By Corey Boyer

Is your city’s investment policy comprehensive and well-developed? Does it include clearly stated objectives, allowable investment instruments, and compliance with relevant statutes? If it’s been a while since your policy was reviewed, it may be time to fine-tune it to ensure it reflects your city’s current goals and needs and doesn’t include vague or conflicting requirements that unnecessarily limit your investment options.

Remember, a policy sets out what you are able to do, while a procedure spells out how you should do it.

Here are 10 tips to help develop a sound and comprehensive investment policy.

1. Write a clear and concise statement of objectives. Investment policy objectives should be descriptive and elaborate on how the entity will seek to achieve them, providing stronger guidance.

2. Include a standards of care section addressing delegation of authority, prudence, ethics, and conflicts of interest. The delegation of authority states who is responsible for the investment program and cites the source of that authority.

3. Know your investment statutes and determine whether all allowable investment instruments are appropriate for your program. Be aware that some investment policies borrow language from state statutes and include instruments that are not necessarily suitable for all public entities.

4. Use explicit language to describe allowable investment instruments, including clear definitions of investment types, credit criteria, maturity restrictions, and diversification requirements. Clear descriptions reduce misinterpretation and better protect the government from imprudent investment decisions. Manage diversification by assigning maximum percentages of the portfolio to security types and issuers. In addition, some policies unnecessarily limit investment maturities, or how long an investment can be held. Make sure these limits align with the city’s cash flow needs and investment time horizons.

5. Include collateralization requirements in the policy. Public entities often require collateralization for deposit-type investments, such as certificates of deposit and repurchase agreements. Collateral is an asset pledged to the city to help protect its funds if the financial institution fails to meet its obligations. Investment policies should specify the types of collateral that are allowed, the required collateral ratios, and how and where the collateral must be held by a third party for safekeeping.

6. Require that securities be held in third-party custody arrangements. This requirement helps protect the public entity from a bank’s credit risk.

7. Require a formal process for selecting financial institutions and brokers, and describe this process in the policy. Specify the process that will be used to screen firms. This section should require a due diligence review of prospective firms, specify minimum credit criteria for financial institutions, and limit transactions to approved firms.

8. Require competitive quotes from at least three financial institutions and/or broker-dealers. Many entities obtain competitive quotes for their investment transactions without specifically requiring them in their policy. Adding this requirement ensures that the competitive quoting process is used to seek the best trade execution.

9. Address reporting requirements and specifically state-required portfolio holdings information. The policy should state how frequently investment reports are prepared, to whom they are presented, and essential portfolio and individual holdings data to include in the report, such as yield, security type, and maturity.

10. Determine relevant benchmarks to gauge performance. Some investment policies specify a benchmark in one section while requiring a weighted average maturity (WAM) in another section that does not align with that benchmark. The benchmark maturity should be similar to the portfolio’s WAM to provide an appropriate performance comparison over time. Since investment programs are dynamic, stating that the benchmark and the investment portfolio should maintain similar WAMs allows for flexibility.

By using this article as a checklist, public entities can help ensure their investment policies are complete. The Government Finance Officers Association (GFOA) provides a Sample Investment Policy with expanded examples of sample policy language. The sample policy is available on GFOA’s website at bit.ly/InvestmentTemplate.

Corey Boyer is vice president of Investment Services at PTMA Financial Solutions (ptma.com). PTMA is a member of the League’s Business Leadership Council (lmc.org/sponsors).

Disclaimer
All comments and discussions presented are based purely on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is no guarantee of future results. Any financial and/ or investment decision may incur losses. For important disclosure information, please visit ptma.com/disclosures/. PTMA is a service provider to the Minnesota Municipal Money Market Fund (4M Fund).