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SR-204-001 (12) FINANCE:TREASURY:DRC:F:\FINANCE\TREASURY\SHARE\INVPOL04 Council Meeting: February 24, 2004 Santa Monica, California TO: Mayor and City Council FROM: City Staff SUBJECT: Revision to City Investment Policy, Continuation of Delegation of Investment Authority to City Treasurer, and Resolution Authorizing the Establishment and Use of Bank and Brokerage Accounts and Updating the List of Persons Authorized to Conduct Transactions with the State Local Agency Investment Fund INTRODUCTION This report recommends City Council approve a revised City Investment Policy, extend the delegation of investment authority to the Director of Finance/City Treasurer from February 29, 2004 through February 28, 2005, and update the list of persons authorized to conduct transactions with the State Local Agency Investment Fund (LAIF). BACKGROUND State law requires that the City adopt an investment policy (Attachment 1) and that the City Council consider the policy at a public meeting. Section 711 of the Santa Monica City Charter delegates to the City Treasurer authority for investing City funds. State law requires the Council delegate investment authority for a one-year period, renewable annually. The Council last approved the Investment Policy on February 25, 2003. At that time, Council also extended delegation of investment authority to the City Treasurer through February 28, 2004. 1 Resolution No. 9875 (CCS), approved July 22, 2003 designates Director of Finance/City Treasurer Steve Stark, Assistant City Treasurer David Carr, and, Supervising Fiscal Staff Assistant Neela Patel as individuals authorized to conduct investment transactions with LAIF. Ms. Patel is currently authorized to make transactions only under specific instructions from Mr. Carr or Mr. Stark. DISCUSSION The City continues to abide by the highest professional standards in the management of public funds. The Association of Public Treasurers United States & Canada (APT) has made some changes to its model investment policy since 1992 relating mostly to format, but also taking into account changes in the law and best practices for the investment of public funds. Adoption of the proposed revisions to the City’s investment policy will help ensure that the City investment policy adheres to the standards of the APT model investment policy. Other than the format changes, the significant changes from the current policy being proposed are an increase in the maximum weighted average days to maturity of the portfolio from 547 days (one and one-half years) to three years, an increase in the maximum percentage of the portfolio allowed to be invested in a single federal agency from 33 1/3% to 50%, and the removal of the provision that all investments of three years or greater must be approved in advance by a unanimous decision of the Investment Committee. These changes will provide the Director of Finance/City Treasurer greater flexibility in making investment decisions and result in an increase in portfolio return without a significant increase in risk. 2 Upon approval of these changes by Council, the policy will be submitted to the APT for re-certification. The APT recommends re-certification at least once every five years. Section 53607 of the State of California Government Code limits the authorization of the legislative body to delegate investment authority to a one-year period, renewable annually. The current delegation to the City Treasurer runs through February 28, 2003. Staff requests that Council extend the delegation from February 29, 2004 through February 28, 2005. The current approved Investment Policy allows the Director of Finance/City Treasurer to delegate investment authority to the Assistant City Treasurer. The proposed revised Investment Policy delegates investment authority to Assistant City Manager Gordon Anderson and City Manager Susan McCarthy in the rare instances when the Director of Finance/City Treasurer and Assistant City Treasurer are not available. Staff further proposes the removal of the Supervising Fiscal Staff Assistant from persons authorized to conduct investment transactions with LAIF. These changes will strengthen the City’s internal control structure for the cash management process. A Council-approved resolution is required by the State to change the persons authorized to conduct LAIF investment transactions. The attached resolution adds Mr. Anderson and Ms. McCarthy and removes Ms. Patel from the list of persons authorized to these transactions. The resolution continues the delegation of authority to establish and use bank and brokerage accounts to the Director of Finance/City Treasurer. 3 BUDGET/FINANCIAL IMPACT There are no budget or financial impacts resulting from this staff report. RECOMMENDATION Staff recommends that Council approve the attached Investment Policy, extend Delegation of investment authority to the Director of Finance/City Treasurer for the period February 29, 2004 through February 28, 2005, and approve and adopt the attached resolution. Prepared by: Steve Stark, Director of Finance/City Treasurer David R. Carr, Assistant City Treasurer Attachment: Attachment 1 – Revised City Investment Policy (Redline Copy) Attachment 2 – Revised City Investment Policy Resolution (See adopted Resolution No. 9931 (CCS). 4 Revised 2/0304 ATTACHMENT 1 INVESTMENT POLICY FOR THE CITY OF SANTA MONICA PURPOSE A. The purpose of establishing a formal investment policy is to set broad guidelines within which the City Treasurer is to lawfully invest City funds. These guidelines do not supersede applicable State laws and City codes. 1.0 POLICY It is the policy of the City of Santa Monica to invest public funds in a manner which will safely preserve portfolio principal, provide adequate liquidity to meet the City’s cash flow needs, and optimize returns while conforming to all federal, state, and local statutes governing the investment of public funds. SCOPE B.2.0 This investment policy applies to all cash and financial investments of the various funds of the City of Santa Monica as identified in the City's Comprehensive Annual Financial Report, with the exception of those financial assets explicitly excluded from coverage by theseInvestment Policy policies for legal or operational reasons. All City Funds are listed in Attachment A and all cash and financial investments, which are excluded from coverage by this investment policy, are identified in Attachment B. The Investment Policy will also apply to all new funds created unless specifically exempted. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. Interest is allocated on a quarterly basis. 3.0 PRUDENCE Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in 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. The standard of prudence to be used by investment officials shall be the “prudent person” and/or “prudent investor” standard and shall be applied in the context 5 of managing an overall portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. C. ADMINISTRATION 1. An Investment Committee shall be established consisting of the Director of Finance, City Treasurer/Revenue Manager, and a representative from the City Manager's Office. 2. The Investment Committee will meet at least once each calendar quarter to review and evaluate previous investment activity and yield, to review the current status of all funds held by the City, to discuss anticipated cash requirements and investment activity for the next quarter, and to recommend investment strategy to the City Treasurer. 3. All investment policies and all changes to those policies must be approved by a majority of the Investment Committee. 4. Any two members of the Committee may call a special meeting, and three members shall constitute a quorum. 5. Minutes will be published of all Investment Committee meetings. 6. The Investment Committee will meet at least annually with the City's outside auditors to review accounting controls and to design adequate audit procedures to identify any non-compliance with the City investment policy. 