1 © 2010. Treasury Information Services, LLC. All rights reserved. Governance, ERISA, and...

1© 2010. Treasury Information Services, LLC. All rights reserved.

Governance, ERISA, and BankruptcyChapters 1 & 2 (partial)

Kenneth L. Parkinson, CCMManaging DirectorTreasury Information Services, [email protected]


Chapter Overview

Chapter(s)No. of questions

Chapters 1 & 2 (parts VII & VIII)8-10 & 5-7 questions

Toughness Ch. 1: (moderate)

Ch. 2: (moderate)

Math content None.

Range of material Degree of difficulty determined by your range of experience (could be rough)

3

Organizations

Centralization and decentralization Effects on treasury Effects of foreign subs

Shared service centers (SSCs) Std financial processes (P/R, accounting, etc.) Expand to include cash mgt, AR/AP, et al.)

In-house bank Investments, netting, pooling, reinvoicing, FX

exposure mgt

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4

Corporate Governance

Separation of ownership & management Stockholders as investors, not owners Agency problem: managers take advantage of

shareholders as their agents

SOX (2002) most important CG law Created PCAOB to oversee auditors, further public

interest Other key parties: NYSE, inst investors, state Ags

Investor relations Fair & timely release of info to public


5

Independent Directors

What is an independent director? No material rel. with co. Not employed by co. for 5-yr cooling off period

Must be majority of board Also make up nominating, audit, & comp.

Shareholders must be given ability to participate in governance decisions

Define controls and enforcement procs.© 2010. Treasury Information Services, LLC. All rights reserved.

6

Ethics & Accountability

Treasury code of conduct Keeping specified info confidential Conflicts of interest Outside activity limitations Conduct and appearance Certified conformance Protecting whistle-blowers on unethical and

illegal activities


7

Training Sessions in Ethics

Typical agenda might include: Explaining concern for ethical behavior Review of recent historical cases Review of hypothetical situations & sol’ns Company’s code of conduct Review of policies & procedures Insider trading restrictions & reporting Conflicts of interest



Concerns for Ethical Breaches(Essentials page 26 for full list)

Check & wire transfer fraud Rogue trading Backdating options Revenue recognition Insider trading Fair dealings with vendors


AFP Code of Ethics(Essentials of Treasury Management, page 503)

Competence1. Continue to acquire appropriate level of professional knowledge

and skill in finance.

2. 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.

Confidentiality1. Maintain confidential information acquired in the course of

professional activities and disclose such information when legally obligated to do so.

2. Refrain from using or appearing to use confidential information for unethical or illegal advantage either personally or through third parties.


AFP Code of Ethics (cont’d) (Essentials of Treasury Management, page 503)

3. 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. The Certified Cash Manager (CCM) or Certified Treasury

Professional (CTP) designation may only be used if the certification is active.

11

Chapter 2

ERISA & Bankruptcy


12

ERISA’s 5 Objectives

1. Adequate information to employees and beneficiaries

2. Standards of conduct for managers

3. Adequate funds set aside to pay benefits

4. Benefits obtained after satisfying minimum requirements

5. Pension benefits kept safe for workers whose plans are terminated



Employee Retirement Income Security Act (ERISA) of 1974

Regulations Fiduciary responsibilities Impacts of ERISA on corporate

governance Reporting and disclosure requirements Nondiscrimination rule Plan termination


ERISA Fiduciary Responsibilities Fiduciary: Individual or member of Board given

possession of plan assets in trust Legally obligated to administer plan assets solely for

purpose(s) specified Section 404(a)(1) directs fiduciary to act “with the care,

skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.”

Prudent man has been interpreted and applied to mean “prudent expert.”


ERISA Nondiscrimination Rule

Plan must not discriminate in favor of highly compensated employees (HCEs). Amounts, benefits, rights, features, and amendments and

terminations HCE Employee: 5% owner of company during current or

prior year or earned > $90,000 in prior year (or top-paid 20% of employees)

Minimum coverage requirements (any one required) Ratio % test: Non-HCEs must = 70% of HCEs who benefit Average benefits test: Cover nondiscriminatory group of non-

HCEs who get compensation worth at least 70% of what HCEs get


ERISA Plan Termination Distress termination

PBGC takes over plan and pays all guaranteed benefits up to a maximum amount PBGC determines

Only financially troubled companies qualify Plan sponsor and company liable for unfunded

benefits Standard termination

Lump sums or purchase of annuities pay benefits Must give 60 days’ notice and get PBGC approval Plan reversion disposes excess assets but any surplus

is reduced by federal income and excise taxes and termination benefit enhancements totaling 80% + of surplus (any plan liabilities revert too)


Types of Pension Plans Defined benefit plan

Formula 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) Defined contribution plan

Retirement savings based solely on contributions credited to an individual account and its earnings

Participants bear risk of self-directed investment decisions Assets and liabilities are always equal 401(k) and 403(b)

Portability Depends on plan type and vesting


Comparison

Defined Benefit Plan

Defined Contribution Plan

Who bears risk of shortfall?

