Item 4DM E M O R A N D U M
September 8, 2020
To: Shana Yelverton, City Manager
From: Sharen Jackson, Chief Financial Officer
Subject: Resolution No. 20-037, Annual review of investment policy and
investment strategies
Action
Requested: Approval of Resolution No. 20-037. 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 2019. The
City’s finance staff has reviewed the investment policy
against the Act and has not identified any necessary
changes to the investment 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
Supporting
Documents: Resolution No. 20-037
City of Southlake Investment Policy dated September 2020
Approved Listing of Banks and Brokers
Staff
Recommendation: Approval of Resolution No. 20-037
Item 4D
RESOLUTION NO. 20-037
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF SOUTHLAKE, TEXAS, REVIEW OF INVESTMENT
POLICY AND INVESTMENT STRATEGIES.
WHEREAS, Section 2256.005 (e) of the Public Funds Investment Act (the “Act”)
directs the governing body of an investing entity to review its investment policy and investment
strategies not less than annually; and
WHEREAS, the City of Southlake’s financial advisor has reviewed the investment
policy against recent changes to the Act and has not identified any necessary changes to the
investment policy; and
WHEREAS, there are not any recommended changes to the investment policy.
NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF
THE CITY OF SOUTHLAKE, TEXAS:
Section 1. The City Council of Southlake has reviewed the Investment Policy and investment
strategies and hereby adopts the Investment Policy dated September 2020, as attached to this
resolution. The Investment Policy amends and supersedes the Investment Policy adopted by the
City in September 2019.
Section 2. This resolution shall be effective immediately upon adoption.
PASSED AND APPROVED this ______ day of _____________________, 2020.
CITY OF SOUTHLAKE, TEXAS
ATTEST:
_____________________________
Laura Hill
Mayor
___________________________
Amy Shelley
City Secretary
INVESTMENT POLICY
Amended September 2020
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
security.
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.
2
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
3
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. .
2. The officer has a personal business relationship with a business
organization offering to engage in an investment transaction with
the City (as defined in PFIA 2256.005 (i)(1-3)); or
3. The officer is related within the second degree by affinity or
consanguinity, as determined under Chapter 573 of the Texas
Government Code, to an individual seeking to transact investment
business with the entity. (PFIA 2256.005 (i))
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 with
an understanding of the suitability of the investment to the financial requirements of the
entity, and managed in a manner responsive to the public trust and consistent with
State and Local law.
4
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
5
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.
6
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 (LOCs), 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
7
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.
8
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-1", "P-1", 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.).
9
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 bearing 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 guaranteed 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.
10
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.
11
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
12
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
institution offering the most favorable terms and conditions at the least
13
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, requiring at least three competitive offers or
bids , 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,
14
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 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.
15
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.
16
APPENDIX "A"
CERTIFICATION
I hereby certify that I have received and reviewed the entity’s Investment Policy; and
implemented reasonable procedures and controls in an effort to preclude investment
transactions conducted between the entity and the organization that are not authorized
by the entity’s Investment Policy, except to the extent that this authorization is
dependent on an analysis of the makeup of the entity’s entire portfolio or requires an
interpretation of subjective investment standards. (PFIA 2556.005 (k-l)
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
17
APPENDIX "B"
GLOSSARY OF
COMMON TREASURY TERMINOLOGY
Agencies. Federal agency securities.
Asked. The price at which securities are
offered.
Bid. the price offered for securities.
Broker. A broker brings buyers and
sellers together for a commission paid
by the initiator of the transaction or by
both sides; in contrast to a "principal" or
a "dealer", he does not own or take a
position in the security. In the money
market, brokers are active in markets in
which banks buy and sell money and in
inter-dealer markets.
Certificate of Deposit (CD). A time
deposit with a specific maturity
evidenced by a certificate.
Collateral. Securities, evidence of
deposit or other property which a
borrower pledges to secure repayment
of a loan. Also refers to securities
pledged by a bank to secure deposits of
public monies.
Commercial Paper. Short-term,
unsecured promissory notes issued by
corporations to finance short-term credit
needs. Commercial paper is usually
sold on a discount basis and has a
maturity at the time of issuance not
exceeding nine months.
Coupon. The annual rate of interest that
a bond's issuer promises to pay the
bondholder
on the bonds face value. Also, a
certificate attached to a bond evidencing
interest due on a payment date.
