Regulations Governing the Establishment License and ... on the Establishment... · Article 6: The...

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Regulations Governing

the Establishment License and Operations of

Brokerage Firms on the Exchange

Introduction: Pursuant to notes 2 and 6 of article 7 of the Securities Market Act

ratified in November 2005, the existing regulations have been drafted to

handle the scoring and screening of applicants for brokerage activities as well

as setting out the requirements for commencing brokerage activities on the

Exchange.

Article 1: 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.

Article 2: The applicants for brokerage activities on the Exchange can fall

under two groups as follows:

A) The persons who, as founders of brokerage firms, apply for the

establishment of such firms and brokerage activities on the

Exchange.

B) The brokerage firms which have already been established but

have not, by the time of application call, received the license for

brokerage activities on the appropriate Exchange.

The scoring of group (A) applicants shall be handled as per the article (4) and

the scoring of group (B) applicants as per the article (5). In order to obtain the

license, the applicant shall have to earn at least fifty (50%) percent out of the

total scores associated with his own group. The list of these applicants shall, as

mailto:[email protected]

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the qualified applicants, be arranged in the order of highest scores.

Prioritization for license issuance shall take place on the basis of the scores

obtained in each group of eligible applicants and for the number of issuable

licenses in each group as specified in article (1).

Article 3: The time-limits for establishment of the brokerage firms, obtaining

eligibility requirements to start activities and practical commencement of

operations are as follows:

A) For the group (A) applicants as stated in article (2), the time-limit for

establishment, obtaining the eligibility to start activities and

practical commencement of operations as per the issued license

shall be four months as of the priority service date.

B) For the group (B) applicants as stated in article (2), the time-limit for

obtaining eligibility to start activities and practical commencement

of operations shall be two months as of the service date of business

license.

Note 1: If the applicant does not take action, as the case may be, to establish

the firm, obtain the qualifications and start the activities within the time-limits

specified in this article, the license issued to him shall be automatically

cancelled, unless the applicant presents sufficient evidence and the SEO's

board of directors agrees to extend the time-limit.

Note 2: The priority notice shall be delivered to the founders' representative or

sent to his address and the license for brokerage operations shall also be

forwarded to the last applicant's declared address.

Article 4: The scores of group (A) applicants, as stated in article (2) shall, in

respect of the total scores, be based on the following factors:


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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. The score of each of founder shall

be calculated on the basis of appendix 2 herein.

Note: 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.

Article 5: The scores of group (B) applicants, as stated in article (2), shall in

respect of total scores, be based on the following factors: such scores shall be

calculated on the basis of the brokerage position prior to the call application

under article (1).

A) Capital: For each two billion Rials of paid-in capital by the

applicant brokerage firm, one score up to the limit of 10 scores are

calculated. The applicant shall have to obtain at least 5 scores

from this factor.

B) Brokerage Branch Office: In case the broker has, at the discretion

of the Organization, opened an office in each city (other than

Tehran), to receive the customers' orders and render other types of


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services and there is a trading post available in that city to execute

the customers' orders, one branch shall be deemed to exist in

return for each trading post. Where there are two branches, for

each branch one score and more than that for each branch three

scores and up to the maximum limit of 12 scores shall be

calculated for the applicant broker.

C) Special Trading Floor: Where there is a special trading floor, two

scores for each floor in Tehran and 4 scores for each floor in

provincial cities (other than Tehran) and up to the maximum limit of

10 scores shall be calculated.

D) Personnel: For each one of the personnel holding the certificate of

capital market two scores and up to the maximum limit of 14 scores

are calculated providing that the applicant has been engaged in

the brokerage operations for at least 4 months and his name has

been recorded on the insurance list of this company personnel.

E) Systems: In order to establish and operate proper systems for

internal control, accounting, brokerage, website (to provide the

customers with information and other services) and the like, a

maximum of 20 scores shall be calculated at the discretion of SEO.

F) Issued Licenses: For the licenses of portfolio management and

accredited broker one score for each license and for the formation

of each portfolio of common securities at the discretion of the

Organization and appropriate to the size of operations up to the

maximum of 5 scores shall be calculated. For the conclusion of

each accredited contract, 3 scores and for the conclusion of each

portfolio management contract, 2 scores shall be calculated. The

scores limit of this factor shall be 14 scores in the maximum.

G) Transactions Value: The total value of non-block transactions

(fewer than 100 thousand shares in each transaction) conducted

by the applicant broker during the six months ending in the

application call shall be computed in proportion to the total value


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of such transactions and compared with figure A which is

calculated in the following formula and for each percentage

exceeding figure A, one and half (1.5) scores up to the limit of 10

scores shall be taken into account:

A=

1

Number of active brokers at the application call time

H) Number of Clients: The number of the applicant brokerage firm

clients who have had at least one transaction through the

brokerage firm during the six months ending the application call

date shall be calculated and divided into the total number of such

clients at the level of all brokerage firms and then for each

percentage exceeding figure A as calculated in paragraph (G), 2

scores up to the limit of 10 scores shall be taken into account.

