Transcript 1_AFPLST_Slides_Chapters_1_2

AFP Learning System Treasury
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Module One: The Corporate Treasury
Management Function
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Module Two: Corporate Financial Management
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Module Three: Working Capital Management
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Module Four: Cash and Liquidity Management
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Module Five: Money and Capital Markets

Module Six: Treasury Operations and Controls
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Session 1: Course Overview - 1
Session 1, Module One:
The Corporate Treasury Management Function
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Chapter 1:
The Role and Organization of Treasury Management
Chapter 2:
Financial Regulatory Environment
Chapter 1: The Role and Organization of
Treasury Management
Outline:
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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
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Session 1: Module 1, Chapter 1 - 3
Treasury and Its Relationship to
the Corporate Finance Function
Treasury professionals:
Short-term
Long-term
• Perform critical
liquidity management
tasks daily to ensure
availability of cash
resources for
operational activities.
• Perform critical
finance functions that
ensure availability of
funds and information
to sustain initiatives
to support the
financial objectives.
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Session 1: Module 1, Chapter 1 - 4
Discussion Question
What are the principal roles of the corporate
finance function?
Answer:
Corporate finance functions:
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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
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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.
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Session 1: Module 1, Chapter 1 - 6
Discussion Question
What are some actions that can be taken to
mitigate counterparty risk?
Answer:
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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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Session 1: Module 1, Chapter 1 - 7
Financial Function Organization
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Session 1: Module 1, Chapter 1 - 8
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) Treasurer
b) Chief financial officer (CFO)
c) Controller
d) All of the above
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Session 1: Module 1, Chapter 1 - 9
Discussion Question
What are six primary responsibilities of the
treasurer?
Answer:
Managing
overall financial risk
Arranging external financing
Managing relationships with banks and
other financial institutions
Overseeing day-to-day liquidity and cash
management
Investing for the short- and long-term
Developing and implementing treasury
policies and procedures
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Session 1: Module 1, Chapter 1 - 10
Role of the Board of Directors in
Treasury Operations
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General authority for treasury operations
Approve business policies, major
initiatives and business contracts
Board grants authority to:
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Open, close and modify bank accounts
Establish borrowing facilities
Oversee investments
Issue debt and equity securities
Devise, implement and execute risk
management strategies through boardapproved policy statements
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Session 1: Module 1, Chapter 1 - 11
Daily Funds Management
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Daily funds
management
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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.
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Other
responsibilities
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Banking
relationship
administration
Liquidity
management
Cash forecasting
Systems design
Financial risk
management
Daily reporting
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
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Managing all bank and
service provider
relationships
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Company policies
Session 1: Module 1, Chapter 1 - 13
Internal and External Collaboration
Internal collaboration
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Session 1: Module 1, Chapter 1 - 14
Internal and External Collaboration
External collaboration
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Session 1: Module 1, Chapter 1 - 15
Efficient Treasury Operations
Benchmarking
Reengineering
Outsourcing
• Examining and
comparing core
activities
within/across an
industry or
functional area
for the purpose
of identifying
best practices
• Radical redesign
of a particular
business process
with the goal of
continuous
improvement
• Utilizing a third
party to perform
all or part of a
core function
• Example: Basic
staffing levels
• Example:
Application of
Six-Sigma
concepts to
treasury area
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• Example: Payroll
processing
Session 1: Module 1, Chapter 1 - 16
Business Transitions: Mergers,
Acquisitions and Reorganization
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Merger
When two companies combine, with one company
ceasing to exist as legal entity. Combined assets are
operated under surviving company. Usually
consensual.
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Acquisition
When one company buys a majority of voting shares
of another corporation. May be friendly or hostile.
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Reorganization
In the event of severe financial distress, a company
may face bankruptcy, which could result in the
reorganization or liquidation of the company.
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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.
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Session 1: Module 1, Chapter 1 - 18
Discussion Question
What are the advantages and disadvantages
of centralized and decentralized control of the
global treasury management organization?
Answer:
Centralized control Decentralized control
Advantages—
Control,
economies of
scale and lower
operating costs
 Disadvantages—
Little autonomy
for field office
personnel
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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
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Session 1: Module 1, Chapter 1 - 19
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.
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Session 1: Module 1, Chapter 1 - 20
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.
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Session 1: Module 1, Chapter 1 - 21
Corporate Governance
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Major concern for large, publicly traded
companies; regulations vary widely between
countries.
Challenges include:
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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.
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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:
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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)
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Session 1: Module 1, Chapter 1 - 23
Investor Relations
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Company function that deals with the
disclosure or release of information to bondand stockholders in a timely manner;
activities mandated to support market
regulatory requirements.
