The 2005 Law Governing the Securities Market in the Islamic Republic of Iran Securities and Exchange Commissionestablished the Securities and Exchange Commission, responsible for supervising the capital markets. In addition, according to the Tehran Stock Exchange Corporation, the new Act improved regulation of the primary market, instituted punishment for insider trading, incorporated the Tehran Stock Exchange (TSE) and established a Central Securities Depository. Its implementation, in 2006, separated the supervision and operation of the TSE. This law will seek to ensure the efficient functioning of securities markets; protect investors against unfair and fraudulent practices; ensure that adequate and timely information is provided to investors and the general public on companies issuing securities; and regulate activities of market intermediaries. There is not, hHowever, enough there is insufficient publicly available information to make an assessment as to compliance with the International Organization of Securities Commissions (IOSCO) Principles of Effective Securities Regulation.

General Overview

According to the Tehran Stock Exchange (TSE) Corporation's "TSE Handbook," the TSE was founded in 1967 with the implementation of the Stock Exchange Act. Economic expansion in the 1970s increased the number of listing to 105 in 1970. However, the Islamic Revolution that same year, and the subsequent decentralization of the majority of the economy, halted TSE activity. After the Budget Act, enacted in 1989, the TSE again experienced growth, and was allocated greater responsibility as a facilitator of privatization. The 2005 Law Governing the Securities Market, which entered into force in 2006, restructures and incorporates the TSE. At the end of 2006, 332 companies were listed on the TSE, 12 de-listed and 90 temporarily de-listed.

The 2005 Law Governing the Securities Market makes a number of changes to capital markets regulation including establishing a Securities and Exchange Commission, increasing primary market regulation, implementing punishments for insider trading, incorporating the TSE and establishing a Central Securities Depository, as listed by the TSE Corporation's "TSE Handbook." The Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It will be in charge of the Securities and Exchange Organization which is responsible for enforcing market supervision. Also, the TSE, over-the-counter (OTC) market and commodity exchange are now self-regulatory agencies. Dr. Ali Rehmani indicates, in the TSE Corporation's "Managing Director's Message," that having developed an independent regulator, separate from operations, the Act has enabled the transition of the TSE to a joint stock company and expanded the number and variety of financial institutions and instruments available. In addition, the 2007 report on the IMF Article IV Consultation with Iran notes that "regulations are being developed on investment banking, mutual funds and supervision of investment companies" (2007, p. 13).

With respect to demutualization of the TSE, the Federation of Euro-Asian Stock Exchanges reports that "the Tehran Stock Exchange (TSE) is entering a new era of life after having officially and successfully completed the demutualization process by registering itself as a public joint stock company in the Registry of Deeds and Real Estate during November 2006. Financial institutions and brokerage firms own 40 and 32 percent of the shares of the TSE Company respectively, while the remaining 28 percent is owned by individuals after the public subscription announcement. Separation of the current employees into the both Securities & Exchange Organization (SEO) and TSE, hiring qualified staff, searching for a new location and building is on the agenda of the newly formed company which is currently under way and in process" (2006).

In the TSE Corporation's "Managing Director's Note," Dr. Ali Rahmani acknowledges the poor performance of the TSE in 2006. The volume of trades decreased by 19.9 percent from 13,123.62 to 10,939.70 million shares and the number of trades decreased by 24 percent from 2, 252,972 to 1, 816, 144. However, he reports that in 2006, the TSE "established a set of fundamental and structural reforms in order to create possibilities to obtain considerable growth and development in the future." In addition, he notes that "implementation of the new Securities Act of 2006... ought to be able to guide industries towards a new horizon and greater opportunities" and "become a highly liquid secondary market for securities to raise funds and win confidence from all stakeholders." In the second half of 2006, the TSE did experience growth. The IMF 2007 report on the Article IV Consultation with Iran attributes the drop in the stock market, after two years of serious growth, to "uncertainty associated with the presidential election" (p.11) and escalating nuclear issue tension. Through a government privatization program, shared of newly privatized companies will be available for investment on the TSE. Also, "the recently approved bylaws authorizing foreign portfolio investment should strengthen the operations of the TSE (IMF 2007, p. 50).

