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Chapter 2: Legal and Regulatory Environment
Learning Objectives- 2 Upon completion of this Module, students will be able to: ● Understand the legal & regulatory issues in the financial services business and how it impacts treasury management. ● The issues covered are the impact of the Federal Reserve, various legislation and regulations, bankruptcy laws and taxes. Module Two, Chapter 2: Legal and Regulatory Environment: ● Milton Friedman was the father of monetary policy ● Free markets with no regulations would be like the wild west, but more regulation makes it less of a free market Outline ● Introduction ● General Regulatory Environment ● Primary Regulators and Standard Setters in International Financial Markets ● US Regulatory and Legal Environment ● Tax Considerations ● Bankruptcy Laws ● As a treasurer you must be aware of regulations and changes ○ FDIC insurance is each social security number is ensured up to $250, ○ We as consumers at the bank get lower interest on our investments and higher interest on our debts so the banks make money and can pay FDIC insurance ● General Types of FI Regulations
○ Monitor/manage overall safety and soundness of banking system ○ Set and implement monetary policy ■ #2: The Fed can increase or decrease monetary policy through rate hikes or decreasing the federal fund rates around 5.5%; if the Fed increases rates, that’s tightening the economy ■ #3: Change reserve requirement (10% the company must keep in reserve) ● Used to be 12% reserve requirement for banks, but they loosened it and made it 10% and there was more money in the economy ■ #1: Quantitative tightening or easing also works (buying/selling of debt securities or bonds from banks) ● Fed buying bonds from banks loses the economy as more money into the economy ○ Determine guidelines for chartering banks and other depository FIs ○ Allocate credit toward sectors of economy and protect consumers ○ Protect investors purchasing securities through FIs ● Moral Hazard is a lack of incentive to guard against risk where one is protected from its consequences (typically though insurance) ○
■ After years of over 20% stock market growth, this act basically got rid of Glass-Steagall Act ■ Citibank combined commercial banking, investing, and insurance ○ Dodd-Frank Act of 2010 ■ Was a direct response to the 2010 subprime mortgage crisis ■ Said investment banks and commercial banks can do business together ○ When times are good, nothing really happens and we free things up - When times are bad, we need someone to blame (banks, usually) and the government is reactionary ● Regulatory Agencies: ● Securities and Exchange Commission (SEC) ○ Registers public offerings of debt and equity ○ Sets financial disclosure standards for corporations that sell securities to public ○ Requires companies with publicly owned securities to file quarterly (10Q) and annual (10K) financial statements ○ Regulates mutual funds and investment advisors ○ Monitors insider trading ● Federal Reserve and Glass-Steagall
○ Federal Reserve Act ■ 1913 ■ Foundation for current banking system ■ All banks with national charter from OCC to become Reserve banks ■ National check collection and settlement system ○ Glass-Steagall Act ■ 1933 ■ Mostly repealed except deposit insurance ■ Historically: ● Commercial banks can’t underwrite ● Securities firms can’t take deposits ● Interest rating ceilings ● Anti-tying in Banking Holding Company Act ○ 1970 ○ Prohibits tying in financial services ○ Extension of credit not conditional to obtaining other bank services ○ Exceptions for traditional bank product ● Gramm-Leach-Blilely Act (1999) ○ Eliminated many Glass-Steagall Act provisions (e.g., banking, insurance and securities barriers) ○ Permits the creation of financial holding companies (FHCs) ■ Let them have commercial banking, investment banking, and even insurance ○ Establishes the Fed as the primary regulator of FHCs ○ Allows easier entry by foreign banks ○ Key consumer protections ○ Protects nonpublic personal information ● Dodd-Frank Act (2010) ○ Response to near failure of US banking system in 2009 recession ○ Derivatives and accountability:
■ Audit committees pre approved audit/non-audit services ■ Accounting/preferable alternatives briefing ○ Regulation G: ■ Reconcile pro forma information to financials ■ Form 8-K earnings releases ■ Material OBSA in MD&A ● Regulation Q ○ No paying interest on corporate DDAs (deposits left in bank by companies, opportunity cost is bad because no interest) ○ Repealed by Dodd-Frank Act ● Uniform Commercial Code (UCC) ○ Article 3 - Negotiable Instruments ■ Avoids inadvertent accord and satisfaction ● Payee must return within 90 days ■ Unauthorized signatures: ● Properly payable checks ● Liability for check issuance situations ○ Article 4 - Bank Deposits, Collections ■ Deposit and collection parties ■ Customer-bank relationship ■ Company’s duty to examine bank statements ■ Imperative to reconcile accounts accurately, timely ○ Article 4A - Funds Transfers ■ Security procedures available to customer ● PINs ● Callbacks ● Encryption ● Message authentication ■ Consequential damages ● No liability beyond actual loss ● Payment orders: liable for interest losses or incidental expenses
○ Article 5 - Letters of Credit (L/Cs) ■ Defines L/C, documentary draft or documentary demand for payment ■ Defines issuer, applicant, beneficiary, advising and confirming banks ○ Article 9 - Secured Transactions ■ UCC-1 Financing Statement listing collateral ● Tax Considerations ○ Unitary taxes ○ Foreign tax credits ○ Capital tax ○ Asset tax ○ Turnover tax ○ Withholding tax ○ Sales and use taxes ○ Value-added tax ● Bankruptcy Laws ○ Unable to meet scheduled debt payments now or in near future ○ Management and board ○ Creditor forced ○ Critical issues: ■ Temporary cash flow or permanent trend? ■ Restricting and impact on value ■ Worth more if liquidated? ■ Formal or informal? ■ Who will be in charge? ■ Bankruptcy type? ● US Bankruptcy Legislation ○ Chapter 11: Reorganization ■ Unanimous consent procedure ■ Cram-down procedure
Where were these questions mentioned in your Chapter 2 slide deck or recorded lecture? ● Breaking the buck refers to ○ A. The Federal Reserve issuing more dollars int eh economy ■ You Answered ○ B. The allowance of MMF to have a NAV less than $ ■ Correct Answer ○ C. Not permitting MMF to go below $1 NAV in most circumstances ○ D. Not allowing stocks and bonds to go below $1 in value ● The Monetary Control Act of 1980 assisted in loosening the economy by ○ A. Allowing MMF to compete with checking accounts ○ B. Allowing more competition among banks ■ Correct Answer ○ C. Reducing float int eh payment system ■ You Answered ○ D. Having the Federal Reserve charge for its services ● "In case of bankruptcy, what is the order of payment for the following: 1- Bankruptcy Trustee, 2-Senior Debt, 3- Common Shareholders, 4-Taxes owed, 5-Subordinated bond holders" ○ "A. 2, 1, 4, 5, 3" ■ Correct Answer ○ "B. 1, 2, 3, 4, 5" ○ "C. 2, 1, 5, 4, 3" ■ You Answered ○ "D. 1, 2, 4, 5, 3"