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Responsibilities include earnings releases
and forecasts, annual/quarterly reports,
press releases, legal disclosures.
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Investor relations department is a
company’s only interaction with the stock
market, over which it has full control.
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Session 1: Module 1, Chapter 1 - 24
Role of Independent Directors
Define independent directors.
Define role and authority of
independent directors.
Four purposes of
NYSE standards
Define shareholder
participation in governance
decisions.
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Define control and
enforcement mechanisms.
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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Session 1: Module 1, Chapter 1 - 25
Ethics and Accountability
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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.
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Session 1: Module 1, Chapter 1 - 26
Ethics and Accountability
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Code of conduct for
treasury
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Confidential
information
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Encourage ethical
conduct through clear
statements of what is,
and is not, acceptable
behavior.
Cannot be disclosed to
vendors, family or third
parties.
Conflicts of interest
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Avoid conflict of
interest or appearance
thereof.
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External activities
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Employee conduct
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External business
ventures should not
interfere with duties or
create a conflict of
interest.
On-the-job behaviors and
personal habits should
not reflect negatively on
company.
Conformance to code
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Employees should
personally certify that
they have read and
comply with the code.
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:
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Failure to maintain work papers
Manipulation of financial statements
and reports
Document destruction
Securities fraud
Personal loans to executives
Insider trading during blackout periods
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Session 1: Module 1, Chapter 1 - 28
Training Sessions in Corporate
Treasury Ethics
Possible 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.
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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:
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Check and electronic
payments fraud
Rogue trading or trading
without approval
Segregation of duties
failures
Anti-money laundering
violations
Backdating options
Manipulation of earnings
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Revenue recognition
issues
Failure to report
significant accounting
deficiencies
Insider trading
Unfair dealings with
vendors
Improper use of
company assets
Chinese wall violations
Session 1: Module 1, Chapter 1 - 30
AFP Standards of Ethical Conduct
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.
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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.
Session 1: Module 1, Chapter 1 - 31
AFP Standards of Ethical Conduct
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.
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Session 1: Module 1, Chapter 1 - 32
Chapter 2: Financial Regulatory
Environment
Outline:
 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
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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
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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 surveillance
Answer: c. Depositors may not investigate
a bank’s creditworthiness; banks may
undertake more risk.
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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)
• Coordinates
national financial
authorities and
international
standard setting
bodies
• Organization that
fosters
international
monetary and
financial
cooperation
• Develops and
promotes
implementation
of effective
regulatory,
supervisory and
other financial
sector policies
• Serves as bank
for central banks
• Sponsor of BCBS,
CPSS
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International
Organization of
Securities
Commissions
(IOSCO)
Financial Action Task
Force (FATF)
• 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
Session 1: Module 1, Chapter 2 - 36
U.S. Regulatory Environment
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Treasury Department is organized into two
major components:
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Departmental offices
Formulate policy and management of Treasury
Operating bureaus
Carry out specific operations assigned to Treasury
Regulatory agencies:
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OCC
OFAC
FinCEN
IRS
U.S. Mint
FMS
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Office of Inspector General
FSOC
OFR
FIO
FDIC
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NCUA
DOJ
CFPB
SEC
CFTC
FINRA
Session 1: Module 1, Chapter 2 - 37
The Federal Reserve System
(Fed)
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Organization:
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Board of Governors
Federal Open Market
Committee (FOMC)
12 banks and 24
branches
Dodd-Frank Act:
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New governance rules
(appointing members)
Periodic audits and
counterparty disclosure
(discount window and
open market operations)
New vice chairman for
supervision
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Three tools of monetary
policy:
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Open market operations
Discount rate
Reserve requirements
Principal roles:
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Monetary policy
Supervision and
regulation
Government services
Depository institution
services
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.
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Session 1: Module 1, Chapter 2 - 39
Office of the Comptroller of the
Currency (OCC)
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Regulates the national
banking system
Administers:
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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:
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Oversees the execution
of laws
Proposes rules and
regulations governing
operations
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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
Session 1: Module 1, Chapter 2 - 40
Discussion Question
Which 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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Session 1: Module 1, Chapter 2 - 41
Regulatory/Supervisory Agencies
Focusing on Consumer Protection,
Investors and Insurance Companies
CFPB
Office
accountable
for
consumer
protection
SEC
Regulates
and
supervises
securities
sales
CFTC
FINRA
FIO
Regulates
commodity
futures and
options in
U.S.
Provides
investor
protection
and market
integrity
Will provide
recommendations and
guidance on
insurance
industry
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Session 1: Module 1, Chapter 2 - 42
Securities and Exchange
Commission (SEC)
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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
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Regulates mutual funds
and investment advisors
Monitors insider trading
Session 1: Module 1, Chapter 2 - 43
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).

