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LOMA 311- ISTAR > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Name the 6 segments of the financial service industry

A
  1. depository institutions
  2. insurance companies
  3. finance companies
  4. pension funds
  5. mutual funds
  6. securitie firms
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2
Q

define functional regulation, in terms of the financial service industry.

A

its the principle that a single regulatory body should oversee similar financial activities, regardless of which type of financial institution engages in the activity.

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3
Q

what was the purpose of designing the Dood-Frank wall street reform and consumer protection act,

A

was designed to promote the financial stability of the united States by improving accountability and transparency in the financial system and to protect consumers from abusive financial service practices.

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4
Q

what is the consumer financial protection bureau

A

an independent bureau within the federal reserve system.

  1. establishes clear rules of the road for financial service firms.
  2. enforces consumer fincnail protection laws
  3. takes consumer complains
  4. promotes financial education for consumers
  5. researching consumer behavior
  6. monitor financial markets
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5
Q

What is the responsibility of the financial stability oversight council (FSOC)

A

monitoring the safety and stability of the nations’ financial systems, identifying systemic risks, and coordinating regulatory responses to any threats to the system.

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6
Q

the FSOC has the authority to identify systemically important financial institutions (SIFIs). What are these?

A

institutions whose failure could potentially pose a risk to the financial system. They are subject to more stringent regulatory standards

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7
Q

when is a company considered affiliates?

A

when they are under the common control of a holding company

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8
Q

what is a holding company system?

A

a corporate ownership structure in which on company (holding) owns and controls another company, known as a subsidiary.

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9
Q

Name 4 requirements of state law for insurance holding companies

A
  1. proposed holding transactions must be approved by the insurance department of the insurer’s domiciliary state.
  2. amount that an insurer may invest in subsidiaries is limited
  3. domestic insurers part of holding system are subject to registation and periodic reporting requirements
  4. transfactions between affiliated companies must be reported to the insurance departments of the insueres’ domiciliary state
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10
Q

Define a financial holding company (FHC)

A

a holding company that conducts activities that are financial in nature or incidental to financial activities.

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11
Q

Who regulates the process to become and FHC?

A

Federal Reserve system,

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12
Q

State insurance laws can be classified into two broad types of laws: solvency laws, and market conduct laws. Define solvency laws.

A

Regulate an insurers’ capitalization, policy design and policy reserves. They make sure companies stay solvent and can pay their debts

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13
Q

State insurance laws can be classified into two broad types of laws: solvency laws, and market conduct laws. Define market conduct laws

A

designed to assure companies conduct their business fairly and ethically. they regulate most of the nonfinancial operations of isnueres, holding companies, aderticings, producer licensing, u/w etc..

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14
Q

Name 3 additional services the NAIC provides to the states

A
  1. computerized data basis that enable the departments to simplify the licensing.
  2. examination tracking system, enables departments to schedule and coordinate on-site examinations
  3. financial database containig insurers’ annual statements
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15
Q

All united state, state’s insurance regulatory systems contain what similar features?

A
  1. licensing requirements
  2. reporting and filing requirements
  3. periodic examinations of licensed insurers
  4. Right to take action against licensed companies and producers who violate laws
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16
Q

All states require a certificate of authority prior to transacting business within a state. what is a certificate of authority?

A

a document issued by the state insurance department granting the insurer the right to conduct and insurance business in the state.

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17
Q

What is the purpose to having state licensing requirements?

A
  1. make sure that insurers are financially able to meet their obligations
  2. enable the states tho effectively oversee the operations of insurers.
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18
Q

Do insurance producers (people who market and sell insurance products) need to be licensed in each jurisdiction or just by the company they work with?

A

In each jurisdiction they plan on doing business in

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19
Q

How does an insurance company maintain its certificate of authority?

A

they must fill out a comprehensive financial report, known an an annual statement, with the state insurance department and the NAIC, and must pay any required renewal fee to the sate.

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20
Q

What are the two kinds of periodic examinations that state insurance departments conduct?

A
  1. financial condition examination

2. market conduct examination

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21
Q

What is a financial condition examination?

A

a formal investigation of an insurer that is carried out by one or more state insurance departments and is designed to identify and monitor any threats to the insurers’ solvency.
-every 3-5 years

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22
Q

What is a market conduct examination?

A

A formal investigation of an insurer’s non financial operations that is carried out by one or more state insurance departments and is designed to determine whether the insurer;s market conduct operations comply with applicable laws and regulations .

  • some states do it periodically, others do it when there is a complaint.
  • done on multistate basis
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23
Q

what happens when an insurer’s certificate of authority is suspended?

A

the insurer is required to discountinue operating for a certain period of time. A suspension may be imposed for a stated period of time or may continue until the insurer corrects the violation

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24
Q

what happens when an insurer’s certificate is revoked?

A

the certificate is cancelled and the insurer is not permitted to conduct business within the state until the insurer received a new certificate from the state of insurance departement

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25
Q

What happens when an insurer is placed in receivership?

