AFP Learning System Treasury Module One: The Corporate Treasury
Management Function
Module Two: Corporate Financial Management
Module Three: Working Capital Management
Module Four: Cash and Liquidity Management
Module Five: Money and Capital Markets
Module Six: Treasury Operations and Controls
v3.0 © 2011 Association for Financial Professionals. All rights reserved.
Session 1: Course Overview - 1
Session 1, Module One: The Corporate Treasury Management Function Chapter 1:
The Role and Organization of Treasury Management Chapter 2:
Financial Regulatory Environment
Chapter 1: The Role and Organization of Treasury Management
Outline: Introduction to the Study of Treasury
Management The Role of Treasury Management Finance and Treasury Organization Treasury/Finance Organizational Structure Corporate Governance Ethics and Accountability AFP Standards of Ethical Conduct
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 3
Treasury and Its Relationship to the Corporate Finance Function
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Short-term
• Perform critical liquidity management tasks daily to ensure availability of cash resources for operational activities.
Long-term
• Perform critical finance functions that ensure availability of funds and information to sustain initiatives to support the financial objectives.
Treasury professionals:
Discussion Question
What are the principal roles of the corporate finance function?
Answer:Corporate finance functions:
Short-term funding (credit lines, revolving credit agreements, issuance of commercial paper)
Long-term funding (issuance of stocks, bonds, term loans and long-term lease agreements)
Acquiring strategic assets with long lives Assessing when and how to divest assets Advising on declaration and payment of
dividends
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 5
Discussion Question
What are eight major objectives of treasury management?
Answer: Maintain liquidity. Optimize cash resources. Manage risk. Maintain access to short-term financing. Maintain investments. Maintain access to medium- and long-term
financing to support investments in capital assets.
Coordinate financial functions and share financial information.
Enhance global and cross-border focus.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 6
Discussion Question
What are some actions that can be taken to mitigate counterparty risk?
Answer: Add to the number of counterparties to
increase diversification. Eliminate specific counterparties. Implement or adjust single counterparty
balance limits. Rebalance liquidity allocations among
counterparties. Adopt third-party custodians for
investments.
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Financial Function Organization
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Discussion Question
For companies publicly traded on a U.S. public exchange, the Sarbanes-Oxley Act (SOX) makes which of the following personally responsible for the accuracy of financial statements?a) Treasurerb) Chief financial officer (CFO)c) Controllerd) All of the above
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 9
Discussion Question
What are six primary responsibilities of the treasurer?
Answer:Managing overall financial riskArranging external financingManaging relationships with banks and other financial institutionsOverseeing day-to-day liquidity and cash managementInvesting for the short- and long-termDeveloping and implementing treasurypolicies and procedures
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Role of the Board of Directors in Treasury Operations General authority for treasury operations Approve business policies, major initiatives
and business contracts Board grants authority to:
Open, close and modify bank accounts Establish borrowing facilities Oversee investments Issue debt and equity securities Devise, implement and execute risk management
strategies through board-approved policy statements
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Daily Funds Management
Daily funds management Prepare cash position
worksheet. Monitor cash balances. Collect, concentrate and
disburse cash. Invest and borrow on short-
term basis. Research and reconcile
exception items. Coordinate finance
functions with A/R, A/P and accounting.
Other responsibilities Banking
relationship administration
Liquidity management
Cash forecasting Systems design Financial risk
management Daily reporting
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 12
Bank Account Management
Treasury responsibilities: Opening, maintaining and
closing all organization bank accounts Organization’s articles of
incorporation and bylaws Corporate resolution Certificate of incumbency
Managing all bank and service provider relationships Company policies
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Internal and External Collaboration
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Internal collaboration
Internal and External Collaboration
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External collaboration
Efficient Treasury Operations
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Benchmarking
• Examining and comparing core activities within/across an industry or functional area for the purpose of identifying best practices
• Example: Basic staffing levels
Reengineering
• Radical redesign of a particular business process with the goal of continuous improvement
• Example: Application of Six-Sigma concepts to treasury area
Outsourcing
• Utilizing a third party to perform all or part of a core function
• Example: Payroll processing
Business Transitions: Mergers, Acquisitions and Reorganization Merger
When two companies combine, with one company ceasing to exist as legal entity. Combined assets are operated under surviving company. Usually consensual.
