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Item 4C CITY OF S4UTHLAKE MEMORANDUM Item 4C September 12, 2017 To: Shana Yelverton, City Manager From: Sharen Jackson, Chief Financial Officer Subject: Resolution No. 17-036, Annual review of investment policy and investment strategies Action Requested: Approval of Resolution No. 17-036. The City of Southlake Investment Policy requires that the governing body review its investment policy and investment strategies annually. Background Information: Section 2256 — Public Funds Investment Act ("Act") of the Texas Government Code establishes the requirements for a local government investment policy. The City of Southlake last reviewed its investment policy in September 2016. The City's finance staff has reviewed the investment policy against the Act and has identified few minor changes due to amendments to the Act from the 85th Legislative Session: • clarifies that local governments can invest in insured savings accounts with banks; • amended the Act to exclude broker/dealers from the required certification and specifically named investment advisors and investment pools. The changes are noted in in the attached policy. Financial Considerations: Approval of the Resolution will have no financial impact. Investing activity will continue in the same manner as has been in the past. Strategic Link: F1 Adhere to financial management principles and budget F3 Achieve fiscal wellness standards Citizen Input/ Board Review: None required Legal Review: The investment policy has been reviewed by our financial advisors for compliance with the law. Alternatives: Deny or propose changes to current policy Honorable Mayor and City Council Page 2 of 2 Supporting Documents: Resolution No. 17-036 City of Southlake Investment Policy dated September 2017 Approved Listing of Banks and Brokers Staff Recommendation: Approval of Resolution No. 17-036 CITY OF SOUTILAI<,,,E TEXAS INVESTMENT POLICY Amended September 2017 CITY OF SOUTHLAKE, TEXAS INVESTMENT POLICY TABLE OF CONTENTS I. Purpose ......................................................................................................1 A. Formal Adoption B. Scope C. Review and Amendment II. Investment Strategy....................................................................................1 A. Operating Funds B. Debt Service Funds C. Debt Service Reserve Funds D. Special Projects, Special Purpose, or Construction Funds III. Responsibility and Control..........................................................................2 A. Delegation of Authority and Training B. Internal Controls C. Ethics and Conflict of Interest D. Prudent Investment Management IV. Investment Objectives ................................................................................3 A. Safety of Principal B. Liquidity C. Yield D. Public Trust V. Investment Portfolio....................................................................................6 A. Eligible Investments B. Unauthorized Investments VI. Safekeeping and Custody ........................................................................10 A. Collateralization B. Allowable Collateral and Collateral Levels C. Monitoring Collateral Adequacy and Additional Collateral Securities D. Collateral Substitution E. Safekeeping F. Delivery versus Payment VII. Selection of Banks and Dealers................................................................12 A. Depository Selection B. Investment Advisors C. Selection of Investment Broker/Dealers and Advisors D. Approved Broker/Dealers and Investment Advisors VIII. Reporting..................................................................................................14 A. Quarterly Reporting Appendix „A„ - Certification .................................................................................16 Appendix "B" - Glossary of Common Treasury Terminology...............................17 I. PURPOSE A. Formal Adoption. The purpose of this document is to set forth specific investment policy and strategy guidelines for the City of Southlake, Texas in order to achieve the goals of safety, liquidity, yield, and public trust for all investment activity. This Investment Policy is authorized by the City Council in accordance with Chapter 2256, Texas Government Code (the "Public Funds Investment Act"). B. Scope. This Investment Policy applies to all the investment activities of the City, excluding funds governed by Council approved trust agreements and assets administered for the benefit of the City by outside agencies. In addition to this Policy, bonds funds (as defined by the Internal Revenue Service) shall be managed by their governing ordinance and all applicable State and Federal Law. C. Review and Amendment. The City Council of the City of Southlake shall review its investment strategies and policy not less than annually. II. INVESTMENT STRATEGY The City of Southlake maintains one portfolio in which all funds under the City's control are pooled for investment purposes. Within the pooled portfolio are fund components, each having an investment strategy as described below: A. Investment strategies for operating funds are to assure that anticipated cash flows are matched with adequate investment liquidity. The secondary objective is to create a portfolio structure which will experience minimal volatility during economic cycles. This may be accomplished by purchasing high quality, short to medium term securities which will complement each other. A dollar weighted-average maturity of 365 days or less will be calculated using the stated final maturity date of each secu rity. B. Investment strategies for debt service funds shall have as the primary objective the assurance of investment liquidity adequate to cover the debt service obligation on the required payment date. Securities purchased shall not have a stated maturity date which exceeds the debt service payment date. C. Investment strategies for debt service reserve funds shall have as the primary objective the