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Item 9ACity of Southlake, Texas February 24, 2004 TO: Billy Campbell, City Manager FROM: Sharen Elam, Director of Finance Ext. 1713 SUBJECT: Resolution No. 04 -019, Review of Investment Policy and Investment Strategies Action Requested: Approval of Resolution No. 04 -019. The City of Southlake Investment Policy Section 2256.005 (e) 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 modified its investment policy in September 2002 to comply with then - recent legislative changes. The City's finance staff and financial advisor have reviewed the investment policy against recent changes to the Act and have 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. 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. 04 -019 City of Southlake Investment Policy dated March 2004 Staff Recommendation: Approval of Resolution No. 04 -019 RESOLUTION NO. 04 -019 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SOUTHLAKE, TEXAS, ADOPTING A REVISED CITY INVESTMENT POLICY. 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 2004, as attached to this resolution. The Investment Policy amends and supersedes the Investment Policy adopted by the City on September, 2002. Section 2. This resolution shall be effective immediately upon adoption. PASSED AND APPROVED this the day of 1 2004. CITY OF SOUTHLAKE, TEXAS ATTEST: Mayor Andy Wambsganss Lori Farwell City Secretary M: \WDFILES\RES99IN V.DOC ofSoutblake Texas z INVESTMENT POLICY Amended March, 2004 CITY OF SOUTHLAKE, TEXAS IN VESTMENT POLICY TABLE OF CONTENTS L 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 ...................................................................................... ..............................5 A. Eligible Investments B. Unauthorized Investments VI . Safekeeping and 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 VIL 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 VIII Reporting ..................................................................................................... .............................12 A. Quarterly Reporting Appendix "A" - Certification 14 Appendix "B" - Glossary of Common Treasury Terminology ...................................... .............................15 L 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. 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 City of SoutWake Investment Policy - amended August 2002 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: 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; 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 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. City of SoutWake Investment Policy - amended August 2002 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. 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. States, Agencies, Counties, Cities and Other 50% C. Repurchase Agreements 50% d. Certificates of Deposit 100% C. Bankers Acceptances 20% f. Commercial Paper 20% g. Money Market Mutual Funds 50% h. Eligible Investment Pools 100% 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. 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 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 City of SoutWake Investment Policy - amended August 2002 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. 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. 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. 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, 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 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. City of SoutWake Investment Policy - amended August 2002 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. 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- V or "P -1" or an equivalent rating by at least one nationally recognized credit rating agency. 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. 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: City of SoutWake Investment Policy - amended August 2002 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; C. 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: 1. 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. VL 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: City of SoutWake Investment Policy - amended August 2002 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 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. 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. Repurchase Agreements. 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 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. 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. 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 City of SoutWake Investment Policy - amended August 2002 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. 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 m aximiz e investment capabilities while minimiz 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. City of SoutWake Investment Policy - amended August 2002 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, 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: received and thoroughly reviewed this Investment Policy, and 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. VIIL 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: 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. 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. The maturity date of each investment. City of SoutWake Investment Policy - amended August 2002 10 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 SoutWake Investment Policy - amended August 2002 11 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 SoutWake Investment Policy - amended August 2002 12 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. 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. 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 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 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 SoutWake Investment Policy - amended August 2002 13 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. City of SoutWake Investment Policy - amended August 2002 14 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 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, 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 maxim 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, 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 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. 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 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 maxim 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. City of SoutMake Investment Pofiey- amended August 2002 16