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Session 1: Module 1, Chapter 2 - 44
Session 2, Module One:
The Corporate Treasury
Management Function
Chapter 2: Financial Regulatory
Environment
Outline:
 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
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Session 2: Module 1, Chapter 2 - 46
Gramm-Leach-Bliley Act (1999)
Eliminated many
provisions of the
Glass-Steagall Act
(e.g., barriers
among banking,
insurance and
securities
businesses)
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Permits the creation of financial holding
companies (FHCs)
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Establishes the Fed as the primary
regulator of FHCs
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Allows easier entry by foreign banks
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Placed CRA rating stipulations on
mergers of bank holding companies with
insurance or securities firms
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Required financial institutions to
establish and regularly disclose privacy
policies; prohibited credit card and
account numbers from being shared with
third-party marketers
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Session 2: Module 1, Chapter 2 - 47
Dodd-Frank Wall Street Reform and
Consumer Protection Act (2010)

Enacted in
response to the
near failure of the
U.S. banking
system as a result
of the Great
Recession
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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
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Session 2: Module 1, Chapter 2 - 48
Check Clearing for the 21st
Century Act (Check 21) (2003)
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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

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Session 2: Module 1, Chapter 2 - 49
Acts Controlling Money Laundering
Bank Secrecy Act
(1970) and Money
Laundering Control
Act (1986)
 Stages of money
laundering:
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Placement
Layering
Integration
USA PATRIOT Act (2001)
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Imposed obligations on non-bank
financial institutions
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Made foreign banks in U.S. subject
to U.S. jurisdiction
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Prohibited U.S. banks from
maintaining correspondent
accounts for foreign shell banks
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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)
All FIs must report
suspicious financial
transactions.
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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.

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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)
b)
c)
d)
Community Reinvestment Act (CRA) (1977, 1995)
Expedited Funds Availability Act (1997)
Gramm-Leach-Bliley Act (1999)
Dodd-Frank Act (2010)
v3.0 © 2011 Association for Financial Professionals. All rights reserved.
Session 2: Module 1, Chapter 2 - 52
Federal Reserve Regulations
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 Q
Prohibits depository institutions from paying interest on
corporate demand deposit accounts; repealed by DoddFrank Act
v3.0 © 2011 Association for Financial Professionals. All rights reserved.
Session 2: Module 1, Chapter 2 - 53
Federal Reserve Regulations
Regulation Z
Protects consumers from unexpected credit card rate
increases; prohibits issuing credit card to consumer
under age 21; requires consent before charging overlimit fees; limits high fees; bans creditors from twocycle 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
v3.0 © 2011 Association for Financial Professionals. All rights reserved.
Session 2: Module 1, Chapter 2 - 54
Discussion Question
Match each tax with its correct use.
To tax despite no profits
a) Foreign tax credit
(FTC)
To slow foreign direct
b) Capital tax
investment
To relieve double taxation c) Asset tax and turnover
tax
To tax at each stage of
d) Withholding tax
production
e) Sales and use
To tax funds moving out
taxes
of a country
f) VAT
To tax at the point of
purchase or Internet
v3.0 © 2011 Association for Financial Professionals. All rights reserved.
Session 2: Module 1, Chapter 2 - 55
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
v3.0 © 2011 Association for Financial Professionals. All rights reserved.
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
Session 2: Module 1, Chapter 2 - 56
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

v3.0 © 2011 Association for Financial Professionals. All rights reserved.
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.
Session 2: Module 1, Chapter 2 - 57
Retirement Plan Formats
Defined benefit 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.
Defined contribution plan
• Retirement savings based
solely on contributions
credited to an individual
account and its earnings.
• Participants bear risk of selfdirected investment decisions.
• Assets and liabilities are
always equal.
• No funding/valuation issues
but significant record keeping
(work with HR).
Other types of plans:

Hybrid plans (technically one or the other)

Qualified vs. non-qualified plans
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Session 2: Module 1, Chapter 2 - 58
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.
v3.0 © 2011 Association for Financial Professionals. All rights reserved.
Session 2: Module 1, Chapter 2 - 59
ERISA Reporting and Disclosure
Requirements



Favorable tax treatment
vs. penalties,
disqualification or
excise tax
Applies to all privatesector 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
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

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
Session 2: Module 1, Chapter 2 - 60
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 nonHCEs benefiting must be ≥ 70% of HCEs who benefit.
c) Any firm with unfunded benefits can qualify for
a 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: d
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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
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Updates for defined
contribution plans



Removes conflict of
interest fiduciary
liability for selfinterested investment
advice
Gives plan participants
greater control over
how their accounts are
invested
Establishes safe harbor
investments
Session 2: Module 1, Chapter 2 - 62
U.S. Bankruptcy Legislation

Chapter 11 reorganization



Unanimous consent
procedure
Cram-down procedure
Chapter 7 liquidation




Formal
bankruptcy



Freefall
Pre-arranged
Pre-packaged
Provides safeguards against  Informal
withdrawal of assets by
bankruptcy
owners of bankrupt firm
Provides for equitable
distribution of assets among
creditors
Allows insolvent debtors to
discharge all of their
obligations and start over
v3.0 © 2011 Association for Financial Professionals. All rights reserved.
Session 2: Module 1, Chapter 2 - 63
Discussion Question
Complete the following Chapter 7 bankruptcy priority of
claims.
1.
Specific property pledged (e.g., lien)
2.
Trustee’s costs
3.
Pre-trustee involuntary liquidation expenses
4.
Wages earned three months prior to filing
5.
Unpaid benefit contributions owed six months prior
6.
Unsecured claims for customer deposits
7.
Taxes due
8.
Unfunded pension plan liabilities up to 30%
of book value of common/preferred equity
9.
General unsecured creditors
10. Preferred stockholders (paid up to par value)
11. Common stockholders (receive remaining
funds)
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Session 2: Module 1, Chapter 2 - 64