ability to generate a dependable revenue stream to the appropriate debt service fund from securities with a low degree of volatility. Securities should be of high quality and, except as may be required by the bond ordinance specific to an individual issue, of short to medium term maturities. D. Investment strategies for special projects, special purpose, or construction fund portfolios will have as their primary objective the assurance that anticipated cash flows are matched with adequate investment liquidity. These portfolios should include at least 10% in highly liquid securities to allow for flexibility and unanticipated project outlays. The stated final maturity dates of securities held should not exceed the estimated project completion date. III. RESPONSIBILITY AND CONTROL A. Delegation of Authority and Training. The Chief Financial Officer and Deputy Director of Finance are designated as Investment Officer(s) of the City and are responsible for investment decisions and activities. The Chief Financial Officer will retain ultimate responsibility for investment decisions. The Chief Financial Officer, the Deputy Director of Finance, and any members of the Investment Committee must attend an investment training session on the Act not less than once in a two-year period that begins on the first day of the City's fiscal year and consists of the two consecutive fiscal years after that date, and receive not less than 8 hours (renewal) or 10 hours (initial year) of instruction relating to investment responsibilities under this subchapter from an independent source approved by the Southlake City Council. B. Internal Controls. The Investment Officer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that the cost of a control should not exceed the benefits likely to be derived. The City, in conjunction with its annual financial audit, shall perform a compliance audit of management controls on investments and adherence to the City's investment policy and strategy. C. Ethics and Conflicts of Interest. City staff involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair the ability to make impartial investment decisions. The Investment Officer 2 who has a personal business relationship with an entity seeking to sell an investment to the City shall file a statement disclosing that personal business interest with the Texas Ethics Commission and the City Council. For purposes of this subsection, an investment officer has a personal business relationship with a business organization if: 1. The Investment Officer owns 10 percent or more of the voting stock or shares of the business organization or owns $5,000 or more of the fair market value of the business organization; 2. funds received by the investment officer from the business organization exceed 10 percent of the investment officer's gross income for the previous year; or 3. the investment officer has acquired from the business organization during the previous year investments with a book value of$2,500 or more for the personal account of the investment officer. D. Prudent Investment Management. The designated Investment Officer(s) shall exercise the judgment and care, under prevailing circumstances, that a prudent person would exercise in the management of the person's own affairs. Unless authorized by law, a person may not deposit, withdraw, transfer, or manage in any other manner the funds of the City. Investment Officers, acting in accordance with written procedures and exercising the proper standard of care, shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that this Policy and written procedures were followed. In determining whether an Investment Officer has exercised the proper standard of care, all investments over which the individual had responsibility will be considered rather than a single investment. IV. INVESTMENT OBJECTIVES The City of Southlake shall manage and invest its cash with four objectives, listed in order of priority: Safety, Liquidity, Yield, and Public Trust. The safety of the principal invested always remains the primary objective. All investments shall be designed and managed in a manner responsive to the public trust and consistent with State and Local law. 3 A. Safety of Principal. The City shall seek to control the risk of loss due to the failure of a security issuer or grantor. Such risk shall be controlled by investing only in the safest types of securities as defined in Section V-A of this Policy, through portfolio diversification by investment type and maturity, and by collateralization as required by law. 1. Diversification by Investment Type. Diversification by investment type shall be maintained by ensuring an active and efficient secondary market in portfolio investments and by controlling the market and opportunity risks associated with specific investment types. Bond proceeds may be invested in a single security or investment which exceeds the City's maximum percentages if the Investment Officer determines that such an investment is necessary to comply with Federal arbitrage restrictions or to facilitate arbitrage record keeping and calculation. Diversification by investment type shall be established by the following maximum percentages of investment type to the total investment portfolio: a. U.S. Government Securities 100% b. Municipal Obligations 50% C. Repurchase Agreements 50% d. Certificates of Deposit 100% e. Bankers Acceptances 20% f. Commercial Paper 20% g. Money Market Mutual Funds 50% h. Eligible Investment Pools 100% i. Insured Deposit Accounts 20% 2. Diversification by Investment Maturity. In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not exceed the anticipated cash flow requirements of the funds. The City of Southlake intends to match the holding periods of investment funds with liquidity needs of the City. The maximum final stated maturity of any investment shall not exceed five years. Maturity guidelines by fund are as follows: a. Operating Funds. The weighted average days to maturity for the operating