18-07 - RTOWN OF PROSPER, TEXAS
RESOLUTION NO. 18-07
A RESOLUTION OF THE TOWN COUNCIL OF THE TOWN OF PROSPER,
TEXAS, REVIEWING, UPDATING AND ADOPTING THE TOWN OF PROSPER
AND PROSPER ECONOMIC DEVELOPMENT CORPORATION INVESTMENT
POLICY AND INVESTMENT STRATEGY; MAKING FINDINGS; AND
PROVIDING AN EFFECTIVE DATE.
WHEREAS, the Texas Public Funds Investment Act ("the Act'), contained in Chapter
2256 of the Texas Government Code, as amended, provides in Section 2256.005(e) thereof that
the governing body of an investing entity shall review its investment policy and investment
strategies not less than annually; and
WHEREAS, said section of the Act further provides that the governing body shall adopt
a written instrument by rule, order, ordinance, or resolution stating that it has reviewed the
investment policy and investment strategies; and
WHEREAS, the Act requires the written instrument so adopted shall record any changes
made to either the investment policy or the investment strategies.
NOW, THEREFORE, BE IT RESOLVED BY THE TOWN COUNCIL OF THE TOWN OF
PROSPER, TEXAS, THAT:
SECTION 1
The Prosper Town Council hereby confirms that it has reviewed the Town of Prosper
and Prosper Economic Development Corporation Investment Policy and Investment Strategy
and adopts the Investment Policy dated January 23, 2018, attached hereto as Exhibit "A".
SECTION 2
This Resolution shall take effect from and after the date of its passage.
DULY PASSED, APPROVED, AND ADOPTED BY THE TOWN COUNCIL OF THE
TOWN OF PROSPER, TEXAS, ON THIS 23 DAY OF JANUARY, 2018.
,00 1111111#
®���i/
aOF Pt?
mss. APPROVED:
/ O
4: rap
L
i
Ray Smith., Mayor
doo
ATTE, Twp
r �� moi. ••._ ..� - 4� sti
Robyn Batfle, Town Secretary
APPROVED AS TO FORM AND LEGALITY:
Terrence S. Welch, Town Attorney
Resolution No. 18-07 Page 2
Exhibit "A"
`1
1�
TOWN OF
Pk. SPER
PROSPER IS A PLACE WHERE EVERYONE MATTERS
TOWN OF PROSPER, TEXAS
and
PROSPER ECONOMIC DEVELOPMENT CORPORATION
INVESTMENT POLICY
JANUARY 23, 2018
Resolution No. 18-07, Page 3
INVESTMENT POLICY
Table of Contents
PREFACE 5
L PURPOSE 6-7
A. FORMAL ADOPTION 6
B. SCOPE 6
C. REVIEW AND AMENDMENT 7
D. INVESTMENT STRATEGY 7
IL INVESTMENT OBJECTIVES
7-8
A. SAFETY OF PRINCIPAL
7
B. MAINTENANCE OF ADEQUATE LIQUIDITY
7
C. RISK OF LOSS
7
D. YIELD
8
III. INVESTMENT POLICIES
8-20
A. AUTHORIZED INVESTMENTS
8-13
B. PROTECTION OF PRINCIPAL
13-16
C. INVESTMENT ADVISERS AND SECURITIES DEALERS
16-18
D. RESPONSIBILITY AND CONTROL
18-20
IV. INVESTMENT STRATEGY
19-20
A. ACTIVE VS. PASSIVE STRATEGY
21
B. OPERATING FUNDS
21
C. CONSTRUCTION AND CAPITAL IMPROVEMENT FUNDS
21
D. DEBT SERVICE FUNDS
22
APPENDIX "A" — GLOSSARY OF TERMS
23-27
APPENDIX "B" — BANKS/BROKER DEALER OUESTIONAIRE
APPENDIX "C" — RESOLUTION FOR ADOPTION OF INVESTMENT POLICY
APPENDIX "D" — PUBLIC FUNDS INVESTMENT ACT
Resolution No. 18-07, Page 4
PREFACE
The Town of Prosper and the Prosper Economic Development Corporation are separately
chartered, governed, and operated entities. Each ENTITY adheres to its own governing documents
and the Public Funds Investment Act. Each ENTITY additionally seeks to safely and effectively
manage the funds under its control. To achieve those requirements, the governing body of each
ENTITY has legally adopted this Investment Policy.
Throughout this Investment Policy, the two entities shall be singularly referred to as "ENTITY"
and collectively referred to as "PROSPER."
It is the policy of PROSPER that, giving due regard to the safety and risk of investment, all
available funds shall be invested in conformance with State and Federal Regulations, applicable
Bond Resolution requirements, adopted Investment Policy and adopted Investment Strategy.
Effective cash management is recognized as essential to good fiscal management. A
comprehensive and effective cash management system will be pursued to optimize investment
interest earnings as viable and material revenue to all PROSPER funds. PROSPER's portfolio
shall be designed and managed in a manner responsive to the public trust and consistent with all
Federal regulations, State of Texas statutes and other legal requirements, including the Town
Charter, Town Ordinances, Articles of Incorporation, and this Policy.