7. The City investment policy will be reviewed annually by the Investment Committee and submitted annually to the City Council. INVESTMENT OBJECTIVES D.4.0 The primary objective of all City investments, in priority order, shall be: safety. The secondary objective shall be liquidity. The third objective shall be to achieve a return. 4.1 "Safety"Safety: Safety of principal is the foremost objective of the investment program. City investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this, the City will diversify its investments by investing funds among a variety of securities offering independent returns and financial institutions. means that the overall value of City funds shall not be diminished in the process of securing and investing those funds or over the duration of the investments. 6 4.2. LiquidityLiquidity: Liquidity is the ability to change an investment into its cash equivalent on short notice at its prevailing market value. The City’s investment portfolio shall remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with anticipated cash needs. Since all possible cash demands cannot be anticipated, the portfolio will maintain a liquidity “buffer” and invest primarily in securities with active secondary or resale markets. means that funds shall be made available to meet all anticipated City obligations and a prudent reserve shall be kept available to meet unanticipated cash requirements. Availability has two aspects, liquidity and the scheduling of cash flows. Liquidity is the ability to change an investment into its cash equivalent on short notice at its prevailing market value. Scheduling of cash flows means that investments are to mature or are to be converted into cash in tandem with the City's anticipated cash requirements. 4.3. Return: The City’s investment portfolio shall be designed with the objective of attaining a benchmark rate of return throughout budgetary and economic cycles, taking into account safety and liquidity requirements. The benchmark may vary from time to time depending the economic and budgetary conditions present. Achieve a return means to earn the optimum interest income from City funds commensurate with the objectives of safety and availability of the principle invested. At no time shall funds be invested in any security that could result in zero interest accrual if held to maturity. INVESTMENT AUTHORITY DELEGATION E5.0 In accordance with the Santa Monica City Charter, Section 711, the City Council delegates to the City Treasurer the authority toresponsibility invest for conducting the City's fundsinvestment transactions. The Director of Finance/City Treasurer may delegate this authority to the Assistant City Treasurer. or, in In the absence of the Director of Finance/City Treasurer and the Assistant City Treasurer, authority to invest City funds will be delegated extraordinary circumstances, to the Director of Finance. to the Assistant City Manager and/or City Manager. Section 53607 of the State of California Government Code limits the authorization of the legislative body to delegate investment authority to a one-year period, renewable annually. 5.1 INVESTMENT PROCEDURES The Director of Finance/City Treasurer is responsible for conducting and reporting on all City investments. To facilitate this function, the Director of Finance/City Treasurer will prepare and maintain an Investment Procedures Manual to detailing operating procedures for the operation of the investment program consistent with this policy, to be practiced by the Treasury in investing City funds. All such procedures shall be in accordance with and applicable State and City laws,. City codes and the investment policies set by the Investment Committee. All 7 procedures will be subject to review and approval by the Investment Committee. The manual should include reference to safekeeping, banking services contracts, collateral/depository agreements, and repurchase agreements. The manual shall also include explicit delegation of authority to persons responsible for investment transactions. No person may engage in investment transactions except as provided under the terms of this policy and the procedures established by the Director of Finance/City Treasurer. Additionally, the manual will explicitly include a current listing of all City of Santa Monica financial institution deposit and investment accounts, a current list of all financial institutions with which the City currently is authorized to conduct investment transactions, a current copy of State laws pertinent to City investments, a description of specific controls to ensure the proper execution of the City Investment Policy, and copies, with instructions, of all I investment reports required by law or by City investment Ppolicy. C 5.2INVESTMENT COMMITTEE An Investment Committee (the Committee) shall be established consisting of the City Manager, Assistant City Manager, Director of Finance/City Treasurer and the Assistant City Treasurer. In addition, the Committee will include one other department head serving one-year terms on a rotating basis. The purpose of the Committee is to provide general oversight and act in an advisory capacity. The Committee will meet at least once each calendar quarter to review and evaluate previous investment activity and yield, to review the current status of all funds held by the City, to discuss anticipated cash requirements and investment activity for the next quarter, and to discuss investment strategy with the Director of Finance/City Treasurer. 6.0 ETHICS AND CONFLICTS OF INTEREST The Director of Finance/City Treasurer and other employees 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 their ability to make impartial investment decisions. The Director of Finance/City Treasurer and other employees involved in the investment process shall disclose any material interests in financial institutions with which they conduct business within their jurisdiction, and they shall further disclose any material personal financial/investment positions that could be related to the performance of the City’s investment portfolio and shall refrain from personal investment transactions with the same individual with whom business is conducted on behalf of the City. The Director of Finance/City Treasurer and other employees involved in the investment process are required to file annual disclosure statements as required by the Fair Political Practices Commission. During the course of the year, if there is an event subject to disclosure that could impair the ability of the Director of Finance/City Treasurer or investment employees to make impartial decisions, the 8 City Council will be notified, in writing, within ten (10) days of the event. PRUDENCE F. 1. Investments shall be made with judgment, care, skill, prudence, and diligence under circumstances then prevailing, which persons of prudence acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the City. This standard of prudence shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that deviations from expectations are reported in writing to the Director of Finance in a timely fashion, and appropriate action is taken to control adverse developments. 2. Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. 3. Investment officers shall avoid any transactions that might impair public confidence in the Santa Monica City government. 4. Where it is otherwise consistent with the judiciary and statutory obligations of the City Treasurer/Revenue Manager, preference in selecting investments shall be given to those financial institutions, which have demonstrated involvement in the development or rehabilitation of low-income affordable housing. 