fund portfolio shall be 365 days or less and the maximum allowable maturity shall be three years. If funds are comingled for investment purposes into a "General Operating Fund," the final maturity on any single bond shall not exceed the five-year limit imposed on Debt Service Reserve Funds. b. Debt Service Funds. Debt Service Funds shall be invested to ensure adequate funding for each consecutive debt 4 service payment. The Investment Officer shall invest in such a manner as not to exceed an "unfunded" debt service date with the maturity of any investment. An unfunded debt service date is defined as a coupon or principal payment date that does not have cash or investment securities available to satisfy said payment. C. Debt Service Reserve Funds. Market conditions, Bond Resolution constraints and Arbitrage regulation compliance will be considered when formulating Reserve Fund strategy. Maturity limitation shall generally not exceed the call provisions of the Bond Ordinance and shall not exceed the final maturity of the bond issue. All Debt Service Reserve Fund investment maturities shall not exceed five years. d. Special Project, Special Purpose, and Construction Funds. The funds used for construction and capital improvement programs have reasonable predictable draw down schedules. Therefore investment maturities shall generally follow the anticipated cash flow requirements. Investment pools and money market mutual funds shall provide readily available funds generally equal to one month's anticipated cash flow needs, or a competitive yield alternative for short term fixed maturity investments. A singular repurchase agreement may be utilized if disbursements are allowed in the amount necessary to satisfy any expenditure request, this investment structure is commonly referred to as a flexible repurchase agreement. All earnings will be segregated and made available for any necessary payments to the U.S. Treasury. 3. Collateralization. Collateralization of securities will be made in compliance with Section VI of this Policy. B. Liquidity. Liquidity shall be achieved by anticipating cash flow requirements, by investing in securities with active secondary markets and by investing in eligible money market mutual funds and local government investment pools. A security may be liquidated to meet unanticipated cash requirements, to re-deploy cash into other investments expected to outperform current holdings, or otherwise to adjust the portfolio. C. Yield. The City of Southlake's investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account investment risk constraints and cash flow characteristics of the portfolio. 5 D. Public Trust. Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of capital as well as the probable income to be derived. V. INVESTMENT PORTFOLIO A. Eligible Investments. Investments described below are authorized by Chapter 2256, Texas Government Code as eligible securities for the City. City funds governed by this Policy may be invested in: 1. Obligations of the United States or its agencies and instrumentalities including FHLB Letters of Credit (LDCs), excluding principal-only and interest-only mortgage backed securities, and collateralized mortgage obligations and real estate mortgage investment conduits. 2. Direct obligations of the State of Texas, or its agencies and instrumentalities. 3. Other obligations, the principal and interest on which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, including any securities insured by the Federal Deposit Insurance Corporation (FDIC) and excluding all securities specifically listed as "Unauthorized Investments" in section V.B. of this Policy. 4. Obligations of states, agencies, counties, cities, and other political subdivisions of any State having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than "A" or its equivalent. 5. Fully collateralized repurchase agreements having a defined termination date, placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in this state, and secured by obligations described in Section V-A 1 above which are eligible investments under the Public Funds Investment Act, pledged with a third party approved by the City, and having a market value of not less than the principal amount of the funds disbursed. The term includes direct security repurchase agreements and reverse repurchase agreements structured in compliance with the Texas Government Code. All City repurchase agreement transactions shall be governed by a signed 6 Master Repurchase Agreement. The term of any reverse repurchase agreement shall not exceed 90 days. 6. Certificates of deposit issued by a depository institution with its main office or a branch office in the State of Texas that is : a. guaranteed or insured by the Federal Deposit Insurance Corporation or its successor; or, secured by obligations that are described by Section V-A 1 through 4 above, which are intended to include all direct Federal agency or instrumentality issued mortgage backed securities, but excluding those mortgage backed securities of the nature described in Section V-B, that have a market value of not less than the principal amount of the certificates or in any other manner and amount provided by law for deposits of the City; b. governed by a Depository Contract, as described in Section VII-A, that complies with Federal and State regulation to properly secure a pledged security interest; and, C. solicited for bid orally, in writing, electronically, or any combination of those methods. d. In addition to the City's authority to invest funds in certificates of deposit and share certificates stated above, an investment in certificates of deposit made in accordance with the following conditions is an authorized investment under Tex. Govt. Code Sec. 2256.010 (b): (1) the funds are invested by the City through a clearing broker registered with the Securities and Exchange Commission (SEC) and operating pursuant to SEC rule 15c3-3 (17 C.F.R. Section 240.15c3-3) with its main office