Resolution No. 18-07, Page 5
I. PURPOSE
A. Formal Adoption
This Investment Policy is authorized by PROSPER in accordance with Chapter 2256,
Texas Government Code, the Public Funds Investment Act, herein referred to as
"PFIA".
B. Scope
This Investment Policy applies to all of the investment activities of PROSPER. These
funds are accounted for in the Town's Comprehensive Annual Financial Report
(CAFR) and include:
• General Fund
• Debt Service Funds
• Special Revenue Funds
• Capital Project Funds
• Enterprise Funds
• Internal Service Funds
• Economic Development Corporation Funds
• Any new fund created by the Town
The Town of Prosper may consolidate cash balances from multiple funds to maximize
investment earnings. Investment income will be allocated to the various funds based
on their respective participation and in accordance with generally accepted accounting
principles.
This Policy establishes guidelines for:
1. Who can invest PROSPER funds,
2. How PROSPER funds will be invested, and
3. When and how a periodic review of investments will be made.
In addition to this Policy, bond funds (as defined by the Internal Revenue Service) shall
be managed in accordance with their issuing documentation and all applicable State
and Federal Law.
All investments made with PROSPER funds prior to the adoption of this Investment
Policy shall be held or liquidated as determined to be in the best interest of the financial
well being of PROSPER. PROSPER will also monitor changes in the credit ratings of
its investments quarterly using a number of resources including rating agencies,
broker/dealers or financial publications. PROSPER shall take all prudent measures that
are consistent with its investment policy to liquidate an investment that does not have
the minimum rating.
Resolution No. 18-07, Page 6
C. Review and Amendment
This Policy shall be reviewed annually by the ENTITY's governing body. The
ENTITY'S governing body shall adopt a written document stating that it has reviewed
the Investment Policy.
D. Investment Strategy
In conjunction with the annual Policy review, the ENTITY's governing body shall
review the separate written Investment Strategy for each of PROSPER's funds. The
Investment Strategy must describe the investment objectives for each particular fund
according to the following priorities:
1. Investment suitability,
2. Preservation and safety of principal,
3. Liquidity,
4. Marketability prior to maturity of each investment,
5. Diversification, and
6. Yield.
II. INVESTMENT OBJECTIVES
A. Safety of Principal
The primary objective of all investment activity is the preservation of capital and the
safety of principal in the overall portfolio. Each investment transaction shall seek to
ensure first that capital losses are avoided, whether they are from securities defaults or
erosion of the market value.
B. Maintenance of Adequate Liquidity
C. Risk of Loss
The investment portfolio will remain sufficiently liquid to meet the cash flow
requirements that might be reasonably anticipated. Liquidity shall be achieved by
matching investment maturities with forecasted cash flow requirements; investing in
securities with active secondary markets; and maintaining appropriate portfolio
diversification.
Resolution No. 18-07, Page 7
D. Yield
All participants in the investment process will seek to act responsibly as custodians of
the public trust. Investment officials will avoid any transactions that might impair
public confidence in the Town's ability to govern effectively. The governing body
recognizes that in a diversified portfolio, occasional measured losses due to market
volatility are inevitable, and must be considered within the context of the overall
portfolio's investment return, provided that the adequate diversification has been
implemented and the terms of this policy have been followed.
The investment portfolio shall be designed with the objective of attaining a market rate
of return throughout budgetary and economic cycles, taking into account the
investment risk constraints and liquidity needs. Return on investment is of secondary
importance compared to the safety and liquidity objectives described above. Core
investments are limited to relatively low risk securities in anticipation of earning a fair
return relative to the risk being assumed.
III. INVESTMENT POLICIES
A. Authorized Investments
Investments described below are authorized by PFIA as eligible securities for
PROSPER. In the event an authorized investment loses its required minimum credit
rating, all prudent measures will be taken to liquidate said investment. Additionally,
PROSPER is not required to liquidate investments that were authorized at the time of
purchase in the event that subsequent legislation renders certain securities as no longer
authorized for purchase by the Town. PROSPER's funds governed by this Policy may
be invested in:
1. Obligations of Governmental Entities (Section 2256.009). Except for the items
listed in I.e. below, the following are authorized investments for obligations of
governmental agencies:
a. Obligations, including letters of credit, of the United States or its agencies and
instrumentalities;
b. Direct obligations of the State of Texas or its agencies and instrumentalities;
c. Other obligations, the principal and interest on which are unconditionally
guaranteed or insured by, or backed by the full faith and credit of, the State of
Texas or the United States or their respective agencies and instrumentalities,
including obligations that are fully guaranteed or insured by the Federal Deposit
Insurance Corporation or by the explicit full faith and credit of the United
States;
Resolution No. 18-07, Page 8
d. 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;
e. The following are not authorized investments for PROSPER:
1. Obligations whose payments represent the coupon payments on the
outstanding principal balance of the underlying mortgage-backed security
collateral and pays no principal (Interest Only);
2. Obligations whose payments represent the principal stream of cash flow
from the underlying mortgage-backed security collateral and bear no
interest (Principal Only);
3. Collateralized mortgage obligations that have a stated final maturity date of
greater than 10 years; and
4. Collateralized mortgage obligations the interest rate of which is
determined by an index that adjusts opposite to the changes in the market
index (Inverse Floater).