5. Investments in repurchase agreements shall be made only with financial institutions with which the City has an executed master repurchase agreement. The financial institution must be a primary dealer of the Federal Reserve Bank of New York. 7.0 AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS The City shall transact business only with issuers, banks, savings and loans, and registered securities dealers. The purchase of any investment, other than those 9 purchased directly from the issuer, shall be purchased from either an institution licensed by the State as a broker/dealer as defined in Section 25004 of the Corporation Code, who is a member of the National Association of Securities Dealers, or a member of a federally regulated securities exchange, a national or state chartered bank, a federal or state association (as defined by Section 5102 of the Financial Code, or a brokerage firm designated as a primary dealer by the Federal Reserve Bank. The Director of Finance/City Treasurer’s staff shall investigate all institutions that wish to do business with the City in order to determine if they are adequately capitalized, make markets in securities appropriate to the City’s needs, and agree to abide by the City’s Investment Policy. All financial institutions that desire to become qualified bidders for investment transactions must complete the City’s “Broker/Dealer Request for Information” and “Broker/Dealer Certification”. The Director of Finance/City Treasurer shall conduct an annual review of the financial condition and other qualifications of all approved financial institutions and broker/dealers to determine if they continue to meet the City’s guidelines for qualification as defined in this section. Additionally, the City shall keep the current audited financial statements on file for each approved financial institution and broker dealer with which the City does business. RECORDS AND REPORTS G. 1. Records of all investment transactions will be kept, and monthly reports will be made to the Investment Committee and the City Manager detailing and summarizing all transactions and stating the present status of City investments. 2. The City Treasurer/Revenue Manager will report all investments, with certain exceptions, at fair market value rather than original purchase price, in the Monthly Cash & Investment Report as required by the Government Accounting Standards Board (GASB) Statement No. 31. 3. The City Treasurer/Revenue Manager will provide copies of the Monthly Cash & Investment Report to the California Debt and Investment Advisory Commission on a semi-annual basis the June and December reports, as well as the City’s Investment Policy. 4. As of the end of the fiscal year, the City Treasurer/Revenue Manager will make a report to the Director of Finance detailing the present status of City investments, as required by the Government Accounting Standards Board 10 (GASB) statement No. 3. 5. The City Treasurer/Revenue Manager 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 (1) the cost of a control should not exceed the benefits likely to be derived and (2) the valuation of costs and benefits requires estimates and judgments by management. DIVERSIFICATION 8.0H. AUTHORIZED AND SUITABLE INVESTMENTS 1. All City funds, which are not required for immediate cash expenditures or to maintain, required compensating cash balances shall be invested in interest bearing investments or accounts. 2. To reduce overall portfolio risk while attempting to attain market rates of return consistent with the primary objectives of safety and availability of funds, investments shall be diversified across types of investments, maturities of those investments, and institutions in which those investments are made. Generally, the portfolio is to be invested in U.S. Treasury and Federal Agency securities with a modest addition of BAs and CDs. Investments shall be made only in those instruments specifically authorized by California State laws, primarily Sections 53601, 16429.1, and 53684 et sq.of the Government Code and to no greater an extent than authorized by those laws. TheseSaid laws are summarized in Attachment C. Additional City guidelines are as follows: Instruments Additional City Guidelines * U.S. Federal Agencies No more than 33 1/3 50% of portfolio, maximum for each per agency. Banker's Acceptances (BA) Maximum of 10% maximum of portfolio per issuer Negotiable Certificate of Maximum of 10% max. of portfolio per issuer, 30% Deposit (NCD) max. Commercial Paper (CP) Maximum of all (CP), 15% of portfolio max. overall (CP). NOTES: 11 * Fedl. National Mortgage Assn. (FNMA); Fedl. Home Loan Mortgage Corp. (FHLMC); Fedl. Home Loan Bank (FHLB); Student Loan Marketing Assn. (SLMA); Tennessee Valley Authority (TVA); and any other U.S. Federal agency or instrumentality. Maturities Maturities of individual investments shall be diversified to meet the following objectives. In addition to following all legal guidelines, the portfolio will preserve principal, maintain adequate liquidity to meet all City obligations, contain an appropriate level of interest rate risk, and be diversified across types of investments, maturities, and institutions to minimize credit risk and maintain an appropriate return. i. No investment will be purchased which matures more than three years from the date of purchase unless specifically recommended by a unanimous vote of the Investment Committee. No investment will be purchased which matures more than five years from the date of purchase without the additional approval of the City Manager and the prior approval of the City Council. ii. The average weighted maturity of all pooled City investments shall not exceed 18 months (547 days). iii. To minimize the risk of having to make unusually large investments at times when interest rates are temporarily very low, investments will be scheduled to mature so that during any given month there will be a comparable magnitude of funds to be reinvested. These investable funds will be estimated based on scheduled maturities plus anticipated revenues minus anticipated expenses. iv. To the maximum extent practical, monthly operational cash requirements will be met by using anticipated revenues and maturing investments. However, as an aspect of active portfolio management, iy may beneficial for the City to sell investments from time to time. v. To reduce the market and interest rate risks which would result from the excess concentration of assets in a specific maturity, a specific issue or a specific class of securities, no more than 5.0% of the City's investable funds may be invested in any single issue maturing in a given month. The only exceptions are U.S. Treasury securities, to which an alternate limit of 10% will apply. c. Institutions 12 To minimize the risk to the City's overall investment portfolio from the default by a single institution in which City funds are on deposit or invested, the following policies shall be observed: i. City funds shall only be deposited in a financial institution whose performance has been reliable and whose safety rating, as determined by the Investment Committee or a reputable independent rating service selected by the Investment Committee, is in the upper 60% of its peer group. These same standards apply to institutions in which securities owned by the City are held in safekeeping. Exceptions to these standards may be made on an individual basis if they are unanimously recommended by the Investment Committee. ii. The City shall not deposit, in the form of certificates of deposit, time or demand deposits, or similar instruments, in a single institution more than 10% of the City's investable funds. iii. No single institution shall have, in cumulative total, as deposits and investments (other than safekept investments) more than 50% of the City's investable funds. 8.1 d. Repurchase Agreements Investments in repurchase agreements are allowable and shall be made only with financial institutions with which the City has an executed master repurchase agreement. The financial institution must be a primary dealer of the Federal Reserve Bank of New York. The market value (bid price plus accrued interest) of the collateral shall be valued at 102% or greater of the funds borrowed against those securities and the value shall be adjusted no less than quarterly. Eligible collateral shall include the following: 1. U.S. Treasury Obligations 2. U.S. Agency Securities The counter party will deliver the underlying securities to the City by book entry or by third party custodial agreement. The transfer of underlying securities to the counter party bank's customer book-entry account may be used. Certificates of Deposit (CD) E. 13 Collateralized Certificates of Deposit must be collateralized by 110% of the CD value by other eligible securities. Eligible collateral shall include the following: 1. U.S. Treasury Obligations 2. U.S. Agency Securities 8.2 PROHIBITED INVESTMENTS AND TRANSACTIONS Prohibited investments include as inverse floaters, range notes, interest only strips derived from a pool of mortgages (collateralized mortgage obligations), and any security that could result in zero interest accrual if held to maturity, as specified in Section 53601.6. 