or branch office in Texas and selected from a list adopted by the Investment Committee as required by Section 2256.025; or a depository institution that has its main office or a branch office in this state and that is selected by the Investment Committee; (2) the selected broker or depository institution arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located for the account of the City; (3) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States; (4) the selected broker or depository institution acts as custodian for the City with respect to the certificates of deposit issued for the account of the City. 7 7. Bankers' acceptances that: a. have stated maturities of 270 days or fewer, b. will be liquidated in full at maturity, C. is eligible for collateral borrowing from a Federal Reserve Bank; and, d. is accepted by a bank organized and existing under the laws of the United States or any state, if the short-term obligations of the bank, or of the bank holding company of which the bank is the largest subsidiary, are rated not less than "A-1" or "P-1" or an equivalent rating by at least one nationally recognized credit rating agency. 8. Commercial paper with a stated maturity of 270 days or less from the date of issuance that either: a. is rated not less than "A-11", "IP-11", or the equivalent by at least two nationally recognized credit rating agencies; or b. is rated at least "A-1", "P-1", or the equivalent by at least one nationally recognized credit rating agency and is fully secured by an irrevocable letter of credit issued by a bank organized and existing under the laws of the United States or any state thereof. 9. Money market mutual funds regulated by the Securities & Exchange Commission, with a dollar weighted average portfolio maturity of 60 days or less, that fully invests dollar-for-dollar all City funds without sales commissions or loads; and, whose investment objectives include seeking to maintain a stable net asset value of $1 per share. The City may not invest funds under its control in an amount that exceeds 10% of the total assets of any individual money market mutual fund or exceeds 80% of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service in money market mutual funds. This Securities and Exchange Commission regulated fund is required to provide the City with a prospectus and other information required by the Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.) or the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.). 8 10. Eligible Investment Pools as defined in Section 2256.016 of the Texas Government Code provided that: a. investment in the particular pool has been authorized by the City Council; b. the pool shall have furnished the Investment Officer an offering circular containing the information required by Section 2256.016(b) of the Texas Government Code; C. the pool shall furnish to the Investment Officer investment transaction confirmations with respect to all investments made with it; d. the pool shall furnish to the Investment Officer monthly reports that contain the information required by Section 2256.016(c) of the Texas Government Code; e. the pool's investment objectives shall be to maintain a stable net asset value of one dollar ($1); f. whose investment philosophy and strategy are consistent with this Policy and the City's ongoing investment strategy; and g. the pool provides evidence of credit rating no lower than "AAA" or "AAA-m" by at least one nationally recognized credit rating service. h. The net asset value (NAV) of the pool shall be maintained between 99.50 and 100.50. #-i. 11. Interest bearinq bank savings deposits issued by state and national banks or savings bank or a state or federal credit union (having their main or branch office in Texas) that are quaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund (or their successor organizations). B. Unauthorized Investments. The following investments are specifically prohibited by State Law: 1 . Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage- backed security collateral and pays no principal. 9 2. Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest. 3. Collateralized mortgage obligations that have a stated final maturity date of greater than 10 years. 4. Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. C. Downgrade Provision for Investment Ratings An Investment that requires a minimum rating does not qualify as an authorized investment during the period the investment does not have the minimum rating. The City shall take all prudent measures that are consistent with its investment policy to liquidate an investment that does not have the minimum rating. VI. SAFEKEEPING AND CUSTODY A. Collateralization. Consistent with the requirements of State Law, the City requires all bank deposits to be federally insured or collateralized with eligible securities. Financial institutions serving as City Depositories will be required to sign a Depository Agreement with the City and City's safekeeping agent. The safekeeping portion of the Agreement shall define the City's rights to the collateral in case of default, bankruptcy, or closing and shall establish a perfected security interest in compliance with Federal and State regulations, including: 1. the Agreement must be in writing; 2. the Agreement has to be executed by the Depository and the City contemporaneously with the acquisition of the asset; 3. the Agreement must be approved by the Depository's Board of Directors or loan committee, and a copy of the meeting minutes must delivered to the City; and, 4. the Agreement must be part of the Depository's "official record" continuously since its execution. Repurchase agreements must also be secured in accordance with State Law. Each counter party to a repurchase transaction is required to sign a copy of the Security Industry and Financial Markets Association Master Repurchase Agreement. An executed copy of the Agreement must be on file before the City will enter into any transactions with a counter party. 