a specialist to act as dealer as well
as their training as per the relevant rules.
d) To create a finance department and recruitment of a well-experienced
administrator for this department.
e) To draft the procedures for receiving and executing orders, entering and
keeping accounts preparing the necessary forms as well as designating the
scope of powers and individuals' responsibilities thereon.
f) To purchase and implement accounting and brokerage systems and other
necessary software and present at least one balance sheet of the firm's status.
g) To procure the proper office equipment for the firm's operations.
h) To gain admission to the Association of Exchange Brokers and membership
in the appropriate Exchange.

3.6.2. Supervision After Issuance of Business License

According to SEO’s overall missions and visions the main aims behind brokerage firms’
supervision can be categorized as follows:
Taking necessary measurements in preventing violations of brokers in order to protect
investors’ rights and interest,
- Announcing those kinds of violations that SEO is in charge of pursuing them to
competent authorities,
- Monitoring the strict application of pertinent rules and regulations regarding
brokerage firms
- Drafting and proposing related circulars and directives to the SEO’s board to be
codified.

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 - Collaborating with other organizations for reaching SEO’s designated plans.

Although according to Securities Market Act the duty of supervision on brokerage firms
as a financial institution is specifically delegated to SEO, there is a developed structure of
monitoring system on the mentioned firms including entrusting the exchanges for specific
functions. The related external and internal entities as well as SEO which generally cover
the supervision aspects in a typical brokerage firm may be divided as follows:

- Tehran Stock Exchange

- Iran Commodity Exchange
- Iran Farabourse Exchange
- Energy Exchange and
- Brokers Association
-
It is to be mentioned that each brokerage firm has to obtain separate license from SEO for
being able to be active in every above mentioned Exchanges. After receiving the related
activity licenses then the first step in controlling the brokerage firm is taken by the
pertinent Exchanges. For instance, if a brokerage firm has two different certificates for
giving services in Tehran Stock Exchange and Farabourse Exchange, both the said
Exchanges have structuralized procedures for preventing, detecting and divulging any
violation of rules and regulations to SEO and pursuing the issue to the final results.
Although the Exchanges have sophisticated methodologies for monitoring the brokerage
industry, it does not absolve SEO for fulfilling its own monitoring precedures. In some
cases certain supervisions such as on site visiting is entrusted to the Exchanges but when
it comes to further and deeper analysis, SEO is both authorized and capable of doing the
same investigation in order to extract the needed documents and information.

Since 2007 the brokerage firms are continuously rated by SEO and the outcome is
released in SEO official website to the public. The methodology is adopted by the related
directive called “Regulations governing the rating of Tehran Stock Exchange Brokers”
and “Regulations governing the rating of Iran Commodity Exchange Brokers”.

The criteria for rating the brokerage firms at Tehran Stock Exchange are specifically
mentioned in the regulation. The two most important headlines are Ordinary criteria and
Promotional and disciplinary criteria. Ordinary criteria includes: Administration offices
of brokerage firm, Paid-up capital, Active admission office, Board members and the
managing director, The staff holding certificates, Other staff members, Brokerage system
capabilities, Accounting system capabilities, Internet website capability, Block and non-

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block trades and futures contracts, Number of clients/customs, Acceptance and execution
of clients' e-applications, Scores given by the Tehran Stock Exchange Co, Scores given
by the Association of Stock Exchange Brokers. The Promotional and disciplinary criteria
comprise of Portfolio management, Mutual funds, Listing advice and offering advisor,
Bulk trades, Certificates issued by the SEO, Market-making activities, Call center,
Attraction of foreign customers, Qualified opinion, modified opinion and disclaimer by
the auditor and legal inspector and Violations committed by brokerage firms.

The maximum total score which can be earned by a firm is 304 and minimum is 64. The
brokers that get below the minimum would be suspended. Those within the range are
clustered into 4 classifications including A, B, C and D. The assigned rates are important
when it comes to getting new licenses and renewing the previous licenses. The firms’
have to abide by some requirements and standards that are imposed by SEO to be a going
concern unit, if they do not meet required commitments and qualifications. The final
result of Brokerage firms rating by the end of 2015 (from SEO’s official documents)
shows that 52 firms have got grade A, 34 have got B, and 8 C and D.

The same situation exists when it comes to Commodity exchange. Again the Ordering
criteria includes Offices of brokerage firm, Paid-up capital, Active admission office,
Board members and the managing director, The staff holding certificates, Other staff
members, Brokerage system capability, Accounting system capabilities, Internet website
capability, Transaction value, Number of clients/customs, Scores given by the Iran
Commodity Exchange Co, Scores given by the Association of Stock Exchange Brokers.

The Promotional and disciplinary criteria is composed of Listing advisor, Export trades
value, Acceptance and execution of clients' ,e-applications, Certificates issued by the
SEO, Call center, Number of contracts revoked, Qualified report, disclaimer or modified
opinion by the auditor/legal inspector and Violations by brokerage firms. The total score
gamut is between 57 and 263 and the rated firms are grouped into four different groups
from A to D. This could be mentioned that by the end of 2015 , 12 have got grade A, 34
have got B, and 30 have got C and D.