8.3 INVESTMENTS HELD AND/OR MANAGED BY FISCAL AGENTS Investments of bond proceeds held by fiscal agents will be made in accordance with Government Code Section 53601 (l), which states that money from bond proceeds should be invested as specified by bond documents. In most cases these investments will be made under the same guidelines as other City investments. Cemetery and Mausoleum Perpetual Care Funds are private funds held in trust and managed by the City. These funds do not fall under the guidelines of the Government Code sections noted in Section 8.0 of this Policy, but are invested under guidelines established by the City Council. 9.0 INVESTMENT POOLS/MUTUAL FUNDS A thorough investigation of any pooled investments funds, including mutual funds, is required prior to investing, and on a continual basis. To accomplish this, a questionnaire will be used to evaluate the suitability of the pooled fund. The questionnaire will answer the following general questions: ? A description of eligible investment securities, and a written statement of investment policies and objectives. ? A description of interest calculations and how it is distributed, and how gains and losses are treated. ? A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited. ? A description of who may invest in the program, how often, and what size deposit and withdrawal are allowed. ? A schedule for receiving statements and portfolio listings. ? Are reserves, retained earnings, etc. utilized by the pool/fund? ? A fee schedule, and when and how fees are assessed. ? Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds? 14 10.0 COLLATERALIZATION California Government Code Sections 53652, et seq. requires depositories to post certain types of collateral for public funds above the Federal Deposit Insurance Corporation (FDIC) insurance amounts. The collateral requirements apply to bank deposits, both active (checking and savings accounts) and inactive (non-negotiable certificates of deposit. Collateralization is also required for repurchase agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of the market value of principal and accrued interest, and the value shall be adjusted no less than quarterly. Collateral will be in the form of U.S. Treasury Obligations or U.S. Agency Securities. Collateral will always be held by an independent third party with whom the entity has a current custodial arrangement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the City and retained. The right of collateral substitution is granted. 11.0 SAFEKEEPING AND CUSTODY In accordance with California Government Code Section 53601, all securities owned by the City shall be held in safekeeping by the City’s custodial bank or a third party bank trust department, acting as an agent for the City under terms of the custody agreement. Collateral for repurchase agreements will be held by a third party custodian under terms of the Master Repurchase Agreement. All securities will be received and delivered using a delivery vs. payment basis, which ensures that securities are deposited with the third party custodian prior to the release of funds. Securities will be held by a third party custodian as evidenced by safekeeping receipts. Investments in the State Pool or money market mutual funds are undeliverable and are not subject to delivery or third party safekeeping. Investment trades shall be verified against bank transactions and broker confirmation tickets. On a monthly basis, the custodial asset statement shall be reconciled with the month-end portfolio holdings. 12.0 DIVERSIFICATION The City will diversify its investments by security type, institution, and maturity date. Concentration limits are discussed in Section 8.0 (Authorized and Suitable Investments)and in Appendix A. 13.0 MAXIMUM MATURITIES 15 In order to minimize the impact of market risk, it is intended that all investments be held to maturity. To the extent possible, the City will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City will not directly invest in securities with a final stated maturity date of more than five (5) years. Any investment of more than five years requires the advance approval of the City Council, in accordance with State law, and the City Manager. Further maturity limitations are shown in Attachment C. The weighted average maturity of the investment portfolio will be three years or less. Investments may be sold prior to maturity for cash flow needs, appreciation purposes, or in order to limit losses. However, no investment shall be made based solely on earning anticipated from capital gains. Due to the uncertain nature of cash flow requirements, a portion of the portfolio should be continually invested in readily available funds. 14.0 INTERNAL CONTROLS The Director of Finance/City Treasurer shall be responsible for ensuring that all investment transactions comply with the City’s Investment Policy and for establishing internal controls that are designed to prevent losses due to fraud, negligence, and third- party misrepresentation The Director of Finance/City Treasurer will also establish internal control procedures addressing wire transfer controls, separation of duties and administrative controls, avoidance of collusion, separation of transaction authority from accounting procedures, documentation of investment transactions, and monitoring of results. As part of its annual audit of the City, the City’s external auditor will review compliance with statutes, policies, and procedures. 15.0 PERFORMANCE STANDARDS The portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with investment risk constraints and cash flow needs. 15.1 MARKET YIELD (Benchmark) The City’s investment strategy is passive. Given this strategy, the basis used by the Director of Finance/City Treasurer to determine whether appropriate and suitable market yields are being achieved shall be to identify a comparable benchmark to the portfolio’s investment duration, e.g. the Constant Maturing Two Year Treasury bill index. Benchmarks may change over time depending on the portfolio’s duration. 16.0 REPORTING 16 In accordance with State law and the City Charter, monthly reports will be made to the City Council and the City Manager describing the present status of City investments and monies held by the City, as well as summarizing all investment transactions for the month. Schedules in the monthly report should include the following: ? The type of the investment, name of the issuer, maturity date, par value, book value, and market value ? The source of market value data ? The weighted average maturity of the portfolio ? Coupon, discount, or earnings rate for each security ? Percentage of portfolio represented by each investment category ? A certification of compliance with the Investment Policy ? A statement denoting the City’s ability to meet its anticipated expenditures requirements for the next six months ? Benchmark comparison Records of all investment transactions will be kept and filed in the Treasurer’s office. The Director of Finance/City Treasurer will provide copies of the June and December Monthly Cash and Investment Report to the California Debt and Investment Advisory Commission, as well as the City’s Investment Policy subsequent to the Council’s annual review. RELATIONSHIPS WITH FINANCIAL INSTITUTIONS I. 1. The City may only purchase statutorily authorized investments, not purchased directly from the issuer, from either an institution licensed by the state as a broker/dealer, from a national or state chartered bank, from a federal or state savings institution, from a brokerage firm designated as a primary government dealer by the Federal Reserve Bank, or from a member of a federally regulated securities exchange. 