10 B. Allowable Collateral and Collateral Levels. 1. Certificates of Deposit. Eligible securities for collateralization of deposits are defined by the Public Funds Collateral Act, as amended, and meet the constraints of this Policy. The market value of the principal portion of collateral pledged for certificates of deposit must at all times be equal to or greater than the par value of the certificate of deposit plus accrued interest, less the applicable level of FDIC insurance. 2. Repurchase Agreements. Securities underlying repurchase agreements are limited to cash, U.S. Treasuries, , Agencies and Instrumentalities obligations, which are eligible for wire transfer (i.e. book entry) to the City's designated safekeeping agent through the Federal Reserve System and meet the constraints of this Policy. A repurchase agreement's security value shall be the par value plus accrued interest, and the security's market value must be maintained at the following minimum levels: Agreement Maturities Greater Than One Business Day U.S. Treasury Securities 102% U.S. Agency and Instrumentalities 103% Mortgage Backed Securities 105% Agreement Maturities of One Business Day All Securities 100% C. Monitoring Collateral Adequacy and Additional Collateral Securities. 1. Certificates of Deposit. The City shall require monthly reports with market values of pledged securities from all financial institutions with which the City has certificates of deposit. The Investment Officer will monitor adequacy of collateralization levels to verify market values and total collateral positions. If the collateral pledged for a certificate of deposit falls below the par value of the deposit, plus accrued interest less FDIC or other insurance, the institution issuing the certificate of deposit(s) will be notified by the Investment Officer and will be required to pledge additional securities no later than the end of the next succeeding business day. 2. Repurchase Agreements. Weekly monitoring by the Investment Officer of market values of all underlying securities purchased for City repurchase transactions is required. More frequent monitoring may be necessary during periods of market volatility. If the value of 11 the securities underlying a repurchase agreement falls below the margin maintenance levels specified above, the Investment Officer will request additional securities. If the repurchase agreement is scheduled to mature within five business days and the amount is deemed to be immaterial, then the request is not necessary. D. Safekeeping. The City shall contract with a bank or banks for the safekeeping of securities either owned by the City as part of its investment portfolio or as part of its depository and repurchase agreements. All collateral securing bank deposits must be held by a third-party banking institution acceptable to and under contract with the City, or by the Federal Reserve Bank. The securities purchased under a repurchase agreement must be delivered to a third-party custodian with whom the City has established a safekeeping agreement. E. Collateral Substitution. Collateralized certificates of deposit and repurchase agreements often require substitution of collateral. Substitution is allowable for all transactions, but should be limited in the case of bank CDs, to minimize potential administrative problems and transfer expense. In the case of repurchase agreements involving a third- party who shall be contractually responsible for monitoring movement of securities in and out of account. F. Delivery versus Payment. The purchase of individual securities shall be executed "delivery versus payment" (DVP) through the City's Safekeeping Agent. By so doing, City funds are not released until the City has received, through the Safekeeping Agent, the securities purchased. The security shall be held in the name of the City or held on behalf of the City. The Safekeeping Agent's records shall assure the notation of the City's ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the City. VII. SELECTION OF BANKS AND DEALERS. A. Depository Selection. A qualified depository shall be selected through the City's banking services procurement process, which shall include a formal request for proposal (RFP). The City shall permit consideration of applications for a depository contract from banks, credit unions, or saving associations that are doing business in Southlake, and from banks, credit unions, and saving associations that are doing business in the cities contiguous to Southlake. The centralization of depository services is designed to maximize investment capabilities while minimizing service costs. The selection of a depository shall be based on the financial 12 institution offering the most favorable terms and conditions at the least cost, while adhering to the guidelines and provisions within the request for proposal. In selecting a depository, the City shall give consideration to the financial institution's credit characteristics, financial history, service capabilities, and costs for required services. The City's depository contract shall be for three years with an option to extend for an additional two years upon mutual agreement of the depository and the City. Specialized services may be contracted for by the City with another financial institution or company if the depository cannot provide such service or charges more for the same service with little or no appreciable benefit. B. Investment Advisors. The City may contract with an investment advisor, who shall adhere to the spirit, philosophy and specific term of this Policy and shall invest within the same "Standard of Care". The investment advisor must be registered with the Securities and Exchange Commission (SEC) under the Investment Advisor's Act of 1940 as well as with the Texas State Securities Board. Advisors may assist the City with the management of its funds and other responsibilities including but not limited to, broker compliance, competitive bidding, reporting