2. Financial Institution Deposits (Section 2256.010). Certificates of deposit or
share certificates provided the certificate is
a. Issued by a depository institution that has its main office or a branch office in
Texas that is:
1. Guaranteed or insured by the Federal Deposit Insurance Corporation or its
successor or the National Credit Union Share Insurance Fund or its
successor; or
2. Secured by obligations that are described by 1. (Obligations of
Governmental Entities) 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
Le. above, that have a market value of not less than the uninsured amount
of the deposit; or
3. Secured in any other manner and amount provided by the law for deposits
of PROSPER.
b. In addition to the authority to invest funds in certificates of deposit under
Subsection "a", an investment in certificates of deposit made in accordance
with the following conditions is an authorized investment:
Resolution No. 18-07, Page 9
1. The funds are invested through:
(a) a broker that has its main office or a branch office in this state and is
selected from a list adopted by the investing entity as required by
Section 2256.025; or
(b) a depository institution that has its main office or a branch office in this
state and that is selected by the investing entity;
2. The broker or the depository institution selected by the investing entity
under Subdivision (1) arranges for the deposit of the funds in certificates of
deposit in one or more federally insured depository institutions, wherever
located, for the account of the investing entity;
3. The full amount of the principal and accrued interest of each of the
certificates of deposit is insured by the United States or an instrumentality
of the United States; and
4. The investing entity appoints the depository institution selected by the
investing entity under Subdivision (1), an entity described by Section
2257.041(d), or a clearing broker-dealer registered with the Securities and
Exchange Commission and operating pursuant to Securities and Exchange
Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for
the investing entity with respect to the certificates of deposit issued for the
account of the investing entity.
3. Mutual Funds (2256.014).
a. A no-load money market mutual fund is an authorized investment under this
subchapter if the mutual fund:
1. Is registered with and regulated by the Securities and Exchange Commission;
2. Provides the investing entity 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.);
3. Has a dollar -weighted average stated maturity of 90 days or fewer; and
4. Includes in its investment objectives the maintenance of a stable net asset
value of $1 for each share.
b. In addition to a no-load money market mutual fund permitted as an authorized
investment in Subsection (a), a no-load mutual fund is an authorized investment
under this subchapter if the mutual fund:
Resolution No. 18-07, Page 10
1. Is registered with the Securities and Exchange Commission;
2. Has an average weighted maturity of less than two years;
3. Is invested exclusively in obligations approved by this subchapter;
4. Is continuously rated as to investment quality by at least one nationally
recognized investment rating firm of not less than AAA or its equivalent;
and
5. Conforms to the requirements set forth in Sections 2256.016(b) and (c)
relating to the eligibility of investment pools to receive and invest funds of
investing entities.
c. An Entity is not authorized by this section to:
1. Invest in the aggregate more than 15 percent of its monthly average fund
balance, excluding bond proceeds and reserves and other funds held for debt
service, in mutual funds described in Subsection (b);
2. Invest any portion of bond proceeds, reserves and funds held for debt service,
in mutual funds described in Subsection (b); or
3. Invest its funds or funds under its control, including bond proceeds and
reserves and other funds held for debt service, in any one mutual fund
described in Subsection (a) or (b) in an amount that exceeds 10 percent of
the total assets of the mutual fund.
4. Local Government Investment Pools (2256.016). Eligible investment pools
organized and operating in compliance with PFIA described in section 2256.016
and 2256.019 have been authorized by the Town's governing body; and whose
investment philosophy and strategy include seeking to maintain a stable net asset
value of $1 per share, and are consistent with this Policy and PROSPER's ongoing
investment strategy.
5. Commercial Paper (2256.013). Commercial paper is an authorized investment
under this policy if the commercial paper:
a. Has a stated maturity of 270 days or fewer from the date of its issuance; and
b. Is rated not less than A-1 or P -I or an equivalent rating by at least:
1. two nationally recognized credit rating agencies; or
Resolution No. 18-07, Page 11
2. 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.
6. Repurchase Agreements (2256.011).
a. A fully collateralized repurchase agreement is an authorized investment under
PFIA, Subchapter A, if the repurchase agreement:
1. has a defined termination date;
2. is secured by a combination of cash and obligations described by PFIA,
section 2256.009(x)(1); and
3. requires the securities being purchased by the Town to be pledged to the
Town, held in the Town's name, and deposited at the time the investment is
made with the Town or with the third -party selected and approved by the
Town; and
4. is placed through a primary government securities dealer, as defined by the
Federal Reserve, or a financial institution doing business in this state.
b. In this section, "repurchase agreement" means a simultaneous agreement to
buy, hold for a specific time, and sell back at a future date obligations described
by Section 2256.009(x)(1), at market value at the time the funds are disbursed
of not less than the principal amount of the funds disbursed. The term
includes a direct security repurchase agreement and a reverse Security
repurchase agreement.
c. Notwithstanding any other law, the term of any reverse security repurchase a
agreement may not exceed 90 days after the date the reverse security
repurchase agreement is delivered.
d. Money received by an entity under the terms of a reverse security repurchase
agreement shall be used to acquire additional authorized investments, but the
term of the authorized investments acquired must mature not later than the
expiration date stated in the reverse security repurchase agreement.
