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

Chapter 2 - Legal, Regulatory, and Tax Environment Flashcards

1
Q

What are the three areas in which financial regulation is focused on?

A

(1) maintain a safe and sound financial system
(2) retain market confidence
(3) protect consumers

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2
Q

What are the two primary objectives for legislators and regulators re: maintaining a safe and sound financial system?

A

(1) ensure individual FI’s are managed in a way that minimizes the risk of failure
(2) in the event an FI fails, avoid the risk of contagion

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3
Q

What are the three objectives in maintaining market confidence?

A

(1) invester protection against unfair market practices (e.g. insider trading)
(2) operate fair, efficient, and transparent markets (e.g. equal treatment of all market participants and equal access to market info)
(3) protect against systemic failure (e.g. prudent mgmt of asset mgrs and market intermediaries to avoid risk of contagion)

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4
Q

What is the primary goal for consumer protection regulations?

A

provide acceptable access for consumers to financial services, credit, and financial info and to protect consumers from making poor decisions (e.g. distinguish between institutional and retail investors)
BONUS: most common types of investor protection regulation shield investors from insider trading, lack of disclosure, outright malfeasance, and breach of fiduciary duty

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5
Q

Bank for International Settlements (BIS)

A
  • principal center for international central bank cooperation
  • mainly focuses on cooperation among cnetral banks but also including other agences to ensure monetary and financial stability
  • also rpovides / organizes emergency financing to support the international monetary system when necessary
  • BIS also sponsors several committes that support its overal mandate, notably the Basel Committe on Banking Supervision (BCBS)
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6
Q

Basel Committee on Banking Supervision (BCBS)

A
  • established in 1974 in response to problems in the international banking market (i.e. failure of Herstatt Bank in Germany), which highlighted the systemic risk associated iwht the failure of a large international bank between the teim in which the terms of a financial contract are agreed upon and the time of actual settlement
  • BCBS provides a forum for cooperation on supervisory matters and operates as a standard setting body
  • BCBS also developed the Basel Capital Accords
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7
Q

Financial Action Task Force (FATF)

A
  • international org with 35+ member countries
  • purpose: develop policies at national and international levels to combat money laundering and terrorist financing
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8
Q

International Swaps and Derivatives Association (ISDA)

A
  • created in 1985
  • purpose: improve safety and efficiency of swap and derivative markets
  • led to improved documentation procedures and enforceability of netting and collateral provisions (reduces counterparty, credit and legal risks)

-ISDA develops master agreements which include standard terms for financial derivative transactions; which once negotiated governs the ongoing transactions between the two parties

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9
Q

International Accounting Standards Board (IASB)

A
  • develops the International Financial Reporting Standards (IFRS)
  • IFRS interpretation committee is responsible for interpreting the IFRS standards
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10
Q

Organization for Economic Cooperation and Development (OECD)

A
  • established in 1961
  • primary role is to develop world trade and international cooperation
  • with G20, developed framework to eliminate base erosion and profit sharing (BEPS)
  • developed Common Reporting Standards (CRS) to facilitate auto-exchange of financial account info between tax authorities”
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11
Q

Central Banks

A
  • Responsible for implementing and managing a country’s monetary policy including money supply and interest rates.
  • In many countries, they are also responsible for overseeing the commercial banking and payment systems
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12
Q

3 US Regulatory Bodies that oversee banks

A
  • Office of the Comptroller of the Currency
  • Board of Governors of the Federal Reserve (the Fed)
  • Federal Deposit Insurance Corporation (FDIC)
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13
Q

Board of Governors of the Federal Reserve System (the Fed)

A
  • regulates state-chartered member banks and bank holdco’s
  • consists of a network of 12 Federal Reserve Banks
  • FOMC is the body responsible for coordinating Fed’s monetary policy
  • Fed Board of Governors oversee the FOMC and 12 Reserve Banks
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14
Q

Deposit Insurance Fund

A
  • insured institutions pay a premium inot the DIF based on their level of deposits and risk profile (based on the mix of asset to liab. the FI holds)
  • fund is backed by full faith and credit of the US govt and covers deposits up to at least $250k per depositor, per insured bank, for each account ownership category
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15
Q

Federal Deposit Insurance Corporation (FDIC)

A
  • oversees state-chartered banks that are not part of the Fed
  • primary role is to protect depositors from losses caused by bank insolvency
  • FDIC administers the Deposit Insurance Fund (DIF)
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16
Q

Department of the Treasury

A
  • manages the federal govt’s finances
  • Offices and bureaus of the Dept of Treasury include:
    o The Office of the Comptroller of the Currency
    o Internal Revenue Service
    o Financial Crimes Enforcement Network (FinCEN)
    o Office of Foreign Assets Control (OFAC)
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17
Q

Office of the Comptroller of the Currency (OCC)

A
  • Charters and supervises national banks and federal savings institutions
  • Oversees US branches of international banks and foreign branches of US banks
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18
Q

Internal Revenue Service (IRS)