and security documentation. If the City uses an investment advisor, the advisor shall be responsible for performing due diligence and providing its detailed list of qualified broker/dealers to the city not less than annually. An appointed Investment Advisor shall act solely in an advisory and administrative capacity, within the guidelines of this Investment Policy. At no time shall the advisor take possession of securities or funds or otherwise be granted discretionary authority to transact business on behalf of the City. C. Selection of Investment Broker/Dealers and Advisors. Selection will be performed by the Investment Officer, with ratification and approval by the City Council. Selected Investment Advisors and Broker/Dealers shall provide timely transaction confirmations and monthly portfolio reports. Prospective Broker/Dealers shall provide financial and other information as requested by the Investment Officer sufficient to evaluate their fiscal condition and ability to service the City. The Investment Officer will establish criteria to evaluate Investment Advisors and Broker/Dealers, including: 1. Adherence to the City's policies and strategies, 2. Investment performance and transaction pricing within accepted risk constraints, 13 3. Responsiveness to the City's request for services, information and open communication, 4. Understanding of the inherent fiduciary responsibility of investing public funds, and 5. Similarity in philosophy and strategy with the City's objectives. D. Approved Rreker,f ealerc Investment Pools and Investment Advisors. Investment Pools and Investment Advisors eligible to transact investment business with the City shall be presented a written copy of this Investment Policy. Additionally, the registered principal of the business organization seeking to transact investment business shall execute a Certification as shown in Appendix "A", or a Certification similar in form, to the effect that the registered principal has: 1. received and thoroughly reviewed this Investment Policy, and 2. acknowledged that their organization has implemented reasonable procedures and controls in an effort to preclude imprudent investment activities with the City except to the extent that this authorization is dependent on an analysis of the makeup of the City's entire portfolio or requires an interpretation of subjective investment standards. The City shall not enter into an investment transaction with a business organization prior to receiving this written acknowledgement. The City Council or designated investment committee shall review, revise and approve a list of qualified brokers not less than annually. VIII. REPORTING A. Quarterly Reporting. The Investment Officer shall submit a signed quarterly investment report that describes in detail the investment position of the City for the period. The report will include the following: 1. For each pooled fund group: ending book and market value, including fully accrued interest for the reporting period. 2. The book value and market value of each investment end of the period by type of asset and fund type invested. 3. The maturity date of each investment. 4. Fully accrued interest for the reporting period. 14 5. Statement of compliance of the portfolio as it relates to the investment strategy, City investment policy and the Texas Public Funds Investment Act. 6. If the City invests in other than money market mutual funds, investment pools or accounts offered by its depository bank in the form of certificates of deposit, or money market accounts or similar accounts, the reports prepared by the investment officers shall be formally reviewed at least annually by an independent auditor, and the result of the review shall be reported to the City Council by that auditor. 7. The City will seek a third party independent pricing source to determine the value of the City's investment portfolio. 8. The City's independent auditor will review the quarterly investment report for compliance with the Public Funds Investment Act and report findings annually to the City Council. 15 APPENDIX "A" CERTIFICATION I hereby certify that I have personally read and understand the investment policy and master repurchase agreement, (if applicable), conditions of the City of Southlake, Texas, and have implemented reasonable procedures and controls designed to fulfill those objectives and conditions. Transactions between this firm and the City of Southlake will be directed towards precluding imprudent investment activities and protecting the City from credit or market risk. All sales personnel of this firm dealing with the City of Southlake's account(s) have been informed and will be routinely informed of the City's investment horizons, limitations, strategy and risk constraints, whenever we are so informed by the City. This firm pledges due diligence in informing the city of foreseeable risks associated with financial transactions connected to this firm. FIRM REGISTERED PRINCIPAL OF FIRM PRIMARY REPRESENTATIVE: NAME/TITLE (please print) PRIMARY REPRESENTATIVE SIGNATURE DATE 16 APPENDIX "B" GLOSSARY OF COMMON TREASURY TERMINOLOGY Agencies. Federal agency securities. on the bonds face value. Also, a certificate attached to a bond evidencing Asked. The price at which securities are interest due on a payment date. offered. CUSIP. A unique security identification Bid. the price offered for securities. number assigned to securities maintained and transferred on the Broker. A broker brings buyers and Federal Reserve book-entry system. sellers together for a commission paid by the initiator of the transaction or by Dealer. A dealer, as opposed to a both sides; in contrast to a "principal" or broker, acts as a principal in all a "dealer", he does not own or take a transactions, buying and selling for his position in the security. In the money own account. market, brokers are active in markets in which banks buy and sell money and in Debenture. A bond secured only by the inter-dealer markets. general