7. Guaranteed Investment Contracts (2256.015).
a. A guaranteed investment contract is an authorized investment for bond proceeds
under this subchapter if the guaranteed investment contract:
1. Has a defined termination date;
Resolution No. 18-07, Page 12
2. Is secured by obligations described by Section 2256.009(x)(1), excluding
those obligations described by Section 2256.009(b), in an amount at least
equal to the amount of bond proceeds invested under the contract; and
3. Is pledged to the entity and deposited with the Town or with a third party
selected and approved by the Town.
b. Bond proceeds, other than bond proceeds representing reserves and funds
maintained for debt service purposes, may not be invested under this subchapter
in a guaranteed investment contract with a term of longer than five years from
the date of issuance of the bonds.
c. To be eligible as an authorized investment:
1. The governing body of the Town must specifically authorize guaranteed
investment contracts as an eligible investment in the order, ordinance, or
resolution authorizing the issuance of bonds;
2. The Town must receive bids from at least three separate providers with no
material financial interest in the bonds from which proceeds were received;
3. The Town must purchase the highest yielding guaranteed investment
contract for which a qualifying bid is received;
4. The price of the guaranteed investment contract must take into account the
reasonably expected drawdown schedule for the bond proceeds to be
invested; and
5. The provider must certify the administrative costs reasonably expected to
be paid to third parties in connection with the guaranteed investment
contract.
B. Protection of Principal
PROSPER shall seek to control the risk of loss due to failure of a security issuer or
grantor. Such risk shall be controlled by investing only in the safest types of securities
as defined in the Policy; by collateralization as required by law; and through portfolio
diversification by maturity and type.
The purchase of individual securities shall be executed "Delivery versus Payment"
(DVP) through PROSPER's Safekeeping Agent. By so doing, PROSPER's funds are
not released until PROSPER has received, through the Safekeeping Agent, the
securities purchased.
Resolution No. 18-07, Page 13
4. 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 if PROSPER
determines that such an investment is necessary to comply with Federal arbitrage
restrictions or to facilitate arbitrage record keeping and calculation.
2. Diversification by Investment Maturity
In order to minimize risk of loss due to interest rate fluctuations, investment
maturities will not exceed the anticipated cash flow requirements of the funds.
Generally, PROSPER will not directly invest in securities maturing more than five
years from the date of purchase.
Maturity guidelines by fund type are discussed in Section IV, Investment Strategy.
3. Ensuring 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 redeploy
cash into other investments expected to outperform current holdings, or otherwise
to adjust the portfolio.
4. Depository Agreements
Consistent with the requirements of State Law, PROSPER requires all bank
deposits to be federally insured or collateralized with eligible securities. Financial
institutions serving as PROSPER's Depositories will be required to sign a
Depository Agreement with PROSPER and PROSPER's safekeeping agent. The
safekeeping portion of the Agreement shall define PROSPER'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:
• The Agreement must be in writing;
• The Agreement has to be executed by the Depository and PROSPER
contemporaneously with the acquisition of the asset;
• The Agreement must be approved by the Board of Directors or the designated
committee of the Depository and a copy of the meeting minutes must be
delivered to PROSPER;
Resolution No. 18-07, Page 14
• The Agreement must be part of the Depository's "official record" continuously
since its execution.
a. Allowable Collateral
Eligible securities for collateralization of PROSPER deposits are defined by
Chapter 2257, Texas Government Code, the Public Funds Collateral Act, as
amended and meet the constraints of this Section III. A. 2.
b. Collateral Levels
The market value of pledged collateral must at all times be equal to or greater
than 105% of the principal and accrued interest for PROSPER balances, less
the applicable level of FDIC insurance.
c. Monitoring Collateral Adequacy
PROSPER shall require monthly reports of pledged securities marked to market
using quotes by a recognized market pricing service quoted on the valuation
date from all financial institutions with which PROSPER has collateralized
deposits. The Investment Officers will monitor adequacy of collateralization
levels to verify market values and total collateral positions.
d. Additional Collateral
If the collateral pledged for a deposit falls below adequate levels, as defined
above in Section 4.b., the institution holding the deposit will be notified by the
Investment Officers and will be required to pledge additional securities no later
than the end of the next succeeding business day.
e. Security Substitution
Collateralized deposits often require substitution of securities. Any financial
institution requesting substitution must contact an Investment Officer for
approval and settlement. The substituted security's value will be calculated and
substitution approved if the substitution maintains a pledged value equal to or
greater than the required security level. An Investment Officer 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 Officers may
limit substitution and assess appropriate fees if substitution becomes excessive
or abusive.
Resolution No. 18-07, Page 15
5. Safekeeping
a. Safekeeping Agreement
PROSPER shall contract with a bank or banks for the safekeeping of securities
either owned by PROSPER as a part of its investment portfolio or as a part of
its depository agreements.
b. Safekeeping of Deposit Collateral
All collateral securing bank deposits must be held by a third -party custodian
bank eligible under the Public Funds Collateral Act, and acceptable to and under
contract with PROSPER, or by a Federal Reserve Bank.
