2005-011Id
RESOLUTION NO. 05-011 OFECIAL RECORD
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF SOUTHLAKE, TEXAS, REVIEW OF INVESTMENT
POLICY AND INVESTMENT STRATGIES.
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 March 2005, as attached to this
resolution. The Investment Policy amends and supersedes the Investment Policy adopted by the
City on March 2004.
Section 2. This resolution shall be effective immediately upon adoption.
PASSED AND APPROVED this the I St day of 12005.
CITY OF SOUTHLAKE, TEXAS
ATTEST:
Cj0uTH.
c''%Mayor Andy Wambsganss
10:
Lori Farwell _ .:
City Secretary ; :I c
04-
1
M \WDFU.ES\RES99INV DOC
ciito'Southlarke < Texas
INVESTMENT POLICY
Amended March, 2005
TABLE OF CONTENTS
I.
II.
MA
V.
VI.
VII.
VIII.
CITY OF SOUTHLAKE, TEXAS
INVESTMENT POLICY
Purpose....................................................................................................................1
A. Formal Adoption
B. Scope
C. Review and Amendment
InvestmentStrategy.................................................................................................1
A. Operating Funds
B. Debt Service Funds
C. Debt Service Reserve Funds
D. Special Projects, Special Purpose, or Construction Funds
Responsibility and Control......................................................................................2
A. Delegation of Authority and Training
B. Internal Controls
C. Ethics and Conflict of Interest
D. Prudent Investment Management
Investment Objectives..............................................................................................3
A. Safety of Principal
B. Liquidity
C. Yield
D. Public Trust
Investment Portfolio................................................................................................5
A. Eligible Investments
B. Unauthorized Investments
Safekeepingand Custody.........................................................................................8
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
Selection of Banks and Dealers.............................................................................11
A. Depository Selection
B. Investment Advisors
C. Selection of Investment Broker/Dealers and Advisors
D. Approved Broker/Dealers and Investment Advisors
Reporting...............................................................................................................12
A. Quarterly Reporting
Appendix "A" - Certification.............................................................................................14
Appendix "B" - Glossary of Common Treasury Terminology..........................................15
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.
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.
City of Southlake Investment Policy -amended March 2005
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 Director of Finance and Assistant Finance
Director are designated as Investment Officer(s) of the City and are responsible for
investment decisions and activities. The Director of Finance will retain ultimate
responsibility for investment decisions. The Director of Finance, the Assistant
Director, 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 and receive not
less than 10 hours of instruction relating to investment responsibilities under this
subchapter from an independent source approved by the governing body of the local
government or a designated investment committee advising the investment officer as
provided for in the investment policy of the local government.
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 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;
City of SouWake Investment Policy -amended Ma cb 2005 2
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 judgement 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 investing entity.
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.
A. Safetv 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 Tvpe. 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:
City of Southlake Investment Policy -amended Much 2005 3
a. U.S. Government Securities 100%
b. States, Agencies, Counties, Cities and Other 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%
2. Diversification by Investment Maturitv. 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.
b. Debt Service Funds. Debt Service Funds shall be invested to ensure
adequate funding for each consecutive debt 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 Proiect, Special Pumose. 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
City of SoutWake Investment Policy -amended Much 2005 4
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. Liauiditv. 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.
D. Public Trust. Investments shall be made with judgement 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. Eliaible 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,
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,
excluding principal -only and interest -only mortgage backed securities, and
City of SoutWake Investment Poky -amended Much 2005 5
collateralized mortgage obligations and real estate mortgage investment
conduits.
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 selected and 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 Master Repurchase
Agreement. The term of any reverse repurchase agreement shall not exceed
90 days.
6. Certificates of deposit issued by state and national banks domiciled in Texas
that are:
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.
7. Bankers' acceptances that:
a. have stated maturities of 270 days or fewer,
b. will be liquidated in full at maturity,
City of Southlake Investment PoGry-amended Much 2005 6
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 90 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.).
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;
the pool shall furnish to the Investment Officer investment transaction
confirmations with respect to all investments made with it;
City of SoutWake Investment Policy -amended March 2005 7
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.
B. Unauthorized Investments. The following investments are specifically prohibited by
State Law:
Obligations whose payment represents the coupon payments on the
outstanding principal balance of the underlying mortgage-backed security
collateral and pays no principal.
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
City of Southlake Investment Policy -amended Much 2005
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
parry to a repurchase transaction is required to sign a copy of the Public Securities
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.
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 Ap-reements. Securities underlying repurchase agreements are
limited to U.S. Government, 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 Dav_
U.S. Treasury Securities 102%
U.S. Agency and Instrumentalities 103%
Mortgage Backed Securities 105%
City of Southlake Investment Policy -amended March 2005 9
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 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. Collateral Substitution. Collateralized certificates of deposit and repurchase
agreements often require substitution of collateral. Any broker, dealer or financial
institution requesting substitution must contact the Investment Officer for approval
and settlement. The substituted security's value will be calculated and substitution
approved if its value is equal to or greater than the required security level. The
Investment Officer, or a designees, must provide written notification of the decision
to the bank or the safekeeping agent holding the security prior to any security release.
Substitution is allowable for all transactions, but should be limited, if possible, to
minimize potential administrative problems and transfer expense. The Investment
Officer may limit substitution and assess appropriate fees if substitution becomes
excessive or abusive.
E. 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 which the City has
established a safekeeping agreement.
City of Southlake Investment Policy -amended Much 2005 10
F. Delivery versus Pavment. 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. Detnository 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 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.
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.
City of Southlake Investment Policy -amended March 2005 11
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,
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 Broker/Dealers and Investment Advisors. Broker/Dealers 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. Ouarterly Renortin2. 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:
City of SoutWake Investment Poficy-amended March 2005 12
I . For each pooled fund group: a beginning book and market value; book and
market value additions and changes; and ending book and market value,
including fully accrued interest for the reporting period.
2. The book value and market value of each investment at the beginning and 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.
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.
City of Southhdce Investment Policy -amended March 2005 13
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
City of Southlake Investment Pohcy-amended Much 2005 14
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
City of Soul:Wake Investment Policy -amended March 2005 15
on the bond's 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.
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 $100,000 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 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.
City of SouWake Investment Policy -amended March 2005 16
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 twelve 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. Debt securities
issued by government-sponsored enterprises,
federal agencies, and international institutions.
Such securities are not direct obligations of
the Treasury and involve government
sponsorship or guarantees.
Government National Mortgage Association
GNMA or Ginnie Mae). Securities
guaranteed by GNMA and issued by mortgage
bankers, commercial banks, savings and loan
associations, and other institutions. Security
holder is protected by full faith and credit of
the U.S. Government. Ginnie Mae securities
are backed by FHA, VA or FMHM mortgages.
The term pass-through is often used to
describe Ginnie Maes.
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 a 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,
City of SouWake Investment Pohcy-amended March 2005 17
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.
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
judgement 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
City of Southlake Investment Poficy-amended Much 2005 18
an issuer and the investment quality of its
securities. This opinion is expressed in letter
values (e.g., AAA, Baal).
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 posotions.
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 150-1. 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.
Student Loan Marketing Association (Sallie
Mae). A government sponsored entity that
provides liquidity for private lenders (banks,
savings and loan associations, educational
institutions, state agencies and other lenders).
Sallie Mae participates in the Federal
Guaranteed Student Loan Program.
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 Zero -Coupon Security. A security that makes
securities having initial maturities of more no periodic interest payments but instead is
than ten years. sold at a deep discount from its face value.
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.
City of Southlake Investment Policy -amended March 2005 19