credit of the issuer. Certificate of Deposit (CD). A time Delivery versus Payment. Delivery of deposit with a specific maturity securities with an exchange of money evidenced by a certificate. for the securities. Collateral. Securities, evidence of Depository. The bank selected by the deposit or other property which a City to provide depository services. borrower pledges to secure repayment of a loan. Also refers to securities Discount. The difference between the pledged by a bank to secure deposits of cost price of a security and its value at public monies. maturity when quoted a lower than face value. A security selling below original Commercial Paper. Short-term, offering price shortly after sale also is unsecured promissory notes issued by considered to be at a discount. corporations to finance short-term credit needs. Commercial paper is usually Discount Securities. Non-interest sold on a discount basis and has a bearing money market instruments that maturity at the time of issuance not are issued at a discount and redeemed exceeding nine months. at maturity for full face value, e.g., U.S. Treasury Bills. Coupon. The annual rate of interest that a bond's issuer promises to pay the Diversification. Dividing investment bondholder funds among a variety of securities offering independent returns. 17 and uses them to collateralize Federal Credit Agencies. Agencies of mortgage-backed securities. the Federal government set up to supply credit to various classes of institutions and individuals, e.g., savings and loans, Federal National Mortgage Association small business firms, students, and (FNMA or Fannie Mae). FNMA, a farmers. federal corporation, is the largest single provider of residential mortgage funds in Federal Deposit Insurance Corporation the United States. It is a private (FDIC). A federal agency that insures stockholder-owned corporation. The bank deposits, currently $250,000 per corporation's purchases include a deposit. variety of adjustable mortgages and second loans in addition to fixed-rate Federal Funds Rate. The rate of mortgages. FNMA's securities are also interest at which Federal funds are highly liquid and are widely accepted. traded. This rate is currently set by the FNMA assumes and guarantees that all Federal Reserve through open-market security holders will receive timely operations. payment of principal and interest. Federal Home Loan Banks (FHLB). Federal Open Market Committee Created in 1932, this system consists of (FOMC). Consists of seven members of 12 regional banks, which are owned by the Federal Reserve Board and five of private member institutions and the 12 Federal Reserve Bank regulated by the Federal Housing Presidents. The President of the New Finance Board. Functioning as a credit York Federal Reserve Bank is a reserve system, it facilitates extension of permanent member while the other credit through its owner-members in Presidents serve on a rotating basis. order to provide access to housing and The Committee periodically meets to set to improve the quality of communities. Federal Reserve guidelines regarding Federal Home Loan Bank issues are purchases and sales of Government joint and several obligations of the 12 Securities in the open-market as a Federal Home Loan Banks. means of influencing the volume of bank credit and money. Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). Federal Reserve System. The central A stockholder-owned corporation, which bank of the United States created by entered into government Congress and consisting of a seven conservatorship in September 2008, member Board of Governors in that provides a continuous flow of funds Washington, D.C., 12 regional banks to mortgage lenders, primarily through and about 5,700 commercial banks that developing and maintaining an active are members of the system. nationwide secondary market in conventional residential mortgages. Government Agency Issues. A general Freddie Mac purchases a large volume term describing fixed and floating rate of conventional residential mortgages debt securities issued by Federal agencies, and instrumentalities, is including government sponsored and hence, allowing investors to enterprises (GSEs). Such GSE liquidate collateral if a bank or dealer securities, including Fannie Mae, defaults during the term of the Freddie Mac, FHLB and FFCB, are not agreement. direct obligations of the Treasury and involve government sponsorship or Maturity. The date upon which the guarantees. principal or stated value of an investment becomes due and payable. Liquidity. A liquid asset is one that can be converted easily and rapidly into Money Market. The market in which cash without a substantial loss of value. short-term debt instruments (bills, In the money market, a security is said commercial paper, bankers' to be liquid if the difference between bid acceptances, etc.) are issued and and asked prices is narrow and traded. reasonable size can be done at those quotes. Mutual Funds. Mutual fund providers are investment companies that sell Local Government Investment Pool shares to investors, offering investors (LGIP). The aggregate of all funds from diversification and professional portfolio political subdivisions that are placed in management. Prices fluctuate with the the custody of the state managed pool, performance of the fund. Money market or other qualifying pool(s) that meet mutual funds invest in short-term state statute criteria, for investment and securities such as treasury bills, bank reinvestment. CD's and commercial paper. Market Value. The price at which a Open Market Operations. Purchases security is trading and could presumable and sales of government and certain be purchased or sold. other securities in the open market by the New York Federal Reserve Bank as Master Repurchase Agreement. To directed by the FOMC in order to protect investors, many public investors influence the volume of money and will request that repurchase agreements credit in the economy. Purchases inject