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CTP - 7th Edition > Chapter 2 - Legal, Regulatory, and Tax Environment > Flashcards

Chapter 2 - Legal, Regulatory, and Tax Environment Flashcards

(67 cards)

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1
Q

What is an example of something that may present a moral hazard as it relates to offerings from a financial institution?

A

Deposit insurance

Customers will likely not review the bank’s creditworthiness and the bank may take on more risk

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2
Q

BIS

A

Bank for International Settlements

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3
Q

Who oversees the Basel Accords?

A

Basel Committee on Banking Supervision

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4
Q

What are the core focuses of each of the three Basel Accords?

A

Basel I - minimum ratio of capital to risk-weighted assets
Basel II - capital requirements based on risk
Basel III - stress testing and capital adequacy

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5
Q

EPC

A

European Payments Council

Set standards and rules for SEPA

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6
Q

ESRB

A

European Systemic Risk Board

Includes others like EBA, EIOPA, ESMA

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7
Q

Who oversees the Single Rule Book for the European financial markets?

A

European Banking Authority

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8
Q

US Regulatory Entities for Chartered Banks

A

Office of the Comptroller of the Currency (OCC) - Regulates national banks and savings institutions

Board of Governors of the Federal Reserve - regulates state banks that are members

Federal Deposit Insurance Company (FDIC) - regulates state banks that are not part of the fed; also maintains FDIC insurance fund

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9
Q

What are the options a bank has for how to charter in the US?

A

National
State

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10
Q

Federal Reserve Act (1913)

A

Created and firmly established the Federal Reserve as the central bank for the US

Also created national check collection and settlement system

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11
Q

Glass-Steagall Act (1933)

A

Mostly repealed except for deposit insurance (FDIC)

Separated commercial banking from investment banking

Bank cannot underwrite and securities firms can’t take deposits; repealed by Gramm-Leach-Bliley Act (1999)

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12
Q

Anti-tying in Bank Holding Company Act (1970)

A

Prohibits tying in financial services, with exception for traditional bank products

Products must be available separately to the same consumer

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13
Q

Gramm-Leach-Bliley Act (1999)

A

Permits creation of financial holding companies, with Fed as primary regulator

Consolidated capital requirements for holding company

Implemented key consumer protections

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14
Q

Dodd-Frank Act (2010)

A

More transparency across the market, especially for derivatives

Federal Reserve must conduct annual stress tests on the largest and most complex FIs

Volcker rule

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15
Q

E-Sign Act (2000)

A

Digital signatures have the same legal effect as wet-ink signatures

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16
Q

Check 21 (2003)

A

Electronic checks are valid for clearing

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17
Q

Red Flag Rule

A

If the financial institution sees something different than the normal use of the account, they will reach out to the account owner

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18
Q

Regulation FD

A

If MNPI is known to certain entities, then disclose to public

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19
Q

SEC Rule 2a-7

A

Provides regulations on money market funds and floating NAVs

Allows MMFs to utilize floating NAV due to liquidity issues “breaking the buck”

Redemption fees and redemption gates can be employed to secure liquidity

Exception of government money market funds

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20
Q

UCC Article 3

A

Negotiable instruments

Inadvertent accord and satisfaction (90 days)

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21
Q

UCC Coverage Areas

A

Negotiable instruments
Deposit reconciliation
Funds transfers (security procedures and consequential damages)
Letters of Credit
Secured Transactions (collateral)

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22
Q

Where should escheated rebates or gift cards be sent to for a customer?

A

the state of the residence of the customer

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23
Q

BEPS & Methods

A

Base Erosion and Profit Shifting

Multinational corporation artificially books profits to related entities in low-tax jurisdictions, thereby avoiding or reducing its tax liability

Methods: Intercompany Loans & Thin Capitalization

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24
Q

What is double non-taxation?