SEO’s strategy in exercising supervision on financial institutions especially brokers has

recently significantly changed from manually based driven models to automated driven
models. Certain sophisticated software specializing in complex calculations have been
developed to perform this role. They are designed, expanded and run almost completely
domestically by specialized and well acquainted software companies and are supported
by them. Some are SEO’s affiliated companies that enhance spying measurements on
them. One of this assisting software is called SOKNA software that is responsible for

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controlling purchases based on credit for brokers. According to the regulations, Brokers
are allowed to take credit from Banks on behalf their customers and then allocate it to
certified and eligible customers. This technic can significantly improve market turnover
and liquidation if is controlled and implemented cautiously. In order to control the risks
resulted from margin buying, the said software has been come up with to declare certain
alerts that draws either brokers or supervisors’ attention for suitable reactions. If a
brokerage firm grants too much credit to customers that are above firms’ credit line, the
system would send alerting massages that shows urgent corrective actions must be taken.
In other words, the regulator through on line note will announce that the broker has paved
extra steps which need to be restricted. This process will help controlling margin buying
and limiting credits injected to the market. The mentioned system has two roots
interacting with Tehran Securities Exchange Technology Management Company and
brokerage firms’ ledgers. By means of the different provided web services (standard
XMLs) the needed data is extracted from the entities and then is matched accordingly.
The software is linked to Tehran Securities and Exchange Technology Management
Company and Brokerage Firms’ accounting books and is capable of extracting
component of investors’ portfolio and then conforming to credit figures originating from
accounting system. The bigger the credit than market values of assets, the riskier the
investor. It is necessary to argue that there are few order management system (OMS)
providers which are approved by SEO and brokers quench their need through these
companies. So the process of executing the orders and then reflecting the subsequent
effects in accounting system is handled through on line fashion and that’s why it is
possible to control investors’ credit.

Like banking system, all the non-banking financial institutions which are under SEO’s
supervision (those entities that are not permitted to take deposits and give loans) have to
comply with related capital adequacy requirements which are approved and enforced by
SEO. There are two financial ratios including adjusted current ratio and adjusted depth
ratio that have to be controlled and abided by the requirements regularly and on a day to
day basis. Again they are worked out and divulged automatically and once passing the
red lines, the corrective measures must be taken. In periodic on site visiting, the
corroborative documents of the ratios are checked and scrutinized and probable
incompatibilities would be reported for further investigation.

In 2013 a regulation called Regulation of Brokers Internal Control was codified and
executed by SEO’s board members. It apparently obliged Brokers to nominate a
competent and qualified compliance officer to SEO and if he is approved, appoint and
recruit him. His reporting line is directly Brokers Firm board of director and is bound to

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exert monitoring through designated and confirmed methodology to detect possible
infringements and reflect it to competent authorities as soon as possible. To strengthen
his independence, removing the compliance officer is not possible before taking SEO’s
consent. This internal body plays a tremendous role in preventing and identifying
imminent risks and the way to manage it and prevent it from extending to other parts.

The below chart shows the number of accumulated issued licenses to Brokerage Firms
during past 4 years:

License 2012 2013 2014 October 2015

Security 224 225 236 239

Commodity 279 289 337 401

Energy - 39 40 96

Portfolio Management 38 54 61 63

Advisory 185 223 264 144

Online Trading 79 91 94 99

Call Center - 26 58 69

Grand Total 805 947 1,090 1,111

3.6.3. Enforcement
The below chart shows the number of prosecuting of Brokerage Firms for violation of
rules and regulations from April 2014 to November 2015

October October October October 2014-

Action 2011- 2012- 2013- November
October 2012 October 2013 October 2014 2015
prohibition 25 4 2 1
activity suspension 4 2 0 0
Revocation of license 4 4 4 4
reporting to the
Offence Prosecution
Committee 182 163 111 181

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4. Investment/Holding Companies
4.1. Definition
According to paragraph 22 of article 1 of Securities Market Act of the Islamic Republic
of Iran (2005), Parent (Holding) Company means a company that, by investing in an
investee company for gaining profits, acquires sufficient right to vote to elect members of
the board of directors to exercise control over the company operations and/or plays an
effective role in electing the board members. Also, according to paragraph 21 of the same
article, investment companies are specified as a kind of financial institutions but there has
not been a specific definition in that Act. So the other associated regulations have
rendered some clarifications that it can be inferred that Investment Companies are those
entities which devote at least 80 percent of their assets to securities that 70 percent of the
assets must be marketable instruments. It clearly shows that Investment Companies are
not permitted to allocate majority of their assets to affiliates with the aim of taking
subsidiaries’ control.