be preceded by a master repurchase reserves into the bank system and agreement between the investor and the stimulate growth of money and credit; financial institution or dealer. The sales have the opposite effect. Open master agreement should define the market operations are the Federal nature of the transaction, identify the Reserve's most important and most relationship between the parties, flexible monetary policy tool. establish normal practices regarding ownership and custody of the collateral Par. The value of a security as securities during the term of investment, expressed on its face (face value) provide remedies in the case of default without consideration of a discount or by either party and clarify issues of premium. ownership. The master repurchase agreement protects the investor by Portfolio. Collection of securities held eliminating the uncertainty of ownership by an investor. 19 Protection Commission to hold public Positive Yield Curve. A condition where deposits. interest rates are higher on long-term debt securities than on short-term debt Rate of Return. The yield obtainable on securities of the same quality. a security based on its purchase price or its current market price. This may be Premium. The price that a security the amortized yield to maturity on a demands over its par value. This is the bond or the current income return. difference between the price of an instrument and its value at maturity (par Rating. A formal opinion by an outside value) when the price is higher than the professional service on the credit maturity. reputation of an issuer and the investment quality of its securities. This Primary Dealer. A group of government opinion is expressed in letter values securities dealers that submit daily (e.g., AAA, Baal). reports of market activity and positions and monthly financial statements to the Repurchase Agreement (REPO). A Federal Reserve Bank of New York and holder of securities sells these securities are subject to its informal oversight. to an investor with an agreement to Primary dealers include Securities and repurchase them at a fixed price on a Exchange Commission (SEC) registered fixed date. The security "buyer" in effect securities broker-dealers, banks and a lends the "seller" money for the period of few unregulated firms. the agreement, and the terms of the agreement are structured to Prudent Person Rule. An investment compensate him for this. Dealers use standard. Investments shall be made REPO's extensively to finance their with judgment and care, under positions. circumstances then prevailing, which persons of prudence, discretion and Safekeeping. A service to customers intelligence exercise in the management rendered by banks for a fee whereby of their own affairs, not for speculation, securities and valuables of all types and but for investment, considering the descriptions are held in the bank's vaults probable safety of their capital as well for protection. as the probable income to be derived. SEC Rule 15C3-1. See uniform net Qualified Public Depositories. A capital rule. financial institution which does not claim exemption from the payment of any Secondary Market. A market made for sales or compensating use or ad the purchase and sale of outstanding valorem taxes under the laws of this issues following the initial distribution. state, which has segregated for the benefit of the commission eligible Securities and Exchange Commission collateral having a value of not less than (SEC). Agency created by Congress to its maximum liability and which has protect investors in securities been approved by the Public Deposit transactions by administering securities legislation. 20 Uniform Net Capital Rule. Securities and Exchange Commission requirement Treasury Bills. A non-interest bearing that member firms as well as discount security issued by the U.S. nonmember broker-dealers in securities Treasury to finance the national debt. maintain a maximum ratio of Most bills are issued to mature in three indebtedness to liquid capital of 15 to 1; months, six months, or one year. also called net capital rule and net capital ratio. Indebtedness covers all Treasury Bond. Long-term U.S. money owed to a firm, including margin Treasury securities having initial loans and commitments to purchase maturities of more than ten years. securities, one reason new public issues are spread among members of Treasury Notes. Intermediate term underwriting syndicates. Liquid capital coupon bearing U.S. Treasury securities includes cash and assets easily having initial maturities from one to ten converted into cash. years. Zero-Coupon Security. A security that U.S. Government Securities. Various makes no periodic interest payments but types of marketable securities issued by instead is sold at a deep discount from the U.S. Treasury, including bills, notes, its face value. and bonds. Such securities are direct obligations of the U.S. Government and differ mainly in the length of their maturity. Weighted-Average Life. The weighted- average life refers to the average amount of time that will elapse from the date of a security's issuance until each dollar of principal is repaid to the investor. Yield. The rate of annual income return on an investment, expressed as a percentage. (a) Income Yield is obtained by dividing the current dollar income by the current market price of the security. (b) Net Yield or Yield to Maturity is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. 21 ;; SOUTH AKE Listing of Approved Banks, Brokers and Government Pools For Investment and Depository Services Per the City of Southlake Investment Policy Banks Wells Fargo Bank N.A. Bank of America Bank of New York Mellon Regions Bank First Financial Bank Comerica Bank US Bank Trust N.A. Frost Bank J. P. Morgan Chase Bank Capital One Bank Bank of Texas Federal Reserve Bank Brokers and Advisory Services Vining Sparks First Southwest Asset Management Government Pools TexPool TexSTAR Lone Star Investment Pool Texas Class