AcquisitionWhen one company buys a majority of voting shares of another corporation. May be friendly or hostile.
ReorganizationIn the event of severe financial distress, a company may face bankruptcy, which could result in the reorganization or liquidation of the company.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 17
Discussion Question
Why is treasury sometimes set up as a cost center and other times as a profit center? Which is more common, and why?
Answer: A cost center is the most common approach because treasury is seen as a support function.
A profit center is used in companies specializing in global finance, trade or risk management; they require use of derivatives and should be able to generate income from hedging and/or speculation.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 18
What are the advantages and disadvantages of centralized and decentralized control of the global treasury management organization?Answer:Centralized control
Advantages—Control, economies of scale and lower operating costs
Disadvantages—Little autonomy for field office personnel
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Decentralized control Advantages—In-country personnel
familiar with local business and banking practices, language and customs
Disadvantages—May have heavier compliance burden; field offices generally submit periodic reports and the home office must conduct audits
Discussion Question
Describe some of the reasons for the popularity of SSCs.
Answer: Web-based technology has enabled
developments in treasury and may provide cost reduction benefits over outsourcing.
Some global treasury back-office operations do not require local management.
Development of global TMS standardizes information and enhances SSC benefits.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 20
Discussion Question
Discussion Question
What are the benefits of utilizing in-house banks in international treasury management?
Answer:The primary benefit is a reduction in overall banking costs by aggregating many small transactions into fewer larger ones. An in-house bank can also manage five principal international treasury management solutions—investments/debts, netting, pooling, re-invoicing and centralization of FX exposures.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 21
Corporate Governance
Major concern for large, publicly traded companies; regulations vary widely between countries.
Challenges include: Separation of ownership and control in large
companies (stockholders vs. executive officers) Not-for-profit organizations: board serves as oversight
for the public (public vs. internal management)
Think of stockholders as investors rather than owners (agency problem).
Establish procedures for checks and balances, board of directors.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 22
Discussion Question
Who are the five key parties in corporate governance of publicly traded companies in the U.S.?
Answer: Securities and Exchange Commission (SEC) Public Company Accounting Oversight Board
(PCAOB) New York Stock Exchange (NYSE) Large institutional investors (e.g., labor
unions, mutual funds, pension funds) States’ attorneys general offices (especially
New York and California)
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 23
Investor Relations
Company function that deals with the disclosure or release of information to bond- and stockholders in a timely manner; activities mandated to support market regulatory requirements.
Responsibilities include earnings releases and forecasts, annual/quarterly reports, press releases, legal disclosures.
Investor relations department is a company’s only interaction with the stock market, over which it has full control.
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Role of Independent Directors
Financial professionals at NYSE-listed firms must understand standards.
CEOs must certify to the listing exchanges that their companies comply with standards.
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Define independent directors.
Define role and authority of independent directors.
Define shareholder participation in governance decisions.
Define control and enforcement mechanisms.
Four purposes ofNYSE standards
Ethics and Accountability
After numerous accounting scandals, AFP published “Standards of Ethical Conduct.”
Steps to institutionalize ethical conduct: Establish a code of conduct and have all
members of the treasury department pledge to adhere to it.
Develop specific treasury policies and procedures statements.
Provide ethics training sessions that review the code of conduct, its purposes, and examples.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 26
Ethics and Accountability
Code of conduct for treasury Encourage ethical
conduct through clear statements of what is, and is not, acceptable behavior.
Confidential information Cannot be disclosed to
vendors, family or third parties.
Conflicts of interest Avoid conflict of interest
or appearance thereof.
External activities External business ventures
should not interfere with duties or create a conflict of interest.
Employee conduct On-the-job behaviors and
personal habits should not reflect negatively on company.
Conformance to code Employees should
personally certify that they have read and comply with the code.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 27
Discussion Question
Name types of unethical and illegal activities that can be reported under whistle-blower protection.