4.2. Rules and Regulations

There are different acts, laws and regulations about definition, restrictions, reporting

1. Security Market Act of Islamic Republic of Iran

2. Law for Development of New Financial Instruments and Institutions
3. Law for the Fifth Development Plan of the Islamic Republic of Iran
4. Anti-Money Laundering Act;
5. Executive By-Law of the Anti-Money Laundering Act;
6. The Regulations on the Record-Keeping and Reporting Requirements of
Information and Documents by the Regulated Persons/Entities;
7. - The Regulations Governing the Proceedings for Violations Committed by
Persons Mentioned in the Article 35 of the Iran Securities Market Act;
8. Regulations Governing Identifying and Registering Financial Institutions in
Iranian Capital Markets.
9. The Disciplinary Regulations Governing Financial Institutions other than Brokers
10. Furthermore, Investment/Holding companies shall comply with circulars. SEO has
issued 1 circular for Investment/Holding companies since the beginning of 2012
and there has been issued more 6 circulars for all the financial institutions
including Investment/Holding companies.

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4.3. Supervision

4.3.1. Supervision before Issuing Business/Activity Licenses

According to Securities Market Act of the Islamic Republic of Iran (2005), among the
functions and powers of SEO is to issue the establishment licenses of financial
institutions. Also, the financial institutions are required to register with SEO. Registration
of Investment/Holding Companies with SEO is supported by the Law for the Fifth
Development Plan of the Islamic Republic of Iran whereby legal entities which already
have been established under the title of financial institutions, and those legal entities with
a financial institution as their main activity area have to register their company with SEO.
The Investment/Holding Companies are one of these financial institutions that have to be
registered with SEO. Also, any changes in their constitutions and their capital need
SEO’s permission. According to the same law, State Organization for Registration of
Deeds and Properties has to refuse to register Investment/Holding Companies without
SEO’s permission.

4.3.1.1. Identification and Registration of Active Investment/Holding

Companies
Most of rules and regulations on Investment/Holding Companies have been enacted over
the recent years. So there are lots of Investment/Holding Companies which are active in
capital market while they are not registered with SEO yet. To regulate them, SEO passed
the Regulations for Identification and Registration of Active Financial Institutions in the
Stock Market with the Securities and Exchange Organization (SEO).
According to the mentioned regulations, any legal person that has not previously been
registered with SEO, under determined circumstances, have to request to be registered
with SEO as a financial institution consistent with its purpose or its name or to be
excluded from mandatory registration as a financial institutions. Over the recent years,
this criteria has made 130 companies with following circumstances to apply for
registration with SEO:
- If the legal person has used for its name one or more designations or titles
exclusive to financial institutions;
- when the legal person has incorporated for the objective in its constitution one or
more activities recognized as exclusive activities of financial institutions which
require the SEO’s license;
- If the legal person is in any manner engaged in the activities which fall within the
exclusivity of financial institutions;

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 - When the legal person allocates over fifty (50%) percent of its assets to investment
in securities or over fifty (50%) percent of its operating income during a fiscal
year has been earned out of the investment in securities with specified conditions.
A legal person, who is considered a financial institution under the above criteria, has to
be registered with SEO as an investment company or a holding company. Registration
with SEO is the first step to regulate Investment/Holding Companies.

4.3.1.2. Professional Qualifications of Directors

In execution of article 29 of the Securities Market Act, the professional qualifications of
any of the natural candidates have to be certified prior to their appointment to the given
positions in each one of the financial institutions, including Investment/Holding
Companies, or prior to acceptance of such positions by them.

In order to certify the candidate's professional qualifications, he has to, in addition to

certification of his general competency; earn the minimum score in the areas of work
experiences, education background and academic qualifications as described in the
regulations.

In regard with the professional qualifications, article 29 of the Securities Market Act and
paragraph E in Law for the Fifth Five-Year Development Plan of the Islamic Republic of
Iran finally led to Regulations on Certifying the Professional Qualifications of Financial
Institutions' Directors whereby the documents and information of candidates for board
member or CEO of a financial institution, including Investment/Holding Companies, are
examined and their professional qualifications are certified. Due to the importance of
professional qualifications of board members and CEO of Investment/Holding
Companies, the "Committee in Charge of Certifying Qualifications" formed comprising
at least 3 members as elected by SEO to carry out the certifying procedure.

4.3.1.2.1. Academic qualifications

In order to evaluate the candidate's academic qualifications, the committee interview with
the candidate. The course titles (topics) used to evaluate his academic qualifications are
described in the regulations. If the candidate holds professional certificates which are
proposed by SEO, his academic qualifications will be certified with no need of interview.

4.3.1.2.2. Conviction or bad records

The secretary of committee takes up the records relating to the candidate's general
competency. Considering if the candidate has any absolute conviction or bad records with

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the authorities of competent jurisdiction including the law-courts, SEO or Self-
Regulatory Organizations, the committee examines the matter and decides on the
rejection or certification of the candidate's general competency.

4.3.1.2.3. work experiences

The candidate's work experiences are assessed by his work experiences in various
positions. Duration of work experience in each position in months, coefficient of
candidate's position and coefficient of business objective at workplace are among the
assessment criteria.

4.3.1.2.4. Education background

The candidate's education background is calculated on the basis of his last academic
degree and his major as described in the regulations.

4.3.1.3. Minimum Capital

According to a resolution by SEO board members, the minimum capital for
Investment/Holding Companies is 100 billion Rials.