2. All financial institutions with which the City conducts investment activities must agree in writing to undertake reasonable efforts to prevent illegal and/or imprudent transactions involving City funds. Should it come to the attention of the City Treasurer/Revenue Manager that City funds have been involved in illegal and/or imprudent transactions, this will be reported to the City Council along with options for dealing with the situation. 3. Primary government securities dealers, which report to the New York Federal 17 Reserve, are preferred for conducting transactions of all eligible securities other than non-negotiable certificates of deposit. Other security dealers who wish to engage in transactions with the City must meet the City's requirements for reliability and safety, and any purchases made by the City from such secondary sources shall require third party safekeeping or delivery of the securities to the City. 4. To ensure yields consistent with this policy and to provide for the objective investment of City funds, the City's investment procedures shall be designed to include transactions with several firms that compete directly for public business, and to encourage competitive bidding on transactions. Such bids shall be on file with the City Treasurer's Office and copies shall be provided to the Director of Finance monthly. SOCIALLY RESPONSIBLE INVESTING J.17.0 RESTRICTIONS - The direct investment of City funds are restricted as follows: 1. Investments are to be made in entities, which that support clean and healthy environment, including following safe and environmentally sound practices. 2. No investments are to be made in tobacco or tobacco-related products. 3. No investments are to be made to support the production of weapons, military systems, or nuclear power. 4. Investments are to be made in entities, whichthat supports equality of rights regardless of sex, race, age, disability or sexual orientation. 5. Investments are to be made in entities, which that promote community economic development. Prior to making investments, Director of Finance/City Treasurer/Revenue Manager shall verify compliance with the guidelines either through direct contact with company or with Investors Responsibility Research Center. 18.0COMMUNITY REINVESTMENT ACT (CRA) K. The City will invest deposit funds only in those financial institutions, which have a CRA rating (as determined by the appropriate regulatory body) of "Outstanding" or "Satisfactory". 19.0 INVESTMENT POLICY ADOPTION 18 The City’s investment policy shall be reviewed and adopted by the City Council annually. The Investment Committee will review the policy periodically to ensure its consistency with the overall objectives of preservation of principal, liquidity, and return, and its conformance with current law, financial and economic trends, and cash flow needs of the City. CUSTODY AND SAFEKEEPING OF SECURITIES AND CITY FUNDS L. 1. Wherever practical, all City investments shall have the City of Santa Monica as the registered owner, and all interest and principal payments and withdrawals shall indicate the City of Santa Monica as the payee. All securities shall be safekept with the City itself or with a qualified financial institution, contracted by the City as a third party. All securities shall be acquired by the safekeeping institution on a "delivery-vs-payment" (DVP) basis. In other words, the security must be delivered before funds are released. The DVP basis for delivery applies also to the delivery and safekeeping of repurchase agreement collateral. 2. Original copies of non-negotiable certificates of deposit and confirming copies of all other investment transactions must be delivered to the City. PERFORMANCE STANDARDS M. The investment portfolio will be designed to obtain at least a market level rate of return, given budgetary and economic cycles (3 or more years) cycles and given the City's investment risk and cash flow needs. The City's portfolio management approach is active, necessitating periodic restructuring of the portfolio to take advantage of current and anticipated interest rate movements. In addition, the portfolio is primarily invested in U.S. Treasury and Federal Agency securities. Given this strategy, the performance benchmarks shall be the rolling average of 6- month and 12-month U.S. Treasury bills, traded on the secondary market as reported in the Federal Reserve System's monthly report of interest rates. IMPLEMENTATION N. The City Treasurer/Revenue Manager is responsible for conducting and reporting on all City investments. To facilitate this function, the Treasurer will prepare and maintain an Investment Procedures Manual to detail operating procedures to be practiced by the Treasury in investing City funds. All such procedures shall be in accordance with applicable State laws, City codes and the investment policies set by the Investment Committee. All procedures will be subject to review and approval by the Investment Committee. The manual will explicitly include a current listing of all City of Santa Monica financial institution deposit and investment accounts, a current list of all financial institutions with which the City currently is authorized to conduct investment transactions, a current copy of State laws 19 pertinent to City investments, a description of specific controls to ensure the proper execution of the City Investment Policy, and copies, with instructions, of all investment reports required by law or by City investment policy. INDEMNIFICATION OF INVESTMENT OFFICIALS O. Any investment officer exercising his or her authority with due diligence and prudence, and in accordance with the City of Santa Monica Investment Policy, will not be held personally liable for any individual investment losses or for total portfolio losses. ATTACHMENT 1-A: City of Santa Monica Funds for Cash Pooling The following listed City of Santa Monica funds shall have their cash balances pooled for investment purposes except for any fund or portion of one or more funds which is specifically identified for exclusion in Attachment B of the City Investment Policy: FUND NUMBER FUND NAME 01 GENERAL FUND 04 SPECIAL REVENUE SOURCE FUND 11 BEACH RECREATION FUND 12 HOUSING AUTHORITY FUND 13 DISASTER RELIEF FUND 14 TENANT OWNERSHIP RIGHTS CHARTER AMENDMENT FUND 15 LOW/MODERATE INCOME HOUSING FUND 16 REDEVELOPMENT-DOWNTOWN PROJECT FUND 17 REDEVELOPMENT-EARTHQUAKE RECOVERY PROJECT FUND 18 REDEVELOPMENT-OCEAN PARK PROJECT FUND 19 COMMUNITY DEVELOPMENT BLOCK GRANT (CBDG) FUND 20 MISCELLANEOUS GRANTS FUND 21 ASSET SEIZURE FUND 20 22 CITIZENS OPTION FOR PUBLIC SAFETY FUND 23 DISASTER FUND 25 WATER FUND 27 SOLID WASTE MANAGEMENT FUND 29 RENT CONTROL FUND 30 PIER FUND 31 WASTEWATER FUND 32 CIVIC AUDITORIUM FUND 33 AIRPORT FUND 34 STORMWATER MANAGEMENT FUND 37 CEMETERY FUND 41 BIG BLUE BUS FUND 42 TRAFFIC SAFETY FUND 43 GAS TAX FUND 44 SCAQMD FUND 51 CABLE COMMUNICATIONS FUND 52 SPECIAL AVIATION FUND 53 PARKS AND RECREATIONAL FUND 54 VEHICLE MANAGEMENT FUND 55 COMPUTER EQUIPMENT REPLACEMENT FUND 56 SELF INSURANCE-COMPREHENSIVE FUND 57 SELF INSURANCE-BUS FUND 58 SELF INSURANCE-AUTO FUND 59 SELF INSURANCE WORKERS=- COMPENSATION FUND 77 PARKING AUTHORITY FUND 80 GENERAL TRUST FUND 82 CEMETERY PERPETUAL CARE FUND 85 DEBT SERVICE FUND 89 MAUSOLEUM PERPETUAL CARE FUND 21 ATTACHMENT 1-B: City of Santa Monica Financial Assets Excluded from the Coverage of the City Investment Policy The following listed City of Santa Monica financial assets are specifically excluded from coverage of the City Investment Policy. This exclusion does not exempt the administrators of these exempted assets from exercising due diligence and prudence in the management of the assets. Airport Certificates of Participation - Under the terms of the trust agreement between the City of Santa Monica and the fiscal agent (Bank of New York) for the City of Santa Monica Certificates of Participation (COP's) (1995 Airport Facilities Refunding Series A and Series B), certain specific funds must be held by the fiscal agent, to (i) refund the City of Santa Monica Certificate of Participation (Airport Facilities) (the "Prior Certificates"), (ii) fund a reserve fund for the Certificates, and (iii) pay the costs incurred in connection with the execution and delivery of the Certificates. Cemetery Perpetual Care Fund Investments - The City