A

Collects federal tax revenue and enforces federal tax laws

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19
Q

Financial Crimes Enforcement Network (FinCEN)

A
  • serves as the US financial intelligence unit (FIU)
  • is the primary agency that oversees and implements policies to prevenet and detect money laundering
  • enforces AML legislation (e.g. Bank Secrecy Act of 1970)
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20
Q

Office of Foreign Assets Control (OFAC)

A
  • administers and enforces economic and trade sanctions against targeted foreign countries, terrorist sponsoring organizations, and international narcotics traffickers
  • imposes controls on financial transactions and freeze foreign assets under US jurisdiction
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21
Q

Department of Justice (DOJ)

A
  • DOJ works with the Fed to review and approve proposed bank mergers and bank holco acquisitions as part of antitrust legislation
  • FBI is a bureau of the DOF and investigates FI fraud and theft and enforces money laundering legislation
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22
Q

The Secret Service

A
  • part of the Dept of Homeland Security (DHS)
  • charged to protect the integrity of our currency and investigate crimes against the US financial system committed by criminals around the world and in cyberspace
  • aslo deals with credit card fraud, check fraud, and identity theft
23
Q

Securities and Exchange Commission (SEC)

A
  • SEC is governed by the securities laws of 1933, 1934, and 1940
  • SEC is a federal agency designed to maintain a fair and orderly market for investors by regulating and supervising securities sales
  • responsbilities include:
  • registering public offerings of debt and equity securitis by both banks and corporations
  • set financial disclosure standards for public companies
  • require public companies to file quarterly and annual financial statements
  • regulate mutual funds and investment advisors
  • monitor insider trading and enforce related regulations”
24
Q

Commodity Futures Trading Commission (CFTC)

A
  • regulates commodity futures and options markets in the US
  • also works with the SEC to regulate OTC derivatives
25
Q

Consumer Financial Protection Bureau (CFPB)

A
  • created in 2010
  • goal was to consolidate and strengthen consumer protection responsibilities
  • oversees the enforcement of federal consumer protection laws (e.g. ensure fair and equitable access to credit for individuals and communities
26
Q

Financial Stability and Oversight Council (FSOC)

A
  • Created by the Dodd-Frank Act of 2010
  • purpose is to prevent system risk from threatening the financial system by:

(1) identify threats to financial stability
(2) identify gaps in regulations
(3) facilitate coordination across federal and state agencies

  • does not directly regulate; has strong systemic oversight role, but limited enforcement power (can only make recommendation to regulators)
27
Q

Financial Industry Regulatory Authority (FINRA)

A
  • regulate securities firms and registered securities reps doing business in the US
28
Q

National Credit Union Administration (NCUA)

A
  • Charteres and supervises federal credit unions
  • aoperates the National Credit Union Share insurance Fund (NCUSIF) which insures savings in all federal credit unions and most state-charted credit unions
29
Q

National Credit Union Share Insurance Fund (NCUSIF)

A

Insures the savings of account holders in all federal credit unions and almost all state-chartered credit unions

30
Q

European Securities and Markets Authority (ESMA)

A
  • oversees the securities markets in Europe
  • supervises entities that have a pan-European reach
  • partially responsible for implementing and adminstering the European Market Infrastructure Regulation (EMIR)
31
Q

European Market Infrastructure Regulation (EMIR)

A
  • intended to increase the stability of the OTC derivatives market throughout Europe
  • implements reporting and clearing obligations for OTC derivatives similar to the requirements of the Dodd-Frank Act in the US
32
Q

European Banking Authority (EBA)

A
  • responsivle for setting standards for the supervision of banks in the EU
  • also responsible for ensuring implemenation of Basel III standards across the EU”
33
Q

European Central Bank (ECB)

A
  • primary objective is price stability through monetary policy
  • also reponsible for overseeing the operation of the EU payment systems including TARGET2
  • directly supervises the most systemically important banks in the EU
34
Q

Uniform Commercial Code (UCC):

A
  • a set of proposals adopted by states as laws to ensure uniformity for commercial transactions in the US
  • UCC defines the rights and duties of all parties involved in a commercial transaction
  • provides a statutory definition of commonly accepted business practices
35
Q

Unclaimed Property (Escheatment) Legislation

A
  • Primarily impact banks or companies that hold unclaimed assets of customers, vendors, or employees
  • Banks / companies hold money / property that goes unclaimed for some specified period of time (aka dormant period)
  • If owner cannot be located, then property must be escheated to the government
  • Each US state has their own rules and databases to search for escheated property
36
Q

Base Erosion and Profit Sharing (BEPS)

A
  • Process where an MNC artificially books profits to related entities in low tax jurisdictions to avoid / reduce their tax liability
  • Double Non-Taxation: using intercompany loans to artificially inflate interest expense for operating companies in high-tax jurisdictions to reduce tax liability in those locations while also maintaining low tax liability in the lower tax jurisdiction
37
Q

Base Erosion and Anti-Abuse Tax (BEAT)