4.3.2. Supervision after business/activity licenses

According to Securities Market Act of the Islamic Republic of Iran, Investment/Holding
Companies have to be operating under the supervision of SEO. When an
Investment/Holding Company is established and starts its operation, there will be some
important items that should be considered by SEO in regard with its activities. Timely
reporting and investment constrictions are the crucial items that are monitored by SEO
throughout its operation.

4.3.2.1. Reporting
Supervising Investment/Holding Companies is majorly based on the information that they
issue in their financial statements and performance reports or can be found in the
auditor/inspector report on them. So, as the one of the first steps for supervising
established Investment/Holding Companies, SEO has obligated them to publish the
mentioned reports to SEO or to the public, due to the kind of companies.

4.3.2.2. Investment constrictions

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Any legal person who is registered with SEO as an Investment/Holding Company is
obligated to take the following items into account in its assets composition:

1. It should allocate at least 80 % of its assets to investment in securities;

2. The holding company should allocate at least 70% of its assets to investment in the
shares, equity shares or investment certificates having voting rights in other
companies, enterprises or mutual funds to the extent that it can alone or along with
its regulated persons gain effective influence or control over the investee
companies, enterprises or mutual funds;

3. The investment company should allocate at least 70% of its assets to investment in
the securities whereby it cannot alone or together with its regulated entities gain
effective influence or control over the securities issuer.

The mentioned restrictions are monitored regularly in the audited financial reports of
Investment/Holding Companies and any non-compliance would be followed up.

4.3.2.3. On-site inspection

According to constitutions of Investment/Holding Companies, the company is obliged to
present all the required deeds, documents, information and reports to SEO for carrying
out its functions and legal duties. And it has to be coordinated with SEO inspectors for
inspection of deeds, documents, information and places under the control of the
company. So in some cases, on-site inspections are carried out.

Also, SEO delegates participate in the annual general meeting of the Investment/Holding
Companies. In a general meeting, SEO delegate can discuss different issues with
shareholders and auditor of the company. The delegate usually warns them about the
violations of regulations.

4.3.3. Enforcement
The Deputy for Supervision on Financial Institution reports any non-compliance with the
regulations on reporting or investment restrictions which are committed by
Investment/Holding Companies to Deputy of Offence Prosecution. From April 2014 to
April 2015, one such case has been reported but 15 written cautions were issued for the
companies by The Deputy for Supervision on Financial Institution.

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5. Associations
According to related regulations, there are three different under supervision entities.
These classifications include Issuers, Financial Institutions and Associations. Issuers are
not under this deputy supervision and the elements of supervision on financial institutions
were described beforehand. Now we are going to elaborate some key issues which are
deemed relevant and important in spying on associations. The overall strategy from a
regulator point of view is enhancing market players’ capabilities and empowers them to
observe regulations and make them exert needed supervision if necessary and restrict the
intervention of regulator to the least possible. This strategy is sometimes called market
discipline strategy. The more watchful the market is, the less necessity for regulator to
meddle with. So following this macro policy, Associations have developed and set up to
regulate market professionally and help facilitating market participants’ affair. As would
be elaborated next, setting professional standards, regulating the members’ collaborations
and coordination, drawing up code of conducts and assisting settling disputes are among
main functions of Associations.

5.1. Introduction

According to Article one of Capital Market Act, Association means self-regulatory

organizations of brokers, broker/dealers, market makers, investment advisors, issuers,
investors, etc., duly registered as per the approved guidelines of the Organization, in the
form of non-governmental, noncommercial and non-profit institutes, regulating the
relations between the parties which are engaged in the securities market based on the
present Law. Self-regulatory Organization also means an organization which is allowed
to set and implement professional and disciplinary rules and standards by observing this
Law to regulate professional activities and create discipline in the relations among its
members for good performance of the tasks and duties entrusted to them by this Law.
Associations have one representative in Securities and Exchange High council.

The Act determine that disputes among brokers, broker/dealers, market makers,
investment advisors, issuers, investors and other concerned parties relating to their
professional activities shall be considered by the Arbitration Board in the case(s) when no
amicable solution can be reached in the Associations. So the first place for settling
disputes are Association s’ settlement and resolutions disputes committees and in case of

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incapability of reaching any settlement, then the case would be transferred and referred to
Arbitration Board of Capital Market.

There are three registered financial associations in Iran at the moment including;
Securities and Exchange Brokers Association, Iranian Institutions Investors’ Association
and Association of Investment Companies Bearing Justice Shares. Their establishment
and activities is under SEO’s surveillance and some more details would be explained in
the following context.

5.2.1 Definition

5.2.1.1 Securities and Exchange Brokers Association

According to article 6 of the Securities and Exchange Brokers Association, association of

brokers has been established to achieve the following goals:
1- To help create a fair, competitive and efficient securities market across the
country so as to win the investors’ confidence;
2- To enhance the credibility of the association members and members’ related
parties with the investors;
3- To regulate and promote the professions in which the association members are
engaged;
4- To improve and expand the services rendered by the association members;
5- To increase the professional expertise of the members' related parties;
6- To direct the relationship between the association’s members with one another
and with the members' related parties;
7- To perform the duties which have been or will be entrusted to the association
in accordance with laws and regulations.