Employer Employee

Who benefits if returns exceed expectations?

Employer; employee receives only promised benefit

Employee

Growth rate of account value

Slow at first; faster in later years

Early contributions accumulate greatest value

Portability Less portable More portable

Popularity trend Less popular More popular


Deferred Compensation and Non-Qualified Plans

Deferring compensation until later date so they may be taxed at lower rate (due to lower overall income)

Must qualify under IRC Section 401(a) 401(k): Allows employer matching by for-profit

companies 403(b) or tax-deferred annuities (TDAs): Non-profit

employees; no employer matching Non-qualified plans avoid HCE and

discrimination requirements but employer loses tax benefits (employee can still defer taxes).


Developments in Private Pension Plan Design

Hybrid plans Legally all plans must be defined benefit or contribution

plans but some combine features. Advantages

Conversion from DB to contribution plan best as hybridSubstantially overfunded benefit plans best as hybridsUsed as a recruitment tool

Cash balance versus pension equity plans Cash balance is career-average plan. Pension equity is a final-pay plan.

21

Bankruptcy “Chapters”

Chapter 7:Liquidation of compnay Chapter 9: Municipalities Chapter 11: Business reorganization Chapter 13: Personal bankruptcy Chapter 15: Establishes trustees


22

Chapter 11

Creditors from group by type Unanimous consent: 2/3 of each credit group

Management become debtor in possession Operates company Files reorganization plan in 120 days (this

may be repeated until consent gained) Cram-down: groups can be forced to accept


23

Chapter 7 Absolute Priority

1. Secured creditors (with liens)

2. Trustee expenses & pre-trustee expenses

3. Wages for past 3 months to employees

4. Employee benefit plan claims for past 6 mos.

5. Unsecured customer deposit claims

6. Taxes to federal, state, county, etc.

7. Unfunded pension fund liabilities

8. Unsevured creditors, including trade credit granters, unsecured loans, etc.

9. Preferred shareholders

10. Common shareholders


24

Formal & Informal Bankruptcies

Formal: goes to bankruptcy court Freefall: No plan for coming out Prearranged: Tentative deal set, not legally

binding Pre-pac: Pre-packaged that creditors (all)

have agreed on

Informal: temporary problems Work with creditors to restructure debt Alternative to Chapter 7 liquidation



Review Questions

1. Which of the following is a 1. Which of the following is a consideration a director must consideration a director must meet to be considered meet to be considered “independent”?“independent”?

(A) Been an independent auditor (A) Been an independent auditor of the corporationof the corporation

(B) Has no material relationship (B) Has no material relationship with the corporationwith the corporation

(C) Has been an employee during (C) Has been an employee during a cooling off perioda cooling off period

(D) Does not meet in regular (D) Does not meet in regular executive sessionsexecutive sessions

2. Which of the following is the 2. Which of the following is the main legislation governing main legislation governing pension funds?pension funds?

(A) PCAOB(A) PCAOB

(B) 401K(B) 401K

(C) ERISA(C) ERISA

(D) CAMEL(D) CAMEL


Review Questions

3. Common shareholders have absolute priority over which of the following?

(A) Secured vendors(B) No one(C) Federal governments(D) Preferred shareholders

4. A company might institute a non-qualified pension plan for which of the following reasons?

(A) To avoid deferral of taxes

(B) To avoid mortality risk(C) To permit standard

termination(D) To discriminate it terms

of highly compensated employees


Review Questions

5.All of the following are board committees that must be entirely composed of independent auditors except which one?

(A) Nominating (B) Compensation (C) Audit (D) Treasury

6. Which of the following appoints and oversees the PCAOB?

(A) The SEC

(B) The Federal Reserve

(C) The President

(D) The Secretary of Defense


Review Questions

7. Hybrid retirement plans may be more attractive choices when which of the following exists?

(A) Existing defined benefit plan is heavily overfunded

(B) Employer changes from a plan with defined contribution characteristics

(C) There are no highly compensated employees during the past five years

(D) Company decides to switch to traditional defined contribution plan

8. Which one of the following is not a risk financing technique?

(A) Risk retention

(B) Self-insurance

(C) Single parent captive

(D) CID insurance

29

Answers

1. D

2. C

3. B

4. D

5. D

6. A

7. D

8. D



Any Questions?

1 © 2010. Treasury Information Services, LLC. All rights reserved. Governance, ERISA, and...

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Transcript of 1 © 2010. Treasury Information Services, LLC. All rights reserved. Governance, ERISA, and...