Answer: Failure to maintain work papers Manipulation of financial statements
and reports Document destruction Securities fraud Personal loans to executives Insider trading during blackout periods
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 28
Training Sessions in Corporate Treasury EthicsPossible off-site meeting agenda: Explain company’s concern for ethics, as mandated by
board of directors, CEO and/or CFO. Discuss recent historical cases of unethical/criminal
behavior. Present hypothetical unethical situations and
resolution. Explain code of conduct (purpose and obligations). Review corporate P&Ps and cite violations at company
or elsewhere. Describe insider trading restrictions. Discuss examples of conflicts of interest.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 29
Discussion Question
What are some areas of particular concern to treasury and finance employees regarding ethical breaches?
Answer: Check and electronic
payments fraud Rogue trading or trading
without approval Segregation of duties
failures Anti-money laundering
violations Backdating options Manipulation of earnings
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 30
Revenue recognition issues
Failure to report significant accounting deficiencies
Insider trading Unfair dealings with
vendors Improper use of
company assets Chinese wall violations
AFP Standards of Ethical Conduct
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Competence
• Continue to acquire appropriate level of professional knowledge and skill in finance.
• Perform professional duties in good faith and in accordance with technical, legal and regulatory practices, as well as the letter and spirit of the law in the field of finance.
Confidentiality
• Maintain confidential information acquired in the course of professional activities and disclose such information when legally obligated to do so.
• Refrain from using or appearing to use confidential information for unethical or illegal advantage either personally or through third parties.
AFP Standards of Ethical Conduct
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Integrity
• Practice honesty and accuracy in all dealings without engaging in any activity that would prejudice the ability to carry out professional responsibilities competently and fairly.
• Avoid conflicts of interest or the appearance thereof.
• Refrain from abusing the financial systems and markets.
• Disclose fully all relevant information that could reasonably be expected to influence business dealings.
• Certified Cash Manager (CCM) and Certified Treasury Professional (CTP) designations may be used only if active.
Chapter 2: Financial Regulatory EnvironmentOutline: General Regulatory Environment Primary Regulators and Standard Setters of
Global Financial Markets U.S. Regulatory Environment U.S. Federal Legislation The Uniform Commercial Code (UCC) The Employee Retirement Income Security Act
(ERISA) (1974) U.S. Bankruptcy Legislation Federal Liquidity Programs
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 33
General Types of FI Regulations
Monitoring and managing the overall safety and soundness of the banking system
Setting and implementing monetary policy
Determining guidelines for the chartering of banks and other depository FIs
Allocating credit toward certain sectors of the economy and protecting consumers
Protecting investors purchasing securities through FIs
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 34
Discussion Question
Which of the following regulatory approaches used to monitor and manage the safety and soundness of the banking system carries a moral hazard for both depositors and bankers?a) Setting minimum capital levels required of banks
operating in the country (ratio of capital to at-risk assets and tiered capital)
b) Ensuring proper investment policies and diversification (impairment of capital rules)
c) Deposit insurance for investors’ funds held by the bank
d) Regular monitoring and surveillanceAnswer: c. Depositors may not investigate a bank’s creditworthiness; banks may undertake more risk.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 35
Primary Regulators and Standard Setters of Global Financial Markets
Financial Stability Board (FSB)
Bank for International
Settlements (BIS)
International Organization of
Securities Commissions
(IOSCO)
Financial Action Task Force (FATF)
• Coordinates national financial authorities and international standard setting bodies
• Develops and promotes implementation of effective regulatory, supervisory and other financial sector policies
• Organization that fosters international monetary and financial cooperation
• Serves as bank for central banks
• Sponsor of BCBS, CPSS
• Recognized as the international standard setter for securities markets
• Membership regulates more than 95% of world’s securities markets
• International organization composed of members from more than 30 countries
• Develops and promotes policies at national and international levels to combat money laundering and terrorist financing
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 36
U.S. Regulatory Environment
Treasury Department is organized into two major components: Departmental offices
Formulate policy and management of Treasury Operating bureaus
Carry out specific operations assigned to Treasury Regulatory agencies:
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 37
OCC OFAC FinCEN IRS U.S. Mint FMS
Office of Inspector General FSOC OFR FIO FDIC
NCUA DOJ CFPB SEC CFTC FINRA
The Federal Reserve System (Fed) Organization:
Board of Governors Federal Open Market
Committee (FOMC) 12 banks and 24 branches
Dodd-Frank Act: New governance rules
(appointing members) Periodic audits and
counterparty disclosure (discount window and open market operations)
New vice chairman for supervision
Three tools of monetary policy: Open market
operations Discount rate Reserve requirements
Principal roles: Monetary policy Supervision and
regulation Government services Depository institution
services
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 38
Discussion Question
Which component of the Fed has the most impact on monetary policy, and why?