Iran is not a member of the International Organization of Securities Commission. (IOSCO website).

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

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The 2005 Law Governing the Securities Market makes a number of changes to capital markets regulation including establishing a Securities and Exchange Commission, increasing primary market regulation, implementing punishments for insider trading, incorporating the TSE and establishing a Central Securities Depository, as listed by the TSE Corporation's "TSE Handbook." The Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It will be in charge of the Securities and Exchange Organization which is responsible for enforcing market supervision. Also, the TSE, over-the-counter (OTC) market and commodity exchange are now self-regulatory agencies. The TSE's managing director, Dr. Ali Rehmani indicates that having developed an independent regulator, separate from operations, the Act has enabled the transition of the TSE to a joint stock company and expanded the number and variety of financial institutions and instruments available. In addition, the 2007 report on the IMF Article IV Consultation with Iran notes that "regulations are being developed on investment banking, mutual funds and supervision of investment companies" (2007, p. 13).However, there is insufficient publicly available information that comprehensively addresses this principle.

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

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The TSE Corporation's "TSE Handbook" indicates that the 2005 Law Governing the Securities Market separates the supervision from the operation of the exchange. The Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It will be in charge of the Securities and Exchange Organization which is responsible for enforcing market supervision. The Securities and Exchange Organization is a "public non-governmental institute with legal and financial independence and shall be funded through a service charge and admission fee collected from companies listed in the Exchanges and other revenues" (Law Governing the Securities Market 2005, p. 6). However, there is insufficient publicly available information that comprehensively addresses this principle.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

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According to the TSE Corporation's TSE Handbook, the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It will be in charge of the Securities and Exchange Organization which is responsible for enforcing market supervision. In addition, the 2005 Law Governing the Securities Market increased regulation of the primary market and implemented punishment for insider trading. However, there is insufficient publicly available information that comprehensively addresses this principle.

4. The regulator should adopt clear and consistent regulatory processes.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It will be in charge of the Securities and Exchange Organization which is responsible for enforcing market supervision. In addition, the 2005 Law Governing the Securities Market increased regulation of the primary market and implemented punishment for insider trading. However, there is insufficient publicly available information that comprehensively addresses this principle.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

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There is insufficient publicly available information that comprehensively addresses this principle.

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

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The TSE, OTC market and commodity exchange are self-regulatory institutions (TSE Corporation website). However, there is insufficient publicly available information that comprehensively addresses this principle.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It will be in charge of the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It will be in charge of the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

9. The regulator should have comprehensive enforcement powers.

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The 2005 Law Governing the Securities Market lists the responsibilities of the Securities and Exchange Council and Organization. However, there is insufficient publicly available information that comprehensively addresses this principle.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

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There is insufficient publicly available information that comprehensively addresses this principle.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

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There is insufficient publicly available information that comprehensively addresses this principle.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

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There is insufficient publicly available information that comprehensively addresses this principle.

The 2005 Law Governing the Securities Market ensures adequate and timely disclosure of information on companies that issue securities to the public. Failure of listed companies to provide the required information results in relegation to the Unofficial Board, which has the authority to temporarily de-list a company until it meets certain requirements (TSE Corporation website). However, there is insufficient publicly available information that comprehensively addresses this principle.

15. Holders of securities in a company should be treated in a fair and equitable manner.

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The Iran Trade Point Network reports that "shareholders of a joint company participate in the ownership, profit, losses and liquidation of a company in direct proportion to their share holding. The liability of each shareholder is limited to the par value of his/her shares and in the absence of fraud there is no recourse to shareholder. As such, a joint stock company under Iranian law holds a separate juridical personality and can sue or be sued in its own name. The minimum share capital at the time of formation is Rls. 1 million for private company and Rls. 5 million for public company's. Payment can be made either in cash or in kind for a public joint stock company and a minimum of 20% of the share capital should be made available to the general public" (2000). At an extraordinary meeting, a majority is two-thirds of present voting. At an ordinary general meeting, it is 51 percent. A shareholder with 20 percent or more of a company has the authority to call a shareholders' meeting or go to court (2000). Also considering shareholders rights, the 2006 report on the IMF Article IV Consultation with Iran indicates that investor protection is weak, measured by an index including different aspects of corporate governance. However, there is insufficient publicly available information that comprehensively addresses this principle.