A

the state insurance commissioner, acting for a state court, takes control of and administers the insurer’s assets and liabilities. The comissioner acts as the reciever- the person responsible for formulating a plan to conserve and control the insures’ assets and for making sure that the insurer’s obligations to customers are met to the extent possible.

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26
Q

An insurance receivership can have two possible outcomes: rehabilitation and liqduidation. Explain both

A
  1. rhabilitation- the insurer continues to exist as a corporation and the insurance department assess the financial disputation. if its possible to rehabilitate they will try with an investor.
  2. liquidation- if it can’t be rehabilitated, its liquidation- the receiver either transfers all the insurer’s business and assets to other insurers or sells the assets and terminates the insurer’s business. - after the business has been liquidated , it no longer exists
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27
Q

What is one primary area of insurance that are subject to federal regulation?

A

their sale of investment-type insurance products.

- they are regulated by federal laws that are enforced by the SEC.

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28
Q

What is the Federal Insurance Office, and what is their reponsibilities?

A

an administrative office within the Treasury department.

  1. monitoring insurance industry, (not health) some long-term care, and crop insurance.
  2. identify areas where the states are not regulating the industry adequately and consulting with the states
  3. helping the FSOC identify systemically risky insurers
  4. coordinating the federal efforts dealing with international insurance matters and representing the US and IAIS.
29
Q

Describe solvency regulation (also known as prudential regulation)- in many countries

A

typically is the primary focus of insurance laws and regulatory requirements though out the world. most countries have a minimum capital requirement as a prerequisite to an insurer’s obtaining a license to conduct business.

30
Q

What is a depository institution?

A

A financial institution that specializes in accepting deposits and making loans. There are 3 kinds

31
Q

Name the 3 kind of depository institutions

A
  1. commercial bank- accepts deposits from people, business, and government agencies
  2. thrift institution- (savings and loan) deposits from consumers and makes residential mortgage loans
  3. credit union, nonprofit, cooperative financial institution owned and run by its members
32
Q

Before a bank can conduct business what must it obtain?

A

a charter from a federal or state agency. Banks are classified national banks or state banks depending on how they were chartered

33
Q

Who regulates the federal chartered credit unions?

A

the NCUA ( national credit union administration), This organization opertates the NCUSIF (national cferdit union share insurance fund)

34
Q

All national banks and most state banks are members of the Federal Reserve System (Fed). What is the primary focus of the Fed?

A
  1. conduct the nations’ monetary policies
  2. supervise and regulate banking institutions and protect the credit rights of consumers
  3. maintain the stability of the nations financial system
  4. Provide certain financial services to the U.S. government, the public and financial institutions
35
Q

What does the department of the Treasury do?

A

its the federal administrative agency with the primary responsibility for administrating federal banking laws

36
Q

What does the Office of the Comptroller of the Currency (OCC) do?

A

its the agency within the Treasury Deprartment that is directly responsible for regulating national banks and most state banks. They adopt and enforce regulations to ensure banks operate in a safe and sound manner.

37
Q

Are banks required to file financial reports with regulatory agencies and are also subjected to periodic examinations by those agencies?

A

yes, they are required to protect the funds of their customers by insuring deposit accounts with the federal deposit insurance corporation

38
Q

What does the Federal Deposit Insurance Corporation do (FDIC)

A

the federal agency that guarantees, with stated limits, the funds deposited in member banks. should and insurance bank fail, the FDIC protects each depositors funds up to the stated dollar amount.

39
Q

Are regulations of banking fairly uniform across the US?

A

Yes, due to the bank laws established

40
Q

Many countries work together to try and promote consistency in the regulation of baking. How is this done? (name one organization and its duties)

A

The Group of 20 Finance Ministers and Central Bank Governors (G20). its a forum for cooperations and consultation amount representatives of key countries, the EU and a few other institutions on matters pertain to the international financial system.

41
Q

What is the purpose of the ‘Basel Committee on Banking Superivision’ organization?

A

the committee members (international) exchange information on supervision issues and have developed guidelines and supervisory standards that member countries are encouraged to follow. They have established international banking regulations.

42
Q

What is the regulation recently created by the Basel Committee on Banking Supervision, called Basel 3? (define)

A

Following the most recent financial crisis, the regulation aims to improve the capital holdings of banks, reduce the amount of risk that banks take on, and increase banks’ transparency.

43
Q

Define a security

A

a certificate or electronic record that represents either an ownership interest in a business or an obligation of indebtedness owned by a business, government or agency

44
Q

Name 5 examples of securities

A
  1. Option (contract to buy or sell specific asset during a limited period of time)
  2. debenture (unsecured corporate bond)
  3. Mutual fund share (share in a fund operated by an investment company that raises and pools money from shareholders and invests it into stocks or other secures)
  4. variable annuity contact
  5. Variable life insurance contract
45
Q

Federal securities laws provide a framework for regulatory oversight of the secures industry, the framework includes 5 requirements. Name them

A
  1. registration requirements
  2. reporting and filing requirements.
  3. the regulation of the purchase and sale of publicly traded securities
  4. periodic examinations of registered entities and individuals
  5. right to take action agaisnt those who violate the laws.
46
Q

Who must the investment company register with prior to conducting business?