Answer:The Federal Open Market Committee (FOMC) because it oversees the buying and selling of T-bills, T-notes and T-bonds. The FOMC’s sale of government securities reduces the money supply and credit; redemption causes the opposite.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 39
Office of the Comptroller of the Currency (OCC)
Regulates the national banking system
Administers: Nationally chartered
banks and federal thrifts of all sizes
Holding companies of national banks and federal thrifts with less than $50 billion in assets
For national banks and federal thrifts: Oversees the execution
of laws Proposes rules and
regulations governing operations
Supervises a nationwide staff of bank examiners
Approves/denies national bank and thrift charters, branches, capital and other banking structure changes
Examines national banks and federal thrifts for asset (loan) quality, capital adequacy, management and key regulatory issues
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 40
Discussion QuestionWhich of the following is true?a) FinCEN enforces counter-money laundering
legislation (e.g., the Bank Secrecy Act) and provides intelligence and analytical support to law enforcement agencies to build investigations and plan new strategies that combat money laundering.
b) The FDIC provides deposit insurance for banks and thrifts and acts as a trustee for failed banks but does not supervise any depository institutions.
c) The Dodd-Frank Act phased out the “dual nature” of the U.S. banking system.
Answer: a
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Regulatory/Supervisory Agencies Focusing on Consumer Protection, Investors and Insurance Companies
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CFPB SEC CFTC FINRA FIO
Office accountable for consumer protection
Regulates and supervises securities sales
Regulates commodity futures and options in U.S.
Provides investor protection and market integrity
Will provide recommen-dations and guidance on insurance industry
Securities and Exchange Commission (SEC) Registers public offerings
of debt and equity securities by banks, bank holding companies and other corporations
Sets financial disclosure standards for corporations that sell securities to the public
Requires filing of quarterly and annual financial statements by companies with publicly owned securities
Regulates mutual funds and investment advisors
Monitors insider trading
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End of Session 1
Assignment: Complete the online pre-test. Complete the following tasks for
Module One, Chapters 1 through 3: Review each chapter. Complete the test-your-understanding
questions at the end of each chapter. Complete the online module-specific test. Complete the Exam Practice (Describe and
Differentiate) questions (located at the end of the module).
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 2 - 44
Session 2, Module One:The Corporate Treasury Management Function
Chapter 2: Financial Regulatory EnvironmentOutline: General Regulatory Environment Primary Regulators and Standard Setters of
Global Financial Markets U.S. Regulatory Environment U.S. Federal Legislation The Uniform Commercial Code (UCC) The Employee Retirement Income Security Act
(ERISA) (1974) U.S. Bankruptcy Legislation Federal Liquidity Programs
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 46
Gramm-Leach-Bliley Act (1999) Permits the creation of financial holding
companies (FHCs) Establishes the Fed as the primary
regulator of FHCs Allows easier entry by foreign banks Placed CRA rating stipulations on
mergers of bank holding companies with insurance or securities firms
Required financial institutions to establish and regularly disclose privacy policies; prohibited credit card and account numbers from being shared with third-party marketers
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 47
Eliminated many provisions of the Glass-Steagall Act (e.g., barriers among banking, insurance and securities businesses)
Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
Ends “too big to fail” bailouts Increases regulation of payment,
clearing and settlement systems Provides an advance warning system Increases transparency and
accountability for exotic instruments Provides executive compensation
and corporate governance Provides transparency and
accountability rules for credit rating agencies
Enforces regulations on the books
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 48
Enacted in response to the near failure of the U.S. banking system as a result of the Great Recession
Check Clearing for the 21st Century Act (Check 21) (2003) Facilitates check truncation Fosters check-payment innovation
without mandating receipt of electronic checks
Improves payment system overall Creates IRD or substitute check that is
legal equivalent of original check MICR-encoded paper reproduction with image
of front/back Conforms to industry standards
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 49
Acts Controlling Money LaunderingBank Secrecy Act (1970) and Money Laundering Control Act (1986) Stages of money
laundering: Placement Layering Integration
All FIs must report suspicious financial transactions.