C. Investment Advisers and Securities Dealers
Investment Advisers shall adhere to the spirit, philosophy and specific terms of this
Policy and shall invest within the same "Standard of Care" as defined in Section E. 3.
below. Securities Dealers shall avoid recommending or suggesting transactions
outside that "Standard of Care."
1. Selection of Investment Advisers
The selection of Investment Advisers will be performed by the Investment Officers.
The Investment Officers will establish criteria to evaluate Investment Advisers
including:
a. Adherence to PROSPER's policies and strategies,
b. Investment performance and transaction pricing within accepted risk
constraints,
c. Responsiveness to PROSPER's request for services, information and open
communication,
d. Understanding of the inherent fiduciary responsibility of investing public funds,
and
e. Similarity in philosophy and strategy with PROSPER's objectives.
Selected Investment Advisers must be registered under the Investment Advisers
Act of 1940 or with the State Securities Board. A contract with an Investment
Adviser may not be for a term longer than two years and any contract, renewal or
extension must be approved by Town Council.
Resolution No. 18-07, Page 16
2. Selection of Authorized Securities Dealers
The ENTITY's governing body or its Investment Officers acting as the ENTITY's
Investment Committee shall, at least annually, review, revise, and adopt a list of
qualified broker/dealers and financial institutions that are authorized to engage in
investment transactions with the ENTITY.
a. Eligibility
Authorized firms may include primary dealers or regional dealers that qualify
under Securities & Exchange Commission Rule 150-1 (Uniform Net Capital
Rule), and qualified depositories.
b. Documentation Requirements
Brokers/dealers and financial institutions requesting to become qualified to
transact investment business with PROSPER shall be required to provide:
1. a completed Broker/Dealer Questionnaire (Appendix B) that provides
information regarding creditworthiness, experience and reputation; and
2. a Certification stating the firm has received, reviewed, understood and
agrees to comply with PROSPER's investment policy. This Certification
also acknowledges that the business organization has implemented
reasonable procedures and controls in an effort to preclude investment
transactions conducted between PROSPER and the organization that are not
authorized by PROSPER's investment policy, except to the extent that this
authorization is dependent on an analysis of the makeup of PROSPER's
entire portfolio or requires an interpretation of subjective investment
standards; and
3. Provide an audited financial statement for the most recent period; and
4. Proof of certification by the National Association of Securities Dealers
(NASD); and
5. Proof of current registration with the State of Texas Securities
Commission.
PROSPER shall not enter into an investment transaction with a business
organization prior to receiving the written instruments described above.
c. Competitive Bids
It is the policy of PROSPER to require competitive bidding will be solicited in
writing, electronically, or any combo method for all individual security
purchases and sales except for: transactions
Resolution No. 18-07, Page 17
with money market mutual funds and local government investment pools.
D. Responsibility and Control
1. Authority to Invest
The Town Manager, Finance Director, and the Accounting Manager are the
"Investment Officers" of the Town of Prosper. The PEDC Treasurer and the
Finance Director are the "Investment Officers" of the PEDC. The Investment
Officers are authorized to deposit, withdraw, invest, transfer, execute
documentation, and otherwise manage PROSPER's funds according to this Policy.
The Investment Officers may authorize one or more Investment Officers to deposit,
withdraw or transfer funds out of or into an investment pool or money market
mutual fund in order to meet daily operating needs of PROSPER.
2. Prudent Investment Management
The designated Investment Officers shall perform their duties in accordance with
the adopted Investment Policy and internal procedures. In determining whether an
Investment Officer has exercised prudence with respect to an investment decision,
the investment of all funds over which the Investment Officer had responsibility,
rather than the prudence of a single investment shall be considered.
Investment Officers acting in good faith and in accordance with these policies and
procedures shall be relieved of personal liability.
3. Standard of Care
The standard of care used by PROSPER shall be that as defined in PFIA, Section
2256.006. It states:
"Investments shall be made with judgment and care, under circumstances then
prevailing, that a person of prudence, discretion and intelligence would exercise in
the management of the person's own affairs, not for speculation, but for investment,
considering the probable safety of capital and the probable income to be derived."
4. Standards of Ethics
The designated Investment Officers shall act as custodians of the public trust
avoiding any transactions which might involve a conflict of interest, the appearance
of a conflict of interest, or any activity which might otherwise discourage public
confidence. Investment Officers 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. Additionally, all
Investment Officers shall file with the Texas Ethics Commission and the ENTITY'S
governing body a statement disclosing any personal business relationship with a
business organization seeking to sell investments to PROSPER or any relationship
Resolution No. 18-07, Page 18
within the second degree by affinity or consanguinity to an individual seeking to
sell investments to PROSPER. For purposes of this subsection, an Investment
Officer has a personal business relationship with business organization if:
a. 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;
b. 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
c. 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.
5. Establishment of Internal Controls
PROSPER's Investment Officers will maintain a system of internal controls over
the investment activities of PROSPER.