5.2.1.2 Iranian Institutions Investors’ Association

According to article 3 of the Iranian Institutions Investors’ Association, this association is

a self-regulatory organization which is non-governmental, non-commercial, non-profit
and non-political and enjoys the juridical personality and financial independence and has
been formed for the unlimited period of time in the execution of article 53 of the
Securities Market Act and on the strength of the regulations governing the formation and
registration of active associations in the securities market and is considered to be one of
the associations defined in paragraph 5 of article 1 of the Securities Market Act.

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The funds of the association are raised through admission fees, membership fees,
members’ deposits, grant-in aids, incomes earned from training courses and research
activities, incomes from bank deposits, participation certificates, certificates of deposit
and/or other resources.

5.2.1.3 Association of Investment Companies Bearing Justice Shares

According to article 3 of the Association of Investment Companies Bearing Justice

Shares, this association is a self-regulatory organization which is non-governmental, non-
commercial, non-profit and non-political and enjoys the juridical personality and
financial independence and has been formed for the unlimited period of time in the
execution of article 53 of the Securities Market Act. This Association has been developed
in accordance with privatization policies with the aim of helping provincial Investment
Companies manage divested assets of the administrative. Portfolio management,
representing Investment Companies in General Meetings and distributing received
bonuses are among main functions of this Association.

The funds of the association are raised through admission fees, membership fees,
members’ deposits, grant-in aids, incomes earned from training courses and research
activities, incomes from bank deposits, participation certificates, certificates of deposit
and/or other resources.

5.2.2 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)
- The Regulations on the Retention and Destruction of Documents in the Capital
Market Concerning Money Laundering Combat(Anti-Money Laundering Supreme
Council on 2011)

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- 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 Securities Market Act of the Islamic Republic of Iran Executive By-law
((approved by board of ministers 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)
- Approved sample of association by SEO

5.3 Purposes of Associations

5.3.1 Securities and Exchange Brokers Association

According to the articles of association of Securities and Exchange Brokers Association,

the association has been established to achieve the following goals:

1- To help create a fair, competitive and efficient securities market across the
country so as to win the investors’ confidence;
2- To enhance the credibility of the association members and members’ related
parties with the investors;
3- To regulate and promote the professions in which the association members are
engaged;
4- To improve and expand the services rendered by the association members;
5- To increase the professional expertise of the members' related parties;
6- To direct the relationship between the associations members with one another
and with the members' related parties;
7- To perform the duties which have been or will be entrusted to the association
in accordance with laws and regulations,
And according to article 7 Association of brokers shall be entitled to engage in the
following activities to achieve its goal and purpose:

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1- To recommend the rules for admission, suspension or cancellation of
membership in the association and the members' related parties to the SEO and
implement them;
2- To monitor the performance of the association members and the members'
related parties and assess their performance within the framework of the rules
aimed to: (a) disseminate information, (b) ensure the enforcement of laws and
regulations, and (c) gain assurance of the maintenance and continuation of
admission requirements and introduction of new conditions during the intervals of
specified periods;
3- To oversee the advertising programs of the association members so as to
prevent the publication of misleading and incomplete information;
4- To draft and implement professional and disciplinary rules and standards for
the association members within the framework of laws and regulations;
5- To resolve the disputes among the brokers, broker/dealers and market- makers
and other parties concerned in execution of article 36 of the Act and within the
framework of regulations;
6- To establish and implement an efficient mechanism to investigate the disputes
among the association members;
7- To direct the relations between the associations members with one another and
with the members' related parties within the framework of the rules for the
operation of paragraph 5 of article I of the Act;
8- To help compile, draft and codify the laws, regulations and by- laws regarding
the association members and securities market;
9- To study continuously the market potential of the services rendered by the
association members and helps to expand this area of service;
10- To propose to the SEO changes in the limits of fees and service rates for the
association members;
11- To propose the employment of new financial instruments in the securities
market so as to diversify the range of services rendered by the association
members;
12- To provide facilities towards developing systematic, specialized and
continuing training for the members' related parties so as to improve their
knowledge and upgrade the quality of their services;
13- To conduct research activities, publish specialist books and journals and make
contribution toward such activities.
14- To organize seminars, training courses, question- answer sessions; to publish
training materials and give interviews with media to make the activities of the

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 association and its members known to the public as well as teaching general topics
related to the securities market;
15- To establish an efficient system to receive information about and solve the
professional problems of the association members and the members' related parties
and protect their independence and professional reputation;
16- To establish liaison between and provide cooperation with the securities
market participants and bodies;
17- To obtain membership in the professional domestic and international
associations, establish contacts and provide cooperation with similar professional
associations in other countries so as to exchange information, use their experiences
and facilitate the overseas activities of association members;
18- To perform other functions which have been or will be assigned to the
association in accordance with the rules.