USA PATRIOT Act (2001) Imposed obligations on non-
bank financial institutions Made foreign banks in U.S.
subject to U.S. jurisdiction Prohibited U.S. banks from
maintaining correspondent accounts for foreign shell banks
Prevented U.S. credit card operators from authorizing foreign banks to issue or accept U.S. credit cards without taking steps to prevent terrorist use
Requires banks to know customers (due diligence)
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 50
Sarbanes-Oxley Act (SOX) (2002)
Improves disclosure and financial reporting. SEC rule changes require companies to:
Disclose code of ethics for senior management (and any waivers).
Indicate if audit committee has a financial expert. Have audit committees preapprove auditor’s audit and non-
audit services; be briefed on company’s accounting (including preferable alternatives).
Regulation G requires companies to: Reconcile pro-forma financial information to financial
statements. Issue earnings releases on Form 8-K. Include material off-balance-sheet arrangements in MD&A.
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 51
Discussion Question
Which act requires periodic evaluations of a depository institution’s records to meet credit needs in the area in which they operate?
a) Community Reinvestment Act (CRA) (1977, 1995)b) Expedited Funds Availability Act (1997)c) Gramm-Leach-Bliley Act (1999)d) Dodd-Frank Act (2010)
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 52
Federal Reserve Regulations
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Regulation D
Implements Federal Reserve Act of 1913; imposes uniform reserve requirements on all depository institutions with different levels of reserves for different types of deposits
Regulation E
Implements EFTA (1978); defines rights and responsibilities of parties using consumer-related EFTs and provides consumer protection for ATM, ACH and credit card transactions
Regulation J
Implements check collection and settlement provision of Federal Reserve Act (1913); establishes check collection and settlement procedures, duties and responsibilities
Regulation QProhibits depository institutions from paying interest on corporate demand deposit accounts; repealed by Dodd-Frank Act
Federal Reserve Regulations
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 54
Regulation Z
Protects consumers from unexpected credit card rate increases; prohibits issuing credit card to consumer under age 21; requires consent before charging over-limit fees; limits high fees; bans creditors from two-cycle billing method; prohibits allocating payments to maximize interest charges
Regulation BB Implements CRA
Regulation CC
Establishes rules designed to speed the collection and return of checks; establishes endorsement standards for banks and companies to follow in depositing and clearing checks; imposes the same return procedures that apply to checks to payable through drafts
Discussion Question
Match each tax with its correct use.a) Foreign tax credit
(FTC)b) Capital taxc) Asset tax and
turnover taxd) Withholding taxe) Sales and use
taxesf) VAT
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 55
To relieve double taxation
To slow foreign direct investment
To tax despite no profits
To tax funds moving out of a country
To tax at the point of purchase or Internet
To tax at each stage of production
The Uniform Commercial Code (UCC)
Article 3—Negotiable Instruments Accord and satisfaction:
Stipulates when a check could constitute a payment made in full
Revised to permit avoidance of inadvertent accord and satisfaction (if the payee discovers an error within 90 days)
Unauthorized signatures: Properly payable checks When a company may be
held liable for situations related to check issuance
Article 4—Bank Deposits and Collections Defines the various
bank parties to the deposit and collection process and their respective rights and duties
Defines the relationship between a bank and its customers
Defines a company’s duty to examine bank statements; makes it imperative to accurately reconcile accounts on a timely basis
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The Uniform Commercial Code (UCC)
Article 4A—Funds Transfers Bank must make security
procedures available to the customer.