6. Reporting
Investment performance will be monitored and evaluated by the Investment
Officers. The Investment Officers will provide a quarterly comprehensive report
signed by all Investment Officers to the ENTITY'S governing body. This
investment report shall:
a. Describe in detail the investment position of PROSPER,
b. Contain a summary statement, prepared in compliance with generally accepted
accounting principles, of each pooled fund group that states the:
1. beginning market value of the reporting period;
2. ending market value for the period;
3. fully accrued interest for the reporting period
c. State the book value and market value of each separately invested asset at the
end of the reporting period by the type of asset and fund type invested;
d. State the maturity date of each separately invested asset that has a maturity date;
e. State the account or fund or pooled group fund in the state agency or local
government for which each individual investment was acquired; and
Resolution No. 18-07, Page 19
C State the compliance of the investment portfolio with PROSPER's Investment
Policy, strategy, and PFIA.
In defining market value, sources independent of the investment provider will
determine valuations and consideration will be given to GASB Statement No. 31.
PROSPER, in conjunction with its annual financial audit, shall perform a
compliance audit of the management controls on investments and adherence to
PROSPER's Investment Policy. If PROSPER invests in other than money market
mutual funds, investment pools or accounts offered by its depository bank in the
form of certificates of deposits, 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 ENTITY's governing body by that auditor.
7. Training
In order to insure the quality and capability of PROSPER's investment personnel
making investment decisions, PROSPER shall provide periodic training in
investments for the investment personnel through courses and seminars offered by
GFOA, GFOAT, GTOT, TML, NCTCOG, ICMA, TSCPA, AICPA, or any
independent source or institute of higher learning approved by the Finance Director.
a. The Investment Officers shall:
1. attend at least 10 hours of training relating to the Investment Officers'
responsibilities within 12 months after taking office or assuming duties; and
2. attend an investment training session not less than once in a two-year period
that begins on the first day of the Town's fiscal year and consists of the two
consecutive fiscal years after that date and receive not less than 8 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. Training under this section must include education in investment controls,
security risks, strategy risks, market risks, diversification of investment
portfolio and compliance with PFIA.
IV. INVESTMENT STRATEGY STATEMENT
In order to minimize risk of loss due to interest rate fluctuations, investment maturities will
not exceed the anticipated cash flow requirements of the fund. Investment guidelines by
fund -type are as follows:
Resolution No. 18-07, Page 20
A. Active vs. Passive Strategy
Prosper intends to pursue an active vs. passive portfolio management philosophy.
Active management means that the financial markets will be monitored by
investment officials and investments will be purchased and sold based on the Town's
parameters for liquidity and based on market conditions. All marketable securities
purchased shall have active secondary markets, unless a specific cash outflow is
being matched with an investment that will be held to maturity to meet that obligation.
Securities may be purchased as a new issue or in the secondary markets. Securities may
be sold before they mature if market conditions present an opportunity to benefit
from the trade or if changes in the market warrant the sale of securities to avoid future
losses. Securities may be purchased with the intent from the beginning to sell them
prior to maturity or with the expectation that the security would likely be called prior
to maturity under the analyzed market scenario. Market and credit risk shall be
minimized by diversification. Diversification by market sector and security types,
as well as maturity, will be used to protect Prosper from credit and market risk in
order to meet liquidity requirements. The portfolio will be structured to benefit from
anticipated market conditions and to achieve a reasonable return.
B. Operating Funds
Operating funds shall have their primary objective to assure that anticipated cash
outflows are matched with the adequate investment liquidity. The secondary objective
is to create a portfolio structure that will experience minimal volatility during changing
economic cycles. These objectives may be accomplished by purchasing high quality,
short to medium term securities in a laddered (maturities coming due regularly and
staggered to match cash outflows) or barbell (maturities that are placed very short term
and maturities that are longer term, such that the average achieves cash flows and
income similar to buying in the middle of those maturity spectrums) maturity
structure and by diversification among market sectors. The dollar -weighted average
maturity of the operating funds, based on the stated final maturity date of each security,
will be calculated and limited to one year or less.
C. Capital Project Funds and Special Purpose Funds
Capital project funds and special purpose funds shall have as their primary objective
to assure that anticipated cash outflows are matched with adequate investment
liquidity. These portfolios should have liquid securities to allow for unanticipated
project expenditures or accelerated project outlays due to abetter than expected or
changed construction schedule. The portfolios shall be invested based on cash flow
estimates. The dollar -weighted average life of the portfolio should be matched to
that of the duration of the liabilities. Funds invested for capital projects may be from
bond proceeds that are subject to arbitrage rebate regulations.
Resolution No. 18-07, Page 21
D. Debt Service Funds
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 final maturity date
which exceeds the debt service payment date.
Resolution No. 18-07, Page 22
Appendix "A"
Glossary of Cash Management Terms
Accretion — Common investment accounting entry in which the book value of securities purchased
at a discount are gradually written up to the par value. The process has the effect of recording the
discount as income over time.
Accrued Interest — Interest earned, but not yet paid, on a bond.