A

the SEC

47
Q

What is an investment company?

A

a company that issues securities and engages primarily in investing and trading securities.

48
Q

Why/how/when is an insurance company considered an investment company?

A

insurer’s that sell variable life insurance and variable annuity products maintain separate accounts for those products, and those separate accounts are considered investment companies, and must be registered with SEC.

49
Q

Name 4 types of US investment companies

A
  1. open-end investment company: they establish a portfolio of securities and issues shares in the portfolio to investors. Their capitalization is no fixed, and work as supply and demand- i.e. mutual funds)
  2. closed-end investment company (issues a fixed number of shares, to public and does not redeem the ones outstanding- i.e. shares traded on exchange or OTC)
  3. unit investment trust ( buys and hold a portfolio of securities for a predetermined time- sells the units in the portfolio to the public for a limited time)
50
Q

Most insurers’ separate accounts are registered with the SEC as what kind of investment?

A

Unit investment trusts. They hold and own assets for the participants in variable life insurance and viable annuity contracts.

51
Q

Who is a securities broker?

A

an individual, corporation, or other legal entity engages in the business of buying and selling securities for the accounts of others.

52
Q

Who is a securities dealer?

A

an individual, corporation or other legal entity that is engaged in the business of buying and selling securities for its own accord.

53
Q

what term is used for a securities broker who often operates as both brokers and dealers?

A

broker-dealer, - they transact securities businesses.

54
Q

Prior to entering into securities transactions, securities brokers and dealers must do what?

A
  1. register with the SEC

2. become members of the Financial Industry Regulatory Authority,

55
Q

What is the Financial Industry Regulatory Authority (FINRA)

A

a non-proffit organization of member firms responsible for regulating all securities firms doing business in the united states. Its supervised by the SEC.

56
Q

Define a registered representative in terms of FINRA qualification and registration

A
  1. a person who is associated with a FINRA member, engages in the securities business on behalf of the member by soliciting the sale of securities or training securities sales people, and has passed a special examination administered by FINRa.
57
Q

Define a principal in terms of FINA qualification and registration

A

an officer/ manager who is involved in the day-to-day operations and supervision of the securities business, has qualified as a registered representative, and has passed additional examinations

58
Q

The issuer of a security is required to provide a prospectus to every potential purchaser of a security. What is a prospectus?

A

a communication, usually written, that offers a security for sale and that must contain detailed information about the issuer of the security and the security itself.

59
Q

FINRA has many rules, which impose a variety of requirements on how broker-dealers and registered persons must conduct business. Name 4 examples of such rules.

A
  1. when making investment recommendations, there must be reasonable grounds to believe the recommendation is suitable for the customer based on their investment profile.
  2. broker-dealers must maintain a system to supervise the registered persons who work under their control . A principal must directly supervise the activities of each registered person.
  3. advertisement, sales literature and other communications with the public must meet regulations.
  4. broker-dealers must submit certain public communication materials to FINRA for review.
60
Q

How doeHow does FINRA carry out its regulatory responsibilities?

A

conducting periodic compliance inspections. They review the broker-dealer’s books and records to ensure that they are accurate and unto date.

61
Q

What does FINRA require when there is a dispute between a customer and a broker-dealer or between a broker-dealer and a registered person?

A

The broker-dealer must submit to arbitration when they are involved.

62
Q

What is stated on the NAIC insurance information and privacy protection model act (model privacy act)

A

it establishes standards for the collection, use, and disclosure of information gathered in connection with insurance transactions.

63
Q

How does the Model privacy act describe an insurance transaction?

A

a transaction that 1. involved insurance for personal, family or household needs, and 2) in which an insure either determines an individuals eligibility for insurance coverage or benefits or services a policy.

64
Q

When is an insure required to provide a consumer with a written notice of the insured’s information practices?

A
  1. when the insure intends to collect information about the consumer
  2. will collect that information from sources other than the consumer or public records.
65
Q

According to the Model privacy act, what is considered an adverse underwriting decision?

A
  1. a declination of coverage
  2. a termination of coverage
  3. an offer to insure at higher than standard premium rates
66
Q

What is considered nonpublic personal information?

A

personally identifiable information about a consumer that is not publicly available.

67
Q

What steps must be taken by a financial institution prior to sharing nonpublic personal information about the consumer with certain nonaffiliated 3rd parties?

A
  1. notify the consumer of the institution’s privacy policies
  2. provide the consumer with an opportunity to opt out of information sharing with 3rd parities.
68
Q

As a general rule, a financial institution is permitted to disclose nonpublic personal information to a nonaffiliated 3rd party after what 3 steps?

A
  1. notified the consumer, that the info may be disclosed to such 3rd party
  2. given the consumer an opportunity to opt out
  3. explained to the consumer how to opt out
69
Q

Sometimes under specific conditions, an financial institution is permitted to disclosed nonpublic information to a nonaffiliated 3rd party without providing consumers an opt out. What must be done?

A

1,. fully disclosed to the customer that the information is going to be provided
2. obtain a contractual commitment from 3rd party to maintain the confidentiality of the information.

LOMA 311- ISTAR (15 decks)

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