I) Violations: For each violation committed by the applicant

brokerage firm which has resulted in the written notice by entering

it in the records (dossier), two negative scores and for each

violation which has resulted in the prohibition of business conduct,

4 negative scores shall be calculated and deducted from the

applicant's total scores.

Article 6: The professional qualifications of the managing director and board

members of the group (B) applicants under article (2), shall, within the specified

time-limit, be approved by SEO or failing that, their application shall be

rejected. Accordingly, the professional qualifications of board members and

the managing director of the group (A) applicants, shall, prior to establishing

the brokerage firm, be approved by SEO in accordance with the prevalent

regulations and then the subscribed capital shall be credited in the bank in the

name of the under-formation brokerage firm and the relevant receipt shall be

presented. Such capital shall be exclusively spent on operating the purpose of

the brokerage firm.


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Article 7: The group (A) and group (B) applicants under article (2) shall, within

the time-limits specified in article 3 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.

Note 1: Where the headquarters is rented by the brokerage firm at the time of

starting operations, the firm shall, within one year after its foundation, have to


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buy a proper location in the name of the brokerage firm for its headquarters

pursuant to paragraph (A) of this article.

Note 2: If any of the conditions specified in this article is not met during the

course of brokerage firm operations, the SEO's board of director may, while

suspending the brokerage business activities set a maximum time-limit of up to

three months to satisfy the conditions and shall, when such conditions are not

met during the said specified period, revoke the brokerage business license.

Article 8: The existing regulations comprising an introduction, eight articles and

five notes were approved by the SEO's board of directors on September 22,

2007. After the approval date of the existing regulations, articles 2 and the

notes thereto, 3, 7, 8, 9 and the note thereto, 16, 16 and the note thereto, 17,

18, 20, 21, 24 and 25 of the By-Laws on the Broker's licensing and operations (in

the form of a legal entity) approved on December 7, 2004 by the Securities

and Exchange Council shall be repealed.

Appendix 1: The Methodology of Scoring the Founder of the Brokerage Firm as

a Legal Entity

The scoring of the brokerage firm founder enjoying the legal entity is obtained

by multiplying the three factors of (a) the score of business purpose, (b) the

coefficient of the type of legal entity and (c) shareholding coefficient as

follows:

a) Score of business purpose: Considering the type of activity, the score of

business purpose is earned as follows:

a-1) Banks, insurances and authorized financial institutions, equating to 12

scores

a-2) Financial and credit institutions, equating to 8 scores


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a-3) Other legal entities (including manufacturing, trading, cooperative and

service companies) equating to 5 scores

b) Type of legal entity coefficient: Such coefficient is earned as follows:

b-1) The public joint-stock companies and cooperative companies having over

250 shareholders or members, equating to one.

b-2) The public joint-stock companies and cooperative companies having 50

to 250 shareholders or members equating to 0.8%.

b-3) The public joint-stock companies and cooperative companies having

fewer than 50 shareholders or members as well as the private joint-stock

companies, equating to 0.65%.

b-4) Other legal entities, equating to 0.5%.

c) Shareholding Coefficient: For the founder that raises 20% or more of the

brokerage firm's total capital, the shareholding coefficient equals one.

For the founder that raises lower than 20% of the brokerage firm's total

capital, 0.1% is deducted from number one in return for each one lower

percent.

Appendix 2: The Methodology of Scoring the Founder of the Brokerage Firm as a Natural

Personality

In order to do the scoring of the brokerage firm founder having a natural

personality, the score of his experiences is calculated as described in item (a)

below and added to the score of his/her education background calculated as

described in item (b) and the sum is multiplied by his shareholding coefficient

earned as described in item (c).

A) Work Experience Score: In order to calculate the founder's work

experience score, first his score in each position is calculated on the


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basis of the following formula and the scores of varying positions are

added to each other:

Duration of work experience in each position in months × coefficient of business purpose of

founder's place of work × coefficient of founder's position × coefficient of the month.

The limit of each founder's work experience score is 6 scores and the

aggregate work experience scores of brokerage firm founders having natural

personality will be 20 scores in the maximum. The maximum score of business

purpose of the founder's place of work and his position coefficient are

extracted from the table below:

No. Applicant's main

area of activity Applicant's position

Coefficient of

business purpose

Coefficient of

applicant's position

1 Brokerage Managing Director 1 1

Agent 1 1 0.85%

Executive Board Member 1 0.7%

Agent 2 1 0.7%

Non-Executive Board Member 1 0.5%

Line Senior Officer 1 0.6%

Line Officer 1 0.4%

Other Personnel 1 Up to limit 0.3%

2 Exchanges or regulatory

entities in the capital

market

CEO 1 1

Executive Board Member or Similar

Authority 1 0.9%

Line Senior Officer 1 0.9%

Middle Manager Connected with

Brokers' affairs 1 0.85%

Other Middle Line Managers 1 0.6%

Non-Executive Board Member 1 0.6%

Senior Officer Connected with Brokers'