Active Management — (also called active investing) refers to a portfolio management strategy
where the manager makes specific investments with the goal to time the investment based on
market conditions, monitor the volatility (or risk), and allow for parameters for liquidity. This
will be performed by preparing 30 day cash flows to determine the liquidity and actively bid out
types of investments the Town will invest in based on the market. Awarding the bid to the highest
yield while monitoring the risk.
Agency — See Federal Agency.
Amortization — Common investment accounting entry in which the book value of securities
purchased at a premium are gradually written down to the par value. The process has the effect of
recording the premium as a reduction to income over time.
Arbitrage — Dealing simultaneously in the same product in two markets to take advantage of
temporary price distortions at minimal risk
Basis Point — A unit of measurement used in the valuation of fixed-income securities equal to
1/100 of 1 percent of yield; e.g., "1/4" of 1 percent is equal to 25 basis points.
Benchmark — Index used to compare risk and performance to a managed portfolio.
Bid — The indicated price at which a buyer is willing to purchase a security or commodity.
Book Value — The original acquisition cost of an investment plus or minus the accrued
amortization or accretion.
Broker — A financial firm that brings securities buyers and sellers together in return for a fee. The
term "broker" is often used interchangeably with "dealer" to refer to a seller of investment
securities.
Callable Bond — A bond issue in which all or part of its outstanding principal amount may be
redeemed before maturity by the issuer under specified conditions.
Cash Settlement — A transaction which calls for delivery and payment of securities on the same
day that the transaction is initiated.
Resolution No. 18-07, Page 23
Collateralization — Process by which a borrower pledges securities, property, or other deposits
for the purpose of securing the repayment of a loan and/or security.
Collateralized Mortgage Obligation (CMO) — A derivative mortgage-backed security (MBS)
created from pools of home mortgage loans. A single MBS is divided into multiple classes, each
class containing unique risk profile and security characteristics. A number of CMO classes are
expressly prohibited by Texas State law.
Commercial Paper — An unsecured short-term promissory note issued by corporations, with
maturities ranging from 1 to 270 days. Commercial paper must carry a minimum rating of Al/P1
in order to be eligible under the Texas Public Funds Investment Act.
Constant Maturity Treasury (CMT) — A calculated average released by the Federal Reserve of
all Treasury yields along a specific maturity point. This calculation is frequently used as a
benchmark for conservative government portfolios.
Coupon Rate — The annual rate of interest received by an investor from the issuer of certain types
of fixed-income securities. Also known as the "interest rate."
Credit Risk — The risk to an investor that an issuer will default in the payment of interest and/or
principal on a security.
Derivative — Financial instruments whose value is derived from the movement of an underlying
index or security.
Dealer — A dealer, as opposed to a broker, sets as a principal in all securities transactions, buying
and selling for their own account. Often times, the terms "broker" and "dealer" are used
interchangeably to refer to a seller of investments securities.
Delivery Versus Payment (DVP) — A type of securities transaction in which the purchaser pays
for securities at the time of delivery either to the purchaser or his/her custodian.
Derivative Security — Financial instrument created from, or whose value depends upon, one or
more underlying assets or indices of asset values.
Discount — The amount by which the par value of a security exceeds the price paid for the security.
Diversification — A process of investing assets among a range of security types by sector, maturity,
and quality rating.
Dollar Weighted Average Maturity (WAM) — The average maturity of all the securities that
comprise a portfolio weighted by the dollar value of each security.
Fair Market Rate — A documented and verifiable rate of interest which approximates the average
rate which could have been earned on similar investments at the time of the transaction.
Resolution No. 18-07, Page 24
Federal Agency — A debt instrument that carries a rating of AAA because it is government
sponsored.
Federal Deposit Insurance Corporation (FDIC) — A federal agency that insures bank deposits,
currently up to $250,000 per account. Public deposits that exceed this amount must be properly
collateralized with investment securities or insured through a surety bond.
Financial Industry Regulatory Authority (FINRA) - the successor to the National Association
of Securities Dealers, Inc. (NASD). FINRA is a private corporation that focuses on regulatory
oversight of all securities firms that do business with the public; professional training, testing and
licensing of registered persons; arbitration and mediation; market regulation by contract for the
New York Stock Exchange, the NASDAQ Stock Market, Inc., the American Stock Exchange LLC,
and the International Securities Exchange.
Interest Rate — See "Coupon Rate."
Internal Controls — An internal control structure designed to ensure that the assets of the entity
are protected from loss, theft, or misuse. The internal control structure is designed to provide
reasonable assurance that these objectives are met.
Interlocal Cooperation Act — Law permitting joint participation by local governments providing
one or more government functions within the State. This law [Section 891.001 et seq. of the Texas
Government Code (the "Act")] has allowed for the creation of investment pools in Texas.
Investment Advisers Act of 1940 — Law which requires all Investment Advisers to be registered
with the SEC in order to protect the public from fraud.
Investment Policy — A concise and clear statement of the objectives and parameters formulated
by an investor or investment manager for a portfolio of investment securities. The Texas Public
Funds Investment Act requires that public entities have a written and approved investment policy.
Investment Pool — An entity created under the Interlocal Cooperation Act to invest public funds
jointly on behalf of the entities that participate in the pool.