Includes the use of: Personal identification
numbers (PINs) Callbacks Encryption Message authentication
Consequential damages: Relieves a bank of liability
for losses beyond the actual loss
Holds a bank liable for interest losses or incidental expenses
Article 5—Letters of Credit (L/Cs) Defines a L/C, a
documentary draft or documentary demand for payment
Defines the roles of the issuer, applicant, beneficiary, advising and confirming banks
Article 9—Secured Transactions Businesses that require a
security interest must file UCC-1 Financing Statement listing collateral.
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Retirement Plan Formats
Defined benefit plan Defined contribution plan
• Based on pay or seniority.• Plan obligation is discounted
aggregate of projected benefits.
• Value is independent of liability and based on fair market value (can be overfunded or underfunded).
• Funding/valuation can have significant impact on firm’s financial condition.
• Retirement savings based solely on contributions credited to an individual account and its earnings.
• Participants bear risk of self-directed investment decisions.
• Assets and liabilities are always equal.
• No funding/valuation issues but significant record keeping (work with HR).
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Other types of plans: Hybrid plans (technically one or the other) Qualified vs. non-qualified plans
Employee Retirement Income Security Act (ERISA)
Objectives Ensure that employees and beneficiaries receive
adequate information on plans. Set standards of conduct for individuals who
manage employee benefit plans and funds. Determine that adequate funds are set aside to
pay promised pension benefits. Ensure that employees receive pension benefits
after they have satisfied certain minimum requirements.
Safeguard pension benefits for workers whose pension plans are terminated.
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ERISA Reporting and Disclosure Requirements Favorable tax treatment
vs. penalties, disqualification or excise tax
Applies to all private-sector retirement plans
DOL Annual report (Form 5500)
that describes plan, financial statements, insurance and actuarial information, plan assets
Summary plan description and ERISA statement of rights
Pension Benefit Guaranty Corporation (PBGC) Insures pension plans of
private U.S. corporations and sends report of premiums due
Other filings Must give participants
summary plan description and annual summary of financial statements (others on request)
Must provide participants with periodic benefit statements
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Discussion Question
Which of the following is true of ERISA rules?a) Using the ratio percentage test, the plan must cover a
nondiscriminatory group of non-HCEs who receive compensation worth at least 70% of what HCEs receive.
b) Using the average benefits test, the percentage of non-HCEs benefiting must be ≥ 70% of HCEs who benefit.
c) Any firm with unfunded benefits can qualify fora distress termination and PBGC plan takeover.
d) In a distress termination, the plan sponsor and control group of companies are liable for unfunded benefits.
Answer: dv3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 61
Pension Protection Act (PPA) (2006)
Impact on defined benefit plans Specifies actions to
remedy underfunded plan
Must pay higher premiums to PBGC
If underfunded at time of termination, must pay extra funding to pension system
Closes other loopholes
Updates for defined contribution plans Removes conflict of
interest fiduciary liability for self-interested investment advice
Gives plan participants greater control over how their accounts are invested
Establishes safe harbor investments
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 62
U.S. Bankruptcy Legislation
Chapter 11 reorganization Unanimous consent
procedure Cram-down procedure
Chapter 7 liquidation Provides safeguards against
withdrawal of assets by owners of bankrupt firm
Provides for equitable distribution of assets among creditors
Allows insolvent debtors to discharge all of their obligations and start over
Formal bankruptcy Freefall Pre-arranged Pre-packaged
Informal bankruptcy
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Discussion Question
Complete the following Chapter 7 bankruptcy priority of claims.1. Specific property pledged (e.g., lien)2. Trustee’s costs3. Pre-trustee involuntary liquidation expenses4. Wages earned three months prior to filing5. Unpaid benefit contributions owed six months prior6. Unsecured claims for customer deposits7. Taxes due8. Unfunded pension plan liabilities up to 30%
of book value of common/preferred equity9. General unsecured creditors10. Preferred stockholders (paid up to par value)11. Common stockholders (receive remaining
funds)
v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 64