According to the 2000 IMF Recent Economic Developments report, highly concentrated ownership leaves, on average, the five largest shareholders with more than 82 percent ownership. Only a small number of institutional investors, including government institutions, state-owned banks, or their subsidiaries dominate the market. The TSE Corporation's TSE Handbook indicates that the 2006 Securities Act protects investors against insider trading.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

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The Commercial code of 1932 requires listed and private companies to be audited in accordance with the Iranian Auditing Standards which, according to the 2005 Iran Daily article, are based on International Standards on Auditing (ISAs). The same report noted that in 1997 the Iranian government issued auditing guidelines which were analyzed by the industry experts. Subsequently, in 1998, thirty auditing standards based on the ISAs became effective as of March 20, 1999. However, the International Auditing and Assurance Standards Board (IAASB) revised the ISAs in the following years. According to the Islamic Republic of Iran Audit Organization (IRIAO) website, as of August 2007, along with projects on Knowledge of business and its environment and risk assessments of material alternations and conceptual framework, projects specifically addressing requirements of ISA 402, 200 and 330 were also underway. In a May 2007 self-assessment report prepared for the International Federation of Accountants (IFAC), the Iranian Institute of Certified Accountants (IICA) noted that the IRIAO had established convergence of national auditing standards with International Auditing and Assurance Board (IAASB) pronouncements as a formal objective. According to the same self-assessment, the Central Bank of Iran regulates the banks and similar financial institutions. There are no special standards for auditing banks. Banks are subject to the general auditing standards.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

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There is insufficient publicly available information that comprehensively addresses this principle.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

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There is insufficient publicly available information that comprehensively addresses this principle.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

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The 2005 Law Governing the Securities Market ensures adequate and timely disclosure of information on companies that issue securities to the public. Failure of listed companies to provide the required information results in relegation to the Unofficial Board, which has the authority to temporarily de-list a company until it meets certain requirements (TSE Corporation website. However, there is insufficient publicly available information that comprehensively addresses this principle.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

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The 2005 Law Governing the Securities Market ensures adequate and timely disclosure of information on companies that issue securities to the public. Failure of listed companies to provide the required information results in relegation to the Unofficial Board, which has the authority to temporarily de-list a company until it meets certain requirements (TSE Corporation website. However, there is insufficient publicly available information that comprehensively addresses this principle.

21. Regulation should provide for minimum entry standards for market intermediaries.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

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The TSE Corporation's TSE Handbook, reports that the Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

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The TSE Corporation's TSE Handbook, reports that the 2005 Law Governing the Securities Market implemented punishment for insider trading. The Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

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The TSE Corporation's TSE Handbook, reports that the 2005 Law Governing the Securities Market implemented punishment for insider trading. The Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

27. Regulation should promote transparency of trading.

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The TSE Corporation's TSE Handbook, reports that the 2005 Law Governing the Securities Market implemented punishment for insider trading. The Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

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The TSE Corporation's TSE Handbook, reports that the 2005 Law Governing the Securities Market implemented punishment for insider trading. The Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

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The TSE Corporation's TSE Handbook, reports that the 2005 Law Governing the Securities Market implemented punishment for insider trading. The Securities and Exchange Council, chaired by the Minister of Economy and Finance, is responsible for policy making, market strategies and market supervision. It governs the Securities and Exchange Organization which is responsible for enforcing market supervision. However, there is insufficient publicly available information that comprehensively addresses this principle.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

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According to the TSE Corporation's "TSE Handbook," the Central Securities Depository of Iran (CSDI), an independent clearing agency, maintains the Automated Trading System, integrated with Clearing, Settlement, Depository and Registry Systems, "to encourage efficient and reliable operations and prompt transfer of securities on a nearly immobilized and dematerialization basis." The TSE issues temporary certificates of ownership to expedite the registration, clearing and settlement processes. However, there is insufficient publicly available information that comprehensively addresses this principle.