CUSIP. A unique security identification
number assigned to securities
maintained and transferred on the
Federal Reserve book-entry system.
Dealer. A dealer, as opposed to a
broker, acts as a principal in all
transactions, buying and selling for his
own account.
Debenture. A bond secured only by the
general credit of the issuer.
Delivery versus Payment. Delivery of
securities with an exchange of money
for the securities.
Depository. The bank selected by the
City to provide depository services.
Discount. The difference between the
cost price of a security and its value at
maturity when quoted a lower than face
value. A security selling below original
offering price shortly after sale also is
considered to be at a discount.
Discount Securities. Non-interest
bearing money market instruments that
are issued at a discount and redeemed
at maturity for full face value, e.g., U.S.
Treasury Bills.
Diversification. Dividing investment
funds among a variety of securities
offering independent returns.
18
Federal Credit Agencies. Agencies of
the Federal government set up to supply
credit to various classes of institutions
and individuals, e.g., savings and loans,
small business firms, students, and
farmers.
Federal Deposit Insurance Corporation
(FDIC). A federal agency that insures
bank deposits, currently $250,000 per
deposit.
Federal Funds Rate. The rate of
interest at which Federal funds are
traded. This rate is currently set by the
Federal Reserve through open-market
operations.
Federal Home Loan Banks (FHLB).
Created in 1932, this system consists of
12 regional banks, which are owned by
private member institutions and
regulated by the Federal Housing
Finance Board. Functioning as a credit
reserve system, it facilitates extension of
credit through its owner-members in
order to provide access to housing and
to improve the quality of communities.
Federal Home Loan Bank issues are
joint and several obligations of the 12
Federal Home Loan Banks.
Federal Home Loan Mortgage
Corporation (FHLMC or Freddie Mac).
A stockholder-owned corporation, which
entered into government
conservatorship in September 2008,
that provides a continuous flow of funds
to mortgage lenders, primarily through
developing and maintaining an active
nationwide secondary market in
conventional residential mortgages.
Freddie Mac purchases a large volume
of conventional residential mortgages
and uses them to collateralize
mortgage-backed securities.
Federal National Mortgage Association
(FNMA or Fannie Mae). FNMA, a
federal corporation, is the largest single
provider of residential mortgage funds in
the United States. It is a private
stockholder-owned corporation. The
corporation's purchases include a
variety of adjustable mortgages and
second loans in addition to fixed-rate
mortgages. FNMA's securities are also
highly liquid and are widely accepted.
FNMA assumes and guarantees that all
security holders will receive timely
payment of principal and interest.
Federal Open Market Committee
(FOMC). Consists of seven members of
the Federal Reserve Board and five of
the 12 Federal Reserve Bank
Presidents. The President of the New
York Federal Reserve Bank is a
permanent member while the other
Presidents serve on a rotating basis.
The Committee periodically meets to set
Federal Reserve guidelines regarding
purchases and sales of Government
Securities in the open-market as a
means of influencing the volume of bank
credit and money.
Federal Reserve System. The central
bank of the United States created by
Congress and consisting of a seven
member Board of Governors in
Washington, D.C., 12 regional banks
and about 5,700 commercial banks that
are members of the system.
Government Agency Issues. A general
term describing fixed and floating rate
debt securities issued by Federal
agencies, and instrumentalities,
19
including government sponsored
enterprises (GSEs). Such GSE
securities, including Fannie Mae,
Freddie Mac, FHLB and FFCB, are not
direct obligations of the Treasury and
involve government sponsorship or
guarantees.
Liquidity. A liquid asset is one that can
be converted easily and rapidly into
cash without a substantial loss of value.
In the money market, a security is said
to be liquid if the difference between bid
and asked prices is narrow and
reasonable size can be done at those
quotes.
Local Government Investment Pool
(LGIP). The aggregate of all funds from
political subdivisions that are placed in
the custody of the state managed pool,
or other qualifying pool(s) that meet
state statute criteria, for investment and
reinvestment.
Market Value. The price at which a
security is trading and could presumable
be purchased or sold.
Master Repurchase Agreement. To
protect investors, many public investors
will request that repurchase agreements
be preceded by a master repurchase
agreement between the investor and the
financial institution or dealer. The
master agreement should define the
nature of the transaction, identify the
relationship between the parties,
establish normal practices regarding
ownership and custody of the collateral
securities during the term of investment,
provide remedies in the case of default
by either party and clarify issues of
ownership. The master repurchase
agreement protects the investor by
eliminating the uncertainty of ownership
and hence, allowing investors to
liquidate collateral if a bank or dealer
defaults during the term of the
agreement.