A
  • Introduced in 2017 to combat BEPS
  • Imposes a minimum tax on interest payments to foreign related parties
38
Q

Withholding Tax

A
  • Withholding tax is deducted at payment source and paid directly to the tax authorities in the jurisdiction in which the payment originates
  • Can be applied on both domestic and cross border payments
  • Commonly applied on interest, dividend, and royalty payments
  • Withholding tax liability can be reduced if there is a double-taxation treaty in place between the relevant jurisdictions
39
Q

Multilateral Instrument (MLI) Treaty Modification

A
  • MLI modifies provisions of bilateral income tax treaties for all of the signatories and the principal purpose test (PPT) applies to all signatories
  • As part of BEPS initiative, majority of participating jurisdictions have signed onto the MLI treaty modification
  • The US abstained and is NOT an MLI signatory
40
Q

Thin Capitalization

A
  • Since debt financing is tax deductible, tax authorities are concerned that companies will lever up / become over-leveraged in order to reduce their tax liability
  • Companies that have over-leveraged (thin-capitalized) entities in high-tax jurisdictions and low-leveraged (highly-capitalized) entities in low-tax jurisdictions are subject to additional scrutiny
41
Q

How has Thin Capitalization been addressed in the US and EU?

A
  • Putting a limit on tax-deductible borrowing costs:
    o For US – tax-deductible interest expense is capped at 30% of Adj. Taxable Income (EBIT)
    o For EU – tax-deductible interest expense is capped at 30% of EBITDA
42
Q

How do tax authorities determine whether an entity is thinly capitalized? (3 criteria)

A
  • Arm’s length pricing – consistent application of pricing for financing, such that if the entities are not related, the financing would be on the same terms
  • Clear debt to equity ratios – max limit for debt to equity ratio, where any tax deduction for interest would be permitted
  • Interest coverage ratios – entities that cannot meet interest payments via profits may be considered thinly capitalized and tax deductibility of debt financing would be denied
43
Q

Transfer Pricing

A
  • Process of pricing intragroup transactions such as intercompany loans
  • Tax authorities are wary of companies trying to use intragroup transactions to shift profits from a high tax jurisdiction to a low tax jurisdiction
  • Authorities will want to see clearly documented pricing structures
44
Q

Sales Tax

A
  • Charged at point of sale
  • Collected from the buyer > seller remits the tax to the govt
45
Q

Use Tax

A
  • Imposed directly on the consumer for goods purchased without paying sales tax
  • e.g. online order from a vendor in another state and mailed to buyer
46
Q

Value-Added Tax

A
  • sales tax charged at each stage of production based on increased value that occurs at that stage
  • need to be accounted for in each jurisdiction
47
Q

New Tax Regimes – Pillar One and Pillar Two

A
  • proposed two pillar plan to address MNC tax
  • Pillar One: requires tax revenues from residual profit to be allocated to jurisdictions where they are active per a formula; applies to MNCs with annual global turnover of $20bn+ USH and annual profitability of >= 10%
  • Pillar Two: requires MNCs with annual global turnover of $750mm+ to pay a minimum 15% corporate income tax
48
Q

Bankruptcy and Insolvency Laws

A

Company becomes insolvent if it does not have enough assets to pay its debts or if it cannot pay debt on their contractual due date

49
Q

Absolute Priority Rule

A
  • Governs the distribution of assets during liquidation based on the priority of claims
    1. Secured creditors – entitled to proceeds from sale of pledged property; any residual claims not met will have same priority as general creditor claim
    2. Trustees costs – costs from admin and operating the bankrupt firm are reimbursed next
    3. Expenses incurred from involuntary liquidation before a trustee was appointed are reimbursed next
    4. Unpaid wages to workers earned within 3 months prior to bankruptcy
    5. Unpaid claims for employee benefit plans that should have been paid within 6 months prior to bankruptcy filing
    6. Unsecured claims for customer deposits
    7. Taxes
    8. Unfunded pension liabilities have priority over general creditor claims for up to 30% of book value of common and preferred equity – remaining unfunded pension claims have same priority as general creditor
    9. General, unsecured creditors, sub debt (final category before equity holders)
    10. Preferred stockholders- up to par value of the preferred stock
    11. Common stockholders – any remaining funds
50
Q

Chapter 7 Bankruptcy

A

Liquidation; total shutdown of the firm with orderly liquidation of assets

51
Q

Chapter 9 Bankruptcy

A

For financially distressed municipalities

52
Q

Chapter 11 Bankruptcy

A
  • Business re-organization; try to preserve the firm as an ongoing entity
  • Used for failing firms experiencing temporary financial distress but are worth saving
  • Allows for the firm to continue to operate while the claims of the creditors are settled
53
Q

Chapter 13 Bankruptcy

A

Personal bankruptcy – adjustment of debts for individuals

54
Q

Chapter 15 Bankruptcy

A

Establish bankruptcy trustees for bankruptcies that involve companies, assets or individuals in more than one country

CTP (22 decks)

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