Council authorized the investment consulting firm of RNC Capital Management to manage these investments in accordance with parameters approved by the Council. They are accounted for in Fund 82, the Cemetery Perpetual Care Fund. Downtown Redevelopment Lease Revenue Bonds - Under the terms of the trust agreement between the Redevelopment Agency of the City of Santa Monica for Lease Revenue Bonds, Refunding Project of 2002, and BNY Western Trust Company (fiscal agent) certain specific funds must be held by the fiscal agent, to (i) refinance the Agency’s Lease Revenue Bonds, Series 1992 (Downtown Redevelopment Refunding Project of 1992), (ii) provide funds to repay a portion of a certain loan made by the City to the Agency, which indebtedness is evidenced by a promissory note of the Agency in favor of the City, (iii) cause the amount of money on deposit for the reserve fund for the Bonds to be at least equal to the serve requirement established under the indenture, and (iv) pay the costs of issuance incurred with the issuance of the Refunding Bonds. The amount of funds held by the fiscal agent varies from year to year as the bonds mature. The funds are accounted for in the 85 Fund, the Debt Service Fund. Earthquake Recovery Redevelopment Project Area Tax Allocation Bonds - Under the terms of the trust agreement between the Redevelopment Agency of the City of Santa Monica for Tax Allocation Bonds, Series 1999, and BNY Western Trust Company, as trustee, certain specific funds must be held by the fiscal agent, for the acquisition of certain real property, for other redevelopment purposes, for principal and interest payments and for reserve requirements. The funds are accounted for in Fund 85, the Debt Service Fund. Main Library Improvements Project G.O. Bonds (1990) - Under the terms of the trust agreement between the City of Santa Monica and the fiscal agent (U.S. Bank Corporate Trust Services) for the City of Santa Monica General Obligation Bonds (Main Library Improvements Project), Series 1990, certain specific funds must be held by First Trust 22 of California for the acquisition of certain real property, for construction and improvement needs, for principal and interest payments, and for reserve requirements. The funds are accounted for in Fund 01, the General Fund and Fund 85, the Debt Service Fund. Main Library Improvements Project G.O. Refunding Bonds (1998) - Under the terms of the trust agreement between the City of Santa Monica and the fiscal agent (U.S. Bank Corporate Trust Services) for the City of Santa Monica General Obligation Bonds (Main Library Improvements Project), Series 1998, certain specific funds must be held by the fiscal agent for payment of principal and interest and for reserve requirements. The funds are accounted for in Fund 01, the General Fund and Fund 85, the Debt Service Fund. Library Improvements Project G.O. Bonds (2002) Under the terms of the trust agreement between the City of Santa Monica and the fiscal agent (BNY Western Trust Company) for the City of Santa Monica General Obligation Bonds (Library Improvements Project), Series 2002, certain specific funds must be held by the fiscal agent to finance acquisition and construction of improvements for the Santa Monica Public Library. The funds are accounted for in Fund 01, the General Fund and Fund 85, the Debt Service Fund. Mausoleum Perpetual Care Fund Investments - On July 8, 1986, the City Council amended the Municipal Code, Section 7300 et al., to create the new Mausoleum Perpetual Care Fund. RNC Capital Management, the investment counselor for the Cemetery Perpetual Care Fund, was also designated to manage these funds in accordance with parameters approved by the Council. These funds are accounted for in Fund 89, the Mausoleum Perpetual Care Fund. Ocean Park Redevelopment Projects - Under the terms of the trust agreement between the Redevelopment Agency of the City of Santa Monica and the fiscal agent (BNY Western Trust Company) for the Redevelopment Agency of the City of Santa Monica Ocean Park Redevelopment Projects Tax Allocation Bonds, Series 2002), certain specific funds must be held by the fiscal agent, to (i) refinance for the Agency’s Ocean Park Redevelopment Projects Tax Allocation Refunding Bonds, Series 1992, (ii) provide funds to make certain payments with respect to a certain loan made by the City of Santa Monica (the “City”) to the Agency, (iii) provide funds for the purpose of aiding in increasing, improving, and preserving low and moderate income housing in the Project Area, (iv) fund a reserve fund for the refunding bonds, and (v) pay the costs incurred with the issuance of the Refunding Bonds. The funds are accounted for in Fund 85, the Debt Service Fund. Parking Authority Lease Revenue Bonds - Under the terms of the trust agreement between the Parking Authority and the fiscal agent (BNY Western Trust Company) for the Parking Authority of the City of Santa Monica Lease Revenue Refunding Bonds, 2002, certain specific funds must be held by the fiscal agent, to (i) refinance the Authority’s 1992 Lease Revenue Bonds, (ii) cause the amount in the reserve fund to be 23 at least equal to the reserve requirements set forth in the indenture, and (iii) pay the costs incurred in connection with the issuance of the bonds. The funds are accounted for in Fund 85, the Debt Service Fund. Petty Cash - Section 1513 of the City Charter provides for the establishment of petty cash funds for use by department heads to make cash expenditures of a minor nature. Petty cash funds are managed by each individual department and are accounted for in each department's financial records. These funds are not invested. Public Safety Facility Project - Under the terms of the trust agreements the Public Financing Authority of the City of Santa Monica and BNY Western Trust Company, and, as trustee, for the Santa Monica Public Financing Authority Lease Revenue Bonds, Series 1999 and Series 2002A, certain specific funds must be held by the fiscal agent, for (i) the acquisition, construction and installation of certain capital improvements constituting a public safety facility and related improvements, facilities and equipment, (ii) for principal and interest payments and (iii) for reserve requirements. The funds are accounted for in Fund 85, the Debt Service Fund. Wastewater Enterprise Revenue Bonds - Under the terms of the trust agreement between the City of Santa Monica and the fiscal agent, (U.S. Bank Corporate Trust Services for the City of Santa Monica Wastewater Enterprise Revenue bonds (Hyperion Project), 1993 Refunding Series, certain specific funds must be held by the fiscal agent for payment of principal and interest and for reserve requirements. The funds are accounted for in the 31 Fund, the Wastewater Enterprise Fund. The following accounts for the City of Santa Monica appear on the books for accounting purposes, but are not City assets and are excluded from coverage of the City Investment Policy: Downtown Redevelopment Lease Revenue Bonds Escrow Account - As a result of the issuance of the Downtown Redevelopment Lease Revenue Bonds, Series 1992 (Downtown Redevelopment Refunding Project of 2002), an escrow fund was established with BNY Western Trust Company for purposes of payment of principal of, and premium and interest payments with respect to the 1992 Lease Revenue Bonds, Series 1992 (Downtown Redevelopment Project of 1992). Downtown Redevelopment Lease Revenue Bonds Escrow Account - As a result of the issuance of the Downtown Redevelopment Lease Revenue Bonds, Series 2002 (Downtown Redevelopment Refunding Project of 1992), an escrow fund was established with Union Bank for purposes of payment of principal of, and premium and interest payments with respect to the 1978 Lease Revenue Bonds, Series 1992 (Downtown Redevelopment Project of 1978). Ocean Park Redevelopment Projects Tax Allocation Bonds Escrow Accounts (Refunding Bonds, Series 1988A and Refinancing Bonds, Series 1988B) - As a result of the issuance of the Ocean Park Redevelopment Projects Tax Allocation Refunding 24 Bonds, Series 1992, escrow funds were established with Bank of America (now with First Trust of California) for purposes of payment of (i) the