5.3.2 Iranian Institutions Investors’ Association

According to the articles of association of “Iranian Institutions Investors’ Association”, In

order to enhance the efficiency and effectiveness of the securities market, develop the
professional cooperation among the members and organize the interrelationships between
the parties that are admitted as association members subject to this constitution, the
Association of the Iranian Investment Institutions was established. In order to achieve a
good performance, regulate the professional activities and organize the inter-member
relationships, the association shall draft and implement the necessary professional and
disciplinary rules and standards within the framework of the prevailing laws. The
association is mandated to carry out the following activities:

1. To improve and develop the relationships within the members and with the
SEO, exchanges, OTC markets, central securities depository and settlement
companies and other active institutions in the securities market as well as creating
proper situations to facilitate the investments by members in the stock exchange;
2. To present the data, information and analytical reports within the realm of the
member entities for the conduct of applied research;
3. To build the credibility of members within the community through promoting
the professional ethical standards and encouraging the members to comply with
the laws and regulations;
4. To improve the professional knowledge and expertise of the members’
directors and employees through developing the professional training programs,

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expanding the relations with domestic and foreign educational and research
institutes as well as research conduct and publication of specialist journals;
5. To draw up the necessary guidelines requiring the association members to
enforce the legislation, establish internal control systems, respect the professional
ethics with emphasis on presenting the fair and transparent reports to the securities
market;
6. To exchange views and cooperate with legislators and decision-making
authorities and participate in drafting rules and regulations towards expansion of
the efficient securities market and protection of the investors’ interests and
benefits;
7. To organize conferences, meetings, workshops and training courses to
exchange information and increase the knowledge level of members’ directors and
personnel towards expansion of the securities market in the country;
8. To provide cooperation with societies, associations and similar international
institutions as well as well as the international financial training and research
institutions in the line with developing the presence of the country’s securities
market in the global financial community and possible membership in them;
9. To resolve the disputes within the member and with other persons concerned
arising from their professional activity in the securities market and make
mediatory efforts to settle the possible disagreements within the association’s
members in the enforcement of article 36 of the Securities Market Act;
10. To form the working groups and specialized committees in the association
such as the legal, training and advisory working groups and committees in line
with providing efficient and effective services to the members;
11. To survey the perspectives, business barriers and difficulties of the members
in the securities market and report them to the authorities concerned and present
proposals for removing such barriers;
12. To create and monitor the implementation of principles for professional and
disciplinary ethics within the framework of laws and regulations and internalize
and promote such principles among the members;
13. To enhance the public awareness towards the necessity of collective
participation in the securities market and attempt to expand the investment culture
and financial knowledge among the Iranian households;
14. To monitor the securities market performance and developments to help the
regulatory authority for the purpose of monitoring and regulating an efficient and
fair securities market.

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5.3.3. Association of Investment Companies Bearing Justice Shares

According to the sample of association of “Association of Investment Companies

Bearing Justice Shares”, In order to enhance the efficiency and effectiveness of the
securities market, develop the professional cooperation among the members and organize
the interrelationships between the parties that are admitted as association members
subject to this constitution, the Association of the Iranian Investment Institutions was
established. In order to achieve a good performance, regulate the professional activities
and organize the inter-member relationships, the association shall draft and implement
the necessary professional and disciplinary rules and standards within the framework of
the prevailing laws. The association is mandated to carry out the following activities:

1. To improve and develop the relationships within the members and with the
SEO, exchanges, OTC markets, central securities depository and settlement
companies and other active institutions in the securities market as well as creating
proper situations to facilitate the investments by members in the stock exchange;
2. To present the data, information and analytical reports within the realm of the
member entities for the conduct of applied research;
3. Manage members’ shares and to enforce the stockholders’ rights in assembly
of the investee companies.
4. Manage members’ portfolio of asset
5. To build the credibility of members within the community through promoting
the professional ethical standards and encouraging the members to comply with
the laws and regulations;
6. To improve the professional knowledge and expertise of the members’
directors and employees through developing the professional training programs,
expanding the relations with domestic and foreign educational and research
institutes as well as research conduct and publication of specialist journals;
7. To draw up the necessary guidelines requiring the association members to
enforce the legislation, establish internal control systems, respect the professional
ethics with emphasis on presenting the fair and transparent reports to the securities
market;
8. To exchange views and cooperate with legislators and decision-making
authorities and participate in drafting rules and regulations towards expansion of
the efficient securities market and protection of the investors’ interests and
benefits;

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 9. To organize conferences, meetings, workshops and training courses to
exchange information and increase the knowledge level of members’ directors and
personnel towards expansion of the securities market in the country;
10. To provide cooperation with societies, associations and similar international
institutions as well as well as the international financial training and research
institutions in the line with developing the presence of the country’s securities
market in the global financial community and possible membership in them;
11. To resolve the disputes within the member and with other persons concerned
arising from their professional activity in the securities market and make
mediatory efforts to settle the possible disagreements within the association’s
members in the enforcement of article 36 of the Securities Market Act;
12. To form the working groups and specialized committees in the association
such as the legal, training and advisory working groups and committees in line
with providing efficient and effective services to the members;
13. To survey the perspectives, business barriers and difficulties of the members
in the securities market and report them to the authorities concerned and present
proposals for removing such barriers;
14. To create and monitor the implementation of principles for professional and
disciplinary ethics within the framework of laws and regulations and internalize
and promote such principles among the members;
15. To enhance the public awareness towards the necessity of collective
participation in the securities market and attempt to expand the investment culture
and financial knowledge among the Iranian households;
16. To monitor the securities market performance and developments to help the
regulatory authority for the purpose of monitoring and regulating an efficient and
fair securities market.