Maturity. The date upon which the
principal or stated value of an
investment becomes due and payable.
Money Market. The market in which
short-term debt instruments (bills,
commercial paper, bankers'
acceptances, etc.) are issued and
traded.
Mutual Funds. Mutual fund providers
are investment companies that sell
shares to investors, offering investors
diversification and professional portfolio
management. Prices fluctuate with the
performance of the fund. Money market
mutual funds invest in short-term
securities such as treasury bills, bank
CD's and commercial paper.
Open Market Operations. Purchases
and sales of government and certain
other securities in the open market by
the New York Federal Reserve Bank as
directed by the FOMC in order to
influence the volume of money and
credit in the economy. Purchases inject
reserves into the bank system and
stimulate growth of money and credit;
sales have the opposite effect. Open
market operations are the Federal
Reserve's most important and most
flexible monetary policy tool.
Par. The value of a security as
expressed on its face (face value)
without consideration of a discount or
premium.
Portfolio. Collection of securities held
by an investor.
20
Positive Yield Curve. A condition where
interest rates are higher on long-term
debt securities than on short-term debt
securities of the same quality.
Premium. The price that a security
demands over its par value. This is the
difference between the price of an
instrument and its value at maturity (par
value) when the price is higher than the
maturity.
Primary Dealer. A group of government
securities dealers that submit daily
reports of market activity and positions
and monthly financial statements to the
Federal Reserve Bank of New York and
are subject to its informal oversight.
Primary dealers include Securities and
Exchange Commission (SEC) registered
securities broker-dealers, banks and a
few unregulated firms.
Prudent Person Rule. An investment
standard. 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 their capital as well
as the probable income to be derived.
Qualified Public Depositories. A
financial institution which does not claim
exemption from the payment of any
sales or compensating use or ad
valorem taxes under the laws of this
state, which has segregated for the
benefit of the commission eligible
collateral having a value of not less than
its maximum liability and which has
been approved by the Public Deposit
Protection Commission to hold public
deposits.
Rate of Return. The yield obtainable on
a security based on its purchase price or
its current market price. This may be
the amortized yield to maturity on a
bond or the current income return.
Rating. A formal opinion by an outside
professional service on the credit
reputation of an issuer and the
investment quality of its securities. This
opinion is expressed in letter values
(e.g., AAA, Baa1).
Repurchase Agreement (REPO). A
holder of securities sells these securities
to an investor with an agreement to
repurchase them at a fixed price on a
fixed date. The security "buyer" in effect
lends the "seller" money for the period of
the agreement, and the terms of the
agreement are structured to
compensate him for this. Dealers use
REPO's extensively to finance their
positions.
Safekeeping. A service to customers
rendered by banks for a fee whereby
securities and valuables of all types and
descriptions are held in the bank's vaults
for protection.
SEC Rule 15C3-1. See uniform net
capital rule.
Secondary Market. A market made for
the purchase and sale of outstanding
issues following the initial distribution.
Securities and Exchange Commission
(SEC). Agency created by Congress to
protect investors in securities
transactions by administering securities
legislation.
21
Treasury Bills. A non-interest bearing
discount security issued by the U.S.
Treasury to finance the national debt.
Most bills are issued to mature in three
months, six months, or one year.
Treasury Bond. Long-term U.S.
Treasury securities having initial
maturities of more than ten years.
Treasury Notes. Intermediate term
coupon bearing U.S. Treasury securities
having initial maturities from one to ten
years.
U.S. Government Securities. Various
types of marketable securities issued by
the U.S. Treasury, including bills, notes,
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.
Uniform Net Capital Rule. Securities
and Exchange Commission requirement
that member firms as well as
nonmember broker-dealers in securities
maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1;
also called net capital rule and net
capital ratio. Indebtedness covers all
money owed to a firm, including margin
loans and commitments to purchase
securities, one reason new public issues
are spread among members of
underwriting syndicates. Liquid capital
includes cash and assets easily
converted into cash.
Zero-Coupon Security. A security that
makes no periodic interest payments but
instead is sold at a deep discount from
its face value.
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