principal of and accrued interest on the 1988 Bonds coming due on and prior to the Redemption Data and, (ii) the Redemption Price for the 1988 Bonds on the Redemption Date. Ocean Park Redevelopment Projects Tax Allocation Bonds Escrow Accounts (Refunding Bonds, Series 1992 ) - As a result of the issuance of the Ocean Park Redevelopment Projects Tax Allocation Refunding Bonds, Series 2002, escrow funds were established with BNY Western Trust Company for purposes of payment of (i) the principal of and accrued interest on the 1992 Bonds coming due on and prior to the Redemption Data and, (ii) the Redemption Price for the 1992 Bonds on the Redemption Date. Parking Authority Bonds Escrow Fund - As a result of the issuance of the City of Santa Monica Certificates of Participation (Third Street Mall Project), 1986, the Parking Authority Revenue Bonds of 1966 were placed in "defeasance" with the fiscal agent, Bank of America. The investment securities held are sufficient to provide for the balance of the revenue bond's principal and interest payments. The defeasance of these bonds was accounted for in Fund 77, the Parking Authority Fund. Parking Authority Bonds Escrow Fund - As a result of the issuance of the Parking Authority of the City of Santa Monica Lease Revenue Refunding Bonds, Series 2002, Parking Authority of the City of Santa Monica Lease Revenue Refunding Bonds, Series 1992 were placed in "defeasance" with the fiscal agent, BNY Western Trust Company. The investment securities held are sufficient to provide for the balance of the revenue bond's principal and interest payments. Third Street Mall Certificates of Participation Escrow Account - As a result of the issuance of the Parking Authority Lease Revenue Bonds, Series 1992 (City of Santa Monica Refunding Improvements Project of 1992), an escrow fund was established with First Interstate Bank (now Wells Fargo Bank) for purposes of payment of principal and premium and interest payments with respect to 1986 Third Street Mall Certificates of Participation coming due after the issuance of the refunding bonds. Wastewater Enterprise Revenue Bonds Escrow Account - As a result of the issuance of the City of Santa Monica Wastewater Enterprise Revenue Bonds (Hyperion Project), 1993 Refunding Series, an escrow fund was established with Bank of America (now with First Trust of California) for purposes of payment of principal of and premium and interest payments with respect to the Wastewater Enterprise Revenue Bonds, 1991 Series A through the date that the bonds are redeemed. ATTACHMENT C: Summary of State of California Statutes Applicable to Municipal Investments The following investments are authorized by California State Code, Title 5, Division 2, Sections 53600, 53601, 53631.5 and 53635. See code sections for complete 25 descriptions. Legal Authorized Investment Other Constraints Limit (%) Local Agency Bonds No limit Maximum maturity 5 years. U.S. Treasury Obligations No limit Maximum maturity 5 years. State of California No limit Maximum maturity 5 years. Obligations California Local Agency No limit Maximum maturity 5 years. Obligations U.S. Agencies No limit Maximum maturity 5 years. Bankers Acceptance 40% Eligible for purchase by the Federal Reserve System and not to exceed 180 days to maturity. No more than 30% may be in bankers acceptances of any one commercial bank. Commercial Paper 15%/30% "Prime" quality; U.S. corporate assets over $500,000,000; "A" debt rating; purchases may not represent more than 10% of outstanding paper and may not exceed 270 days to maturity. The maximum limit on commercial paper is 25% of all investments Negotiable Certificates of 30% Maximum maturity 5 years. State and Deposit Federally chartered banks and savings institutions, including U.S. branches of foreign banks regulated by State regulatory authorities ("Yankee CD"). Repurchase Agreement No limit Maximum maturity 1 year. Securities used as collateral for repo's must be investments allowable under Govt. Code (i.e., T-bills, Agencies, BAs, CDs, etc.); must be collateralized at 102% of market value or greater; securities must be safekept by third party. Reverse Repurchase 20%* Must be made with primary dealers of the Agreements Federal Reserve Bank of New York and the securities used for the agreement must have been held by the local agency for at least 30 days. The maximum maturity is 26 92 days. Securities Lending 20%* Must be made with primary dealers of the Agreements Federal Reserve Bank of New York; the securities used for the agreement must have been held by the local agency for at least 30 days. Securities used as collateral must be investments allowable under Govt. Code (i.e. U.S. Treasury obligations, Agencies, BA=s CDs, etc.); both the securities and the collateral are to be held by a third party. Maximum maturity 92 days. Medium-Term Corporate 30% Maximum maturity 5 years; bonds must be Notes rated in top three rating categories by a nationally recognized rating service. Shares of beneficial 20% No more than 10% may be invested in any interest issued by one mutual fund. Funds are invested in diversified management securities and obligations authorized by companies sub-divisions (a) through (m) of Section (mutual funds) 53601and 53635, (any of the authorized investments for local agencies) the investment company must be in highest ranking provided by not less than two of the three largest nationally recognized rating services OR must have the investment advisor registered with the SEC with no less than 5 yrs. experience and have assets under mgmt. in excess of $500 million. Money Market Funds 20% The money market funds must have an average weighted maturity of 90 days or less and abide by SEC regulations; funds must receive the highest ranking by 2 of the 3 largest nationally recognized rating agencies OR retain an investment advisor who is registered, or exempt from registration, with the SEC and has at least 5 years= experience managing money market funds in excess of $500 million. 27 Collateralized Certificate No limit Maximum maturity 5 years#. Banks: of Deposit deposit not to exceed the total of paid-in capital surplus. S&Ls: deposit not to exceed the greater of total net worth or $500,000. State and Federal credit unions: deposit shall not exceed the greater of the total of unpaired capital and surplus or $500,000. Must be collateralized to 110% of the CD value by other eligible securities. Investments in certificates of deposits of state or federal credit unions if any member of the city=s governing or managing officers (council, city manager, fiscal officers) serves on the credit union board or key committee positions is prohibited. Mortgage Securities 20% Maximum maturity 5 years; bonds must be rated in top two rating categories by a nationally recognized rating service. Shall not exceed 95% of the mortgage security's fair market value. Local Agency $ 40 Monies are invested in pooled state fund Investment Fund million managed by State Treasurer. Maximum, (LAIF) 15 transactions per month. County Pooled No limit Investment Funds *20% for reverse repurchase agreements and securities lending agreements combined. 28 Prohibited investments include securities not listed above, as well as inverse floaters, range notes, interest only strips derived from a pool of mortgages (collateralized mortgage obligations), and any security that could result in zero interest accrual if held to maturity, as specified in Section 53601.6. Bond Proceeds Bond proceeds may be invested in accordance with the State Code provisions. ATTACHMENT 1-D GLOSSARY AGENCIES: Federal agency securities and/or Government Sponsored Enterprises (GSE’s). ASKED: The price at which securities are offered. BANKERS’ ACCEPTANCE (BA): A draft or bill of exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the 29 issuer. BASIS POINT: A basis point equals one one-hundredth of 1% (.01%). BENCHMARK: A comparative base for measuring the performance or risk tolerance of an investment portfolio. The benchmark should represent a close correlation to the level of risk and the average duration of the portfolio. BID: The price offered for securities. BOOK ENTRY SECURITIES: All U.S. Treasury and Federal Agencies are maintained on computerized records at the Federal Reserve now known as "wireable" securities. BROKER: A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides; he does not position. In the money market, brokers are active in markets in which banks buy and sell money and in interdealer markets. CALLABLE SECURITY: A security that can be redeemed by the issuer before the scheduled maturity date. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large denomination CD’s are typically negotiable. 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. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the City of Santa Monica. It includes five combined statements and basic financial statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large-denomination CD's are typically negotiable. COMMERCIAL PAPER (CP): An unsecured promissory note with a fixed maturity no longer than 270 days. Usually sold in discount form. Public offerings are exempt from SEC registration. The largest issuers include General Motors Acceptance Corporation (GMAC), General Electric Capital Corporation (GECC) and other major corporations. COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a payment date. 30 DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DELIVERY VERSUS PAYMENT (DVP): There are two methods of delivery of securities: delivery versus payment and delivery versus receipt (also called free). Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DEBENTURE: A bond secured only by the general credit of the issuer. DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying indices or securities, and may include a leveraging factor, or (2) financial contracts based on notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities, or commodities). DISCOUNT: The difference between the cost price of a security and its value at maturity when quoted at 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 and issuers 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., S&L's, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL FUNDS: Non-interest bearing deposits held by member banks at the Federal Reserve. Also used to denote "immediately available" funds in the clearing sense. "Fed Funds" also used to refer to these funds. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions, and insurance 31 companies. The mission of the FHLB’s is to liquefy the housing related assets of members who must purchase stock in their district Bank. FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): A Government Sponsored Enterprise that provides liquidity to the mortgage markets, much like FNMA and FHLB. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing & Urban Development, H.U.D. It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, 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. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures financial institutions' deposits, currently up to $100,000 per deposit. FEDERAL HOME LOAN BANKS (FHLB): The institution that formerly regulated and lent to savings and loan associations. The Federal Home Loan Banks played a role analogous to that played by the Federal Reserve Banks vis-a-vis member commercial banks. However, those responsibilities have been assumed by the Office of Thrift Supervision and the FDIC. FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): A U.S. Corporation and instrumentality of the U.S. government. Through its purchases of conventional mortgages, it provides liquidity to the mortgage markets, much like FNMA. FHLMC'S Securities are highly liquid and widely accepted. FHLMC assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing & Urban 32 Development, H.U.D. It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder- owned corporation. The corporations 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. GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit 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- throughs is often used to describe Ginnie Maes. INVERSE FLOATERS: A structured note in which the coupon increase as interest rates decline and decrease as rates rise. 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 spread between bid and asked prices is narrow and reasonable size can be done at those quotes. LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase-reverse repurchase agreements that establishes each party's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower. 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. OFFER: The price asked by a seller of securities (When you are buying securities, you ask for an offer). See ASKED AND BID. 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 33 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. PORTFOLIO: Collection of securities held by an investor. 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. PRIME RATE: The rate at which banks lend to their best or "prime" customers. Also known as the "reference rate." PRINCIPAL: 1) the dollar cost of an issue excluding accrued interest. 2) The one who takes ownership in a transaction, as opposed to brokering or acting as agent. PRUDENT PERSON RULE: An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the state (the so-called legal list). In other states, the trustee may invest in a security if it is one, which would be brought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. 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. 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. REPURCHASE AGREEMENT (RP OR 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 RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank reserves. 34 REVERSE REPO: An agreement whereby the dealer agrees to buy securities and the investor agrees to repurchase them at a later date. 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. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SEC RULE 15C3-1: See uniform net capital rule. SECURITIES AND EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transaction by administering securities legislation. STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA, SLMA, etc.) and Corporations which have embedded options (e.g. call features, step-up coupons, floating rate coupons, derivative based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options, and shifts in the shape of the yield curve. STUDENT LOAN MARKETING ASSOCIATION (SLMA): A U.S. Corporation and instrumentality of the U.S. government. Through its borrowings, funds are targeted for loans to students in higher education institutions. SLMA's securities are highly liquid and are widely accepted. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SETTLEMENT DATE: The date on which a trade is cleared by delivery of securities against funds. This date may be the same as the trade date or later. TENNESSEE VALLEY AUTHORITY (TVA): A U.S. Corporation created in the 1930's, to electrify the Tennessee Valley area; currently a major utility headquartered in Knoxville Tennessee. TVA's securities are highly liquid and are widely accepted. TRADE DATE: The date on which the buyer and seller agree to a transaction. The trade date may or may not be the date on which the securities and money changes hands (settlement date). 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 coupon-bearing securities U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more 35 than ten years. TREASURY NOTES: Intermediate term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of from one to ten years. UNIFORM CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as non-member 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. 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 for 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. TRADE DATE: The date on which a transaction is initiated or entered into by the buyer and seller. WHEN-ISSUED TRADES: Typically, there is a lay between the time a new bond is announced and sold, and the time when it is actually issued. During this interval, the security trades "wi", "when, as, and if issued." YIELD TO MATURITY: The rate of return yielded by a debt security held to maturity when both interest payments and the investor's capital gain or loss on the security are taken into account. 36