5.4 Bodies

According to the articles of association for self-regulated organizations, there are

generally there 4 separate kinds of bodies including decision making body (Assembly),
governing body (board of managers /Association council /Executive board ) and
supervising body (offence inquiry and settlement board and inspector/auditor or).

5.4 .1 Assembly

According to the article of associations of these self-regulated organizations, the

functions of the ordinary general meetings are set forth as follows:

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 1- The hear the board of director’s report on the operations of the association
during the last fiscal year as well as approving the proposal policies and plans for
the following year;
2- To outline the overall procedures and policies for the association;
3- To hear the inspector’s/auditor’s report;
4- To consider and approve the balance sheet and other financial statements for
the given performance period;
5- To select a mass-circulated newspaper to publish the association’s notices;
6- To elect the inspector/auditor and fix his/their fees;
7- To elect the association board of directors and fir the amount of their
remuneration/bonus;
8- To discuss and decide on other matters which shall not be within the
competence of the extraordinary general meeting.
Where decisions cannot be taken on all items on the agenda by the general meeting, the
chairperson shall adjourn the meeting and fix the date of the next meeting which shall not
exceed two weeks. The adjournment of the general meetings shall not take place through
formal invitation and they shall be formally held at next attempts with same quorum
attained for the first meeting.

5.4 .3 Board of managers;

According to the articles of association for self-regulated organizations, the board of

directors is vested with all powers described in the provisions of the constitution and
approvals of the general meeting to administer the association, in particular, the functions
set down below:

1. To administer the association pursuant to the provisions of the constitution,

approvals of the general meetings and applicable laws and regulations in the
country;
2. To manage financial affairs of the association, open accounts operate such
accounts, collect claims and pay debts.
3. To prepare the annual financial statements and reports to be submitted to the
annual ordinary general meeting for verification and approval;
4. To formulate and approve the strategies, plans and budget of the association;
5. To form, merge and dissolve committees and specialized working groups,
when appropriate;

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6. To adopt the requirements for members admission in satisfaction of the
minimum conditions expected by the SEO;
7. To represent the association before the third parties and with government
departments/agencies and privately-run entities;
8. To compile, modify and amend all laws, rules, regulations and standards
relating to the committees and specialized working groups to be put in operation
for the association affairs and activities subject to the provisions of the
constitution;
9. To supervise the performance of the specialized committees and working
groups and survey the work done by them within a general framework;
10. To refer the cases of violations or disputes to the board for violations
investigation and settlement;
11. To plan on the holding and formation of meetings, committees and
specialized working groups;
12. To admit and revoke membership pursuant to the rules and regulations for
admission;
13. To draft and amend the rules governing the complaints, violations, disputes
which should receive the SEO’s approval;
14. To invite the general meetings subject to the provisions of the constitution;
15. To review provisions of the constitution where necessary and propose them to
the extraordinary general meeting upon the SEO’s approval;
16. To appoint the members of the board for violations investigation and
settlement as well as the association secretary general and fix their fees and
remuneration;
17. To exercise the association’s voting rights to elect the representative of
associations in the Securities and Exchange High Council under paragraph 7 of
article 3 of the Securities Market Act;
18. To designate the persons from the board members or other persons who shall
be authorized to sign on behalf of the association while having the right of
substitution and dismissal of the attorney on frequent occasions;
19. To buy, sell, lease, rent and conduct other transactions on the association’s
movable and immovable property and assets, to conclude any contract on behalf of
the association for the purpose of the association’s object and change, convert
revoke or rescind such contracts or transactions;
20. To examine and make decisions on the reports and proposals received from
committees and specialized working groups and implement the rules within the
context of appropriate by laws;

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 21. To create and/or dissolve branches and agencies at any location inside or
outside the country;
22. To initiate proceedings and suit of any type; to defend the pending case; to
submit to or withdraw the suit whether criminal or civil, to have full powers to
take any measures in connection with the court proceedings; to launch an appeal
(request of revision); to reach settlement; to appoint an attorney or a counsel for
compromise; to bring up a claim of forgery and request for withdrawal of the
forged document and designation of the forger; to initiate recourse to arbitration
by appointing the arbitrator with or without the right to make or reach settlement;
to use and exercise all the rights arising from the arbitration law; to appoint an
attorney; to defend at hearing sessions with or without the right of substitution, or
the right of substitution in succession even on frequent occasions; to dismiss and
reappoint the attorney; to replace the attorney with another person with or without
the right of substitution or the right of substitution in succession even on frequent
occasions; to appoint an expert or a surveyor; to make confession on the merit of
the case or to a matter as a conclusive statement; to sue for damages and withdraw
such suit, to initiate the impleader and defend this case; to bring a counter-claim
and defend it; to secure attachment and seizure of the property or persons for the
remedy sought; to grant a grace period for recovery of the association’s claims; to
request for the issuance of the writ of execution and follow up the executive
process; to collect the judgment debt, whether decided by courts, departments or
deeds registration offices;
23. To create the association secretariat to be responsible for the administrative
tasks of the association under the direction of the secretary general;
24. To make interpretation of the constitution, if need be, and resolve any type of
conflict arising from such action upon the SEO’s confirmation;
25. To subscribe, endorse, accept, pay and protest against the commercial papers
on behalf of the association for the purpose of the association objective;
26. To transfer, assign or acquire any type of business goodwill;
27. To make a request and act for having any type of trademark registered;
28. To deposit any type of documents, records and funds owned by the
association with the state and private funds and take action for their return;
29. To mortgage the assets and property owned by the association whether
movable or immovable, and release the mortgaged assets, even frequently if it
deems necessary for the purpose of the association’s objective;
The board of directors shall have full powers to do any act in the name of the association
and perform any activity or any transaction being related to the association’s object