A

Due to tax loopholes, a company may not pay tax in any jurisdiction

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25
What is Thin Capitalization?
Taking on higher levels of debt to reduce taxable income
26
What are methods taxing authorities will use to determine if thin capitalization is being employed?
Arm's Length Pricing Debt to Equity Ratio Interest Coverage Ratio
27
What is transfer pricing?
The determination of appropriate pricing for intercompany transactions
28
Chapter 11 Bankruptcy
Reorganization Must adopt a reorganization plan
29
Two Options for Proceeding with Chapter 11 Bankruptcy
Unanimous Consent *2/3 of each creditor category must approve *Gives management more negotiating power (can threaten Chapter 7) Cram-Down Procedure *If at least own creditor group agrees, court can proceed so long as all parties are treated equitably
30
Chapter 7 Bankruptcy
Liquidation Equitable distribution of assets among creditors
31
What is a claw-back as it relates to bankruptcy?
Return of funds previously distributed for distribution under bankruptcy proceedings
32
Three Main Objectives for Chapter 7 Bankruptcy
Safeguards against owner withdrawals Equitable distribution of assets among creditors Allow insolvent debtors to discharge all of their obligations and start over
33
Chapter 9 Bankruptcy
Financially distressed municipalities
34
Chapter 13 Bankruptcy
Adjustment of debt for individuals with regular income
35
Chapter 15 Bankruptcy
Establishment of bankruptcy trustees for things in more than one country
36
Three Formal Bankruptcy Procedures
Free-Fall: no structured plan Prearranged: discussions with some creditors Prepackaged: files plan with SEC that all creditors have voted on and accepted
37
Informal Bankruptcy
Working directly with creditors to renegotiate amounts due
38
What type of bankruptcy is informal bankruptcy more common for?
Chapter 11
39
Chapter 7 Bankruptcy Priority or “Absolute Rule”
Specific property pledged (secured creditors) Trustee’s costs Pre-trustee involuntary liquidation expense Wages earned (3 months) Unpaid benefit contributions (6 months) Unsecured claims for customer deposits Taxes Unfunded pension liability (30% book value of equity) General unsecured creditors Preferred stockholders Common stockholders
40
Three Primary Focus Areas of Financial Regulation
Safety & Soundness of the Financial System Market Confidence Consumer Protection
41
Risk of Contagion
A collapse of one bank will result in the collapse of another
42
FinCEN
US financial intelligence unit and primarily oversees criminal or money laundering legislation
43
OECD
Organization of Economic Co-Operation and Development
44
Primary Goals of OECD
Develop world trade and international cooperation Developed framework to avoid base erosion and profit shifting (BEPS)
45
OFAC
Office of Foreign Assets Control Administers and enforces sanctions
46
Secret Service Charge & Responsibilities
“Integrity of US currency and investigate crimes against the US financial system” Counterfeit currency Credit card fraud Check fraud Identity theft
47
FINRA
Financial Industry Regulatory Authority Regulates securities forms and registered securities representatives
48
FSOC
Financial Stability Oversight Council Created post Dodd-Frank Act of 2010 Strong systemic oversight role over the Board of Governors of the Federal Reserve System to prevent systemic risk, but has limited enforcement power
49
ESMA
European Securities and Markets Authority EMIR responsibility
50
EBA
European Banking Authority Setting standards for supervision of banks Implementation of Basel III standards
51
ECB
European Central Bank Price stability via the operation of monetary policy Oversees EU payment systems
52
Examples of regulations most likely to differ across different countries
Bank account opening Availability of physical and notional cash pooling Tax rules Securities registrations requirements (e.g. commercial paper)
53
Is a worldwide tax system common?
No, but US is one of the countries that does
54
What is a hybrid tax system?
Territorial system, with additional taxation for local country requirements Common in Europe
55
Double Taxation Treaty
Reduces withholding liability for taxes May require reclamation of tax paid
56
MLI Treaty Modification (Tax)
modifies provisions of bilateral income tax treaties for all of the signatories the principal purpose test (PPT) applies to all signatories, but the other items are elective
57
What are the two common triggers for the bankruptcy or insolvency process?
Missed scheduled debt payment Short-term cash flow projections show inability to meet debt obligations
58
Who makes the initial choice on the type of bankruptcy to file?
The firm's management
59
What did the Financial Stability Board (FSB) publish proposals for in October 2021?
Enhance money market fund resilience
60
Involuntary Bankruptcy
When creditors initiate bankruptcy proceedings In the US, three or more creditors can petition the federal bankruptcy court Rare due to unjustified proceedings and fines
61
Informal liquidation can be an alternative to what?
Chapter 7 bankruptcy Assignee or trustee will liquidate assets May not fully discharge debts
62
Five potential courses of action for an insolvent company in the UK 1. Administration 2. Company Voluntary Arrangement (CVA) 3. Administrative Receivership 4. Compulsory Liquidation 5. Creditor's Voluntary Liquidation
Administration Company Voluntary Arrangement (CVA)- renegotiate Administrative Receivership – floating charge Compulsory Liquidation Creditors’ Voluntary Liquidation
63
FOMC
Federal Open Market Committee Committee of the US Federal Reserve that runs the open market operations to implement monetary policy
64
If the solvency problem for a company is temporary, what impact should be considered by management?
The impact to the long-term value of the company
65
BCBS
Basel Committee on Banking Supervision
66
Dodd-Frank (2010) created which two entities?
Consumer Financial Protection Board (CFPB) Financial Stability Oversight Council (FSOC)
67
PPT (Taxes)
Principal Purpose Test

CTP - 7th Edition (26 decks)

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