Affairs 1 0.65%

Other Line Senior Officers 1 0.5%


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Line Officer 1 0.4%

Other Personnel 1 Up to limit

0.3%

3 Financial intermediary,

Central Depository

Companies and Capital

Market Associations

Managing Director 0.9% 0.9%

Executive Board Member 0.9% 0.85%

Line Senior Officer 0.9% 0.8%

Middle Line Manager 0.9% 0.7%

Non-Executive Board Member 0.9% 0.6%

Line Senior Officer 0.9% 0.4%

Finance Manager, Head of Accounting

Department or Head of Internal

Accounting

0.9% 0.3%

Other Personnel 0.9% Up to limit

0.2%

4 Large Manufacturing or

Service Companies




Senior Manager 0.7% 0.5%

Finance Director, Head of Accounting

Department or Head of Internal Auditing 0.7% 0.4%

Finance Senior Employees 0.7% 0.3%

Other Finance Employees 0.7% Up to limit

0.2%

5 Medium

Manufacturing or

service companies





Finance Manager, Head of Accounting 0.6% 0.4%


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Department or Head of Internal Auditing



0.2%

6 Small Manufacturing

or Service

Companies





Finance Director, Head of Accounting

Department or Head of Internal Auditing

0.4% 0.4%



0.2%

7 Governmental Affairs CEO 0.6% 0.8%


Middle Manager 0.6% 0.5%

Director and Heads connected with financial

affairs or investment

0.6% 0.8%

Senior employees connected with financial

affairs or investment

0.6% 0.7%

Other Personnel 0.6% 0.3%

8 Auditing Auditing director 0.8% 0.8%

Head of Auditing Department 0.8% 0.7%

Senior Auditor 0.8% 0.6%

Auditor 0.8% 0.5%

Assistant auditor 0.8% 0.4%

9 Other items University lecturer (instructor) for courses such

as: Economics, Financial Management,

Accounting, Investment

0.7% 0.7%

University lecturer (instructor) for other related

courses

0.5% 0.7%

Official expert of Justice Administration in the

related fields

0.6% 0.5%

Attorney-at-Law 0.5% 0.5%

Other 0.4% Up to limit


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0.5%

Notes:

1- The month coefficient is 0.2% which may be altered by the SEO's

board of directors.

2- The senior manager means a manager who is one rank below CEO.

3- The middle manager means a manager who is two ranks below

CEO.

4- If the applicant has more than one position during a specific period

of time, thus the position with the highest scores will be taken into

account.

5- The line officers or employees mean that group of managers or

employees who perform their assigned tasks in connection with the

legal entity's main area of activity.

6- The large company means a company that its personnel are over

200 members or its total assets are in excess of 100 billion Rials or its

gross income exceeds 100 billion Rials during one year.

7- The medium company means a company that its personnel are

more than 50 members and fewer than 200 members or its total

assets are over 50 and less than 100 billion Rials or its gross income is

more than 50 and lower than 100 billion Rials during the year.

8- The small company means a company which is deemed not to be

large or medium manufacturing or service companies.

9- Where a limit is set for scores, the applicant's scores shall be

calculated by SEO in view of the applicant's work experience score

in a manner that they shall not exceed the prescribed limit.

B) Education Background Score: The education background score of the

brokerage firm founder is specified as described in the contents of the


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table below. The total education background scores of the brokerage

firm founders having natural personality will be 15 scores in the minimum.

No. Last Education Degree Major Scores per person

1 PhD. Financial Management, Economics, Accounting and Financial Engineering 6

2 PhD. Management, Banking, Insurance and Industrial Engineering 5.5

3 PhD. Mathematics, Statistics, Engineering and Law 4.5

4 PhD. Other fields of Study 3.5

5 Master Financial Management, Economics, Accounting and Financial Engineering 5

6 Master Management, Banking, Insurance and Industrial Engineering 4

7 Master Mathematics, Statistics, Engineering and Law 3.5

8 Master Other fields of Study 3

9 Bachelor Financial Management, Economics, Accounting and Financial Engineering 4

10 Bachelor Management, Banking, Insurance and Industrial Engineering 3

11 Bachelor Mathematics, Statistics, Engineering and Law 2.5

12 Bachelor Other fields of Study 2

Notes:

For each article written with respect to finance which has been published in

accredited journals or has been approved to be published 0.5% score and for

each book compiled in relation to finance one score are added to the above-

named scores. The total scores for articles and books will be 4 in the maximum.

If the founder's major differs at one level from his major at a lower level of

education, the difference between the scores of the higher level and the

scores of lower level is calculated in the same field and is added to the

founder's scores in the lower level so as to obtain the founder's education

background score. For instance, if the founder presents a master degree in

financial management and a bachelor degree in engineering, his education

background score shall be calculated as follows:

Founder's education background score = engineering bachelor score + (financial management

master score –– financial management bachelor score)


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= 2 + (5 - 4) =3

C) Shareholding Coefficient: For the founder who provides 15% or more of

the total brokerage firm capital, the shareholding coefficient equating

to one. For the founder who provides lower than 15% of the total

brokerage firm capital 0.1% is deducted from number one in return for

each one lower percent.


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