Liquidity — A liquid investment is one that can be easily and quickly converted to cash without
substantial loss of value. Investment pools and money market funds, which allow for same day
withdrawal of cash, are considered extremely liquid.
Local Government Investment Pool (LGIP) — An investment by local governments in which
their money is pooled as a method for managing local funds.
Market Risk - The risk that the value of a security will rise or decline as a result of changes in
market conditions.
Market Value — A security's par amount multiplied by its market price.
Resolution No. 18-07, Page 25
Master Repurchase Agreement — A written contract covering all future transactions between the
two parties to a repurchase agreement.
Maturity — The date on which payment of a financial obligation is due. The final stated maturity
is the date on which the issuer must retire a bond and pay the face value to the bondholder. See
"Weighted Average Maturity."
Money Market Mutual Fund — Mutual funds that invest solely in money market instruments
(short term debt instruments, such as Treasury bills, commercial paper, bankers' acceptance, repos
and federal funds).
Mortgage -Backed Security (MBS) — Security backed by pools of home loan mortgages.
Net Asset Value (NAV) — The value of a mutual fund or investment pool at the end of the business
day. NAV is calculated by adding the market value of all securities in a fund or pool, deducting
expenses, and dividing by the number of shares in the fund or pool.
Offer — An indicated price at which market participants are willing to sell a security. Also referred
to as the "Ask Price."
Par — Face value or principal value of a bond, typically $1,000 per bond. A security's par value
is multiplied by its coupon rate to determine coupon payment amount.
Passive Management — Involves the creation of a portfolio allocation that is the same as a specific
index to generate a return that is the same as the chosen index instead of outperforming it. Passive
investing involves leaving high cash balance in banks or pools and not taking advantage of spreads
in the market through other investment types.
Premium — The amount by which the price paid for a security exceeds the security's par value.
Primary Government Securities Dealer (Primary Dealer) — One of 20 (as of 02/2011 ) large
government securities dealers who are required to submit daily reports of market activity and
monthly financial statements to the New York Federal Reserve Bank. Primary Dealers are
required to continually "make a market" in Treasury securities, buying or selling when asked,
thereby creating a liquid secondary market for US debt obligations.
Principal — The face value or par value of a debt instrument. Also may refer to the amount of
capital invested in a given security.
Prudent Investor Rule — Refers to an investment principle in the Public Funds Investment Act
outlining the fiduciary responsibilities of Investment Officers.
Regular Way Delivery — Securities settlement that calls for delivery and payment on the third
business day following the trade date (T + 3); payment on a T + 1 basis is currently under
consideration. Mutual funds are settled on a same day basis; government securities are settled on
the next business day.
Resolution No. 18-07, Page 26
Repurchase Agreement (repo or RP) — An agreement of one party to sell securities at a specified
price to a second party and a simultaneous agreement of the first party to repurchase the securities
at a specified price or at a specified later date.
Reverse Repurchase Agreement (Reverse Repo) — An agreement of one party to purchase
securities at a specified price from a second party and a simultaneous agreement by the first party
to resell the securities at a specified price to the second party on demand or at a specified date.
Safekeeping — Holding of assets (e.g., securities) by a financial institution.
Total Return — The sum of all investment income plus changes in the capital value of the portfolio.
For mutual funds, return on an investment is composed of share price appreciation plus any
realized dividends or capital gains. This is calculated by taking the following components during
a certain time period: (Price Appreciation) + (Dividends Paid) + (Capital Gains) = (Total Return).
Treasury Bills — Short term U.S. government non-interest bearing debt securities with maturities
of no longer than one year and issued with a minimum purchase of $100. Bills pay interest only
at maturity. The interest is equal to the face value minus the purchase price. Auctions of four
week, 13 week and 26 week bills are every week, while auctions of 52 week bills are done every
four weeks. The yields on these bills are monitored closely in the money markets for signs of
interest rate trends.
Treasury Notes — Intermediate U.S. government debt securities with maturities of one to 10 years
and issued with a minimum purchase of $100. Treasury notes, or T -notes, are issued in terms of
2, 3, 5, 7, and 10 years, and pay interest every six months until they mature.
Uniform Net Capital Rule — SEC Rule 15C3-1 outlining capital requirements for brokers/dealers.
Volatility — A degree of fluctuation in the price and valuation of securities.
Yield — The current rate of return on an investment security generally expressed as a percentage
of the security's face value.
Yield -to -Call (YTC) — The rate of return an investor earns from a bond assuming the bond is
redeemed (called) prior to its nominal maturity date.
Yield Curve — A graphic representation that depicts the relationship at a given point in time
between yields and maturity for bonds that are identical in every way except maturity. A normal
yield curve may be alternatively referred to as a positive yield curve.
Yield -to -Maturity — The rate of return yielded by a debt security held to maturity when both
interest payments and the investor's potential capital gain or loss are included in the calculation of
return.
Zero-coupon Securities — Security that is issued at a discount and makes no periodic interest
payments. The rate of return consist of a gradual accretion of the principal of the security and is
payable at par upon maturity.
Resolution No. 18-07, Page 27