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directly or indirectly and if and when such acts and activities do not expressly fall within
the competence of general meetings. Hence, the foregoing functions and powers which
have been mentioned by way of example shall not have any prejudice to the full powers
vested in the board of directors.

5.4.4. Inspector;

According to the articles of association for self-regulated organizations, the

inspector/auditor shall be charged with the functions specified in the Commercial Code
for the inspector of joint-stock companies as well as the responsibilities set forth in
paragraph 3 of article 49 of the Securities Market Act as regards the persons charged with
the task of verification and expressing their opinions. The functions and powers of the
inspector/auditor are listed below:

1- To compare and collate the approvals of and actions taken by the board of
directors with the provisions of the constitution and approvals of the general
meetings;
2- To submit a report on any type of violation committed in the association to the
board of directors for information and decision-making. In the case the board of
directors does not take any effective measure on such report within one month as
of the date of its submission, the inspector/auditor shall have to report the matter
to the general meeting for decision-making;
3- To examine, express an opinion and compile a report on the association’s
annual financial statements which have been prepared by the board of directors for
submission to the general meeting;
4- To issue invitations for the general meetings and set their agendas in the
following circumstances:
a) when the board of directors has not taken any action until the end of
Farvardin( around April 20) of each fiscal year to hold the annual ordinary general
meeting;
b) When the board of directors has not paid any attention to the report submitted
by the inspector/auditor under paragraph 2 of this article.
5- To verify and express an opinion on the accuracy of the information and
records supplied by the board of directors to the general meeting.
All the association bodies and employees shall have to deliver the evidence,
documents and information required by the inspector/auditor for his/its
examination and verification.

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The inspector/auditor may, on his/its own responsibility, use the technical experts’
advice in the performance of his/its duties on the condition that the experts have
already been introduced to the board of directors.

The financial statements and the board of director’s report referred to in

paragraphs 3 and 5 of this article shall be delivered to the inspector/auditor at least
thirty days prior to the convention of the intended general meeting. The
inspector/auditor shall have to submit its/his report at least 20 days after the
receipt of financial statements and the board of directors’ report in order that it can
be delivered to the association members.

5.4 .5 Offence Inquiry and Settlement Board;

According to the articles of association for self-regulated organizations, Offence

inquiry and settlement board shall be formed to make inquiries, express opinions
and settle the pending cases of professional disputes between the members and
other parties arising from their professional activities and professional violations
of the association members as well as from the complaints against them or from
other matters referred to this board by the board of directors. Offence inquiry and
settlement board shall consist of three main members and two substitute members.
The members of the investigation board shall be appointed by the board of
directors from among the persons who have educational and professional
qualifications. The members of offence inquiry and settlement board shall be
appointed for a term of two years and their reappointment shall meet no
impediment. However, no person may be chosen for membership in the board for
violations investigation for more than two consecutive terms. Furthermore, the
modality practiced by offence inquiry and settlement board for inquiring and
expressing opinion thereupon shall be based on the standards and rules drafted by
the board itself which have obtained the approval of the board of directors and the
SEO. Upon receipt of each file and/or for inquiry into each case, offence inquiry
and settlement board shall act as follows:

1- To establish that offence inquiry and settlement board should have

competence to investigate the case in question;

2- To identify that the members of offence inquiry and settlement board are
not interested parties in the case in question;

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 3- To determine the necessity of hiring the experts based on the
specializations related to the case in question;

4- To carry out investigation into the case referred to it.

5.5 Supervision

On the basis of Capital Market Act, SEO is authorized to issue, suspend and cancel the
establishment permit/license of Associations as well as Financial Institutions. It has the
power of approving the articles of association of the Associations subject to that Act.

The professional qualification of Associations board of directors has to be approved by

SEO and in case of renewing their mission they have to extend the required permission.

Associations have to submit audited financial reports to SEO and invite SEO’s
representative to their General Meetings. The presence of SEO delegate is to make sure
the decisions taken by the Meetings is within the framework of regulations.

The ACT also specifies that as long as the Associations for the broker/dealers and market
makers have not been convened, tasks and duties of such Associations shall be
accomplished by the Organization. When the number of the Association members
reaches 11 persons all across Iran, the convention of Associations for broker/dealers and
market makers shall be compulsory. Although it should be mentioned that the needed
Associations by the time of providing this report have been established and also they
have been proactive in our market and fulfilling their own duties and responsibilities.

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