6.20 Investment Policy
A. Purpose
To establish guidelines for investing college funds that comply with legal requirements and demonstrate good judgment and prudence in investing these funds.
B. Policy
The treasurer of the college shall invest public funds in a manner which will provide safety, liquidity and investment returns while meeting the daily cash flow demands of the college and conforming to all state statutes governing the investment of public funds.
Authority and responsibility to manage the investment program is granted to the treasurer, as provided in the college’s 1.02 Duties of the Office policy. The treasurer may delegate management of the investment program to the assistant treasurer and assistant treasurer’s designees.
C. Procedures
Pooling of Funds: Except for cash in certain restricted and special funds, the college will consolidate cash balances from all funds to maximize investment earnings. Investment income will be allocated to the general operating fund.
External Management of Funds: Investment through external programs, facilities and professionals operating in a manner consistent with this policy will constitute compliance.
Primary Objectives
The primary objectives, in priority order, of the college investment activities shall be safety, liquidity and return on investment:
Safety: Safety of principal is the foremost objective of the investment program. Investments of the college shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk.
Credit Risk: The college will minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by:
Pre-qualifying the financial institutions, broker/dealers, intermediaries and advisors with which the college will do business (see section Investment Transactions-1a).
Diversifying the portfolio so that potential losses on individual securities will be minimized.
Interest Rate Risk: The college will minimize the risk that the market value of securities in the portfolio will fall due to changes in general interest rates by:
Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity.
Investing operating funds primarily in shorter-term securities.
Liquidity: The college investment portfolio shall remain sufficiently liquid that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands. A portion of the portfolio may also be placed in bank deposits or repurchase agreements that offer same-day liquidity for short-term funds.
Return on Investment: The college investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the college’s investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall not be sold prior to maturity with the following exceptions: 1) a security with declining credit may be sold early to minimize loss of principal; or 2) liquidity needs of the portfolio require that the security be sold.
Standard of Care
Prudence: All participants in the investment process shall act responsibly as custodians of the public trust. The standard of prudence to be applied is the “prudent investor” rule which states: “Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment considering the probable safety of their capital as well as the income to be derived.”
Ethics and Conflicts of Interest: College officials involved in the investment process shall refrain from personal business activity that could conflict with proper execution and management of the investment program, or which could impair their ability to make impartial investment decisions. These officials shall disclose annually to the Board of Trustees 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. These officials shall refrain from undertaking personal investment transactions with the same individual with which business is conducted on behalf of the college.
Investment Transactions
Authorized Financial Dealers and Institutions: A list will be maintained of financial institutions authorized to provide investment transactions. In addition, a list will be maintained of approved security broker/dealers as determined by the Treasurer and approved by the Board of Trustees. These may include “primary” dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule).
All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following, as appropriate:
Proof of registration or certification with appropriate regulatory agency.
Proof of secretary of state registration.
Certification of having read, understood and agreed to comply with the college’s investment policy.
An annual review of the financial condition and registration of qualified financial institutions and broker/dealers will be conducted by management.
Internal Controls: The assistant treasurer, and assistant treasurer’s designees, is responsible for establishing and maintaining an internal control structure that will be reviewed annually with the college’s independent auditor.
The internal control structure shall be designed to protect college assets from loss, theft or misuse and to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes: (1) the cost of control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits require estimates and judgements by management.
The internal controls shall address the following points:
Control of collusion.
Separation of transaction authority from accounting and record keeping.
Custodial safekeeping.
Avoidance of physical delivery securities.
Clear delegation of authority to subordinate staff members.
Written confirmation of transactions for investment and wire transfers.
Development of a wire transfer agreement with the lead bank.
Delivery vs. Payment: All trades, where applicable, will be executed by delivery vs. payment (DVP) to ensure that securities are deposited in eligible financial institutions prior to the release of funds. All securities shall be perfected in the name for the account of the college and shall be held by a third-party custodian as evidenced by safekeeping receipts.
Suitable and Authorized Investments:
1. Investment Types: In accordance with and subject to restrictions imposed by current statutes, the following list represents the entire range of investments that the college will consider, and which shall be authorized for the investments of funds by the college.
Governmental and Agency Debt – Those securities issued by and/or guaranteed by the Federal Government or an Agency or Instrumentality of the Federal Government:
United States Treasury Securities: The college may invest in obligations of the United States government for which the full faith and credit of the United States are pledged for the payment of principal and interest.
United States Agency Securities: The college may invest in obligations issued or guaranteed by any agency of the United States Government (as described in “Security Selection” below).
Insured Investments and Investments Secured by Collateral:
Repurchase Agreements: The college may invest in contractual agreements between the College and commercial banks or primary government securities dealers. The purchaser in a repurchase agreement (repo) enters into a contractual agreement to purchase U.S. treasury and/or government agency securities while simultaneously agreeing to resell the securities at predetermined dates and prices.
Collateralized Public Deposits (Certificates of Deposit): Instruments issued by financial institutions which state that specified sums have been deposited for specific periods of time and at specified rates of interest. The certificates of deposit are required to be backed by acceptable collateral securities as dictated by state statute.
Insured Cash Sweep accounts (ICS) and CDARS : The ICS service, and CDARS®, provides access to multi-million-dollar FDIC protection by working directly with just one bank, which is a member of the ICS Network and/or the CDARS Network. After placement of a large deposit with the financial institution the deposit is divided into amounts under the standard FDIC insurance maximum of $250,000 and is placed in deposit accounts at other ICS Network or CDARS Network banks. Funds are placed into demand deposit accounts (using the ICS demand option), money market deposit accounts (using the ICS savings option), or into CDs (using CDARS). By placing the college’s funds in increments below the standard FDIC insurance maximum of $250,000, both principal and interest are eligible for FDIC insurance.
Security Selection: The following list represents the entire range of United States agency securities that the college will consider, and which shall be authorized for the investment of funds by the college.
Additionally, the following definitions and guidelines should be used in purchasing the instruments:
U.S. Govt. Agency Coupon and Zero-Coupon Securities: Bullet coupon bonds with no embedded options with maturities of three (3) years or less.
U.S. Govt. Agency Discount Notes: Purchased at a discount with maximum maturities of one (1) year.
U.S. Govt. Agency Callable Securities: Restricted to securities callable at par only with final maturities of three (3) years or less.
U.S. Govt. Agency Step-up Securities: The coupon rate is fixed for an initial term. At coupon date, the coupon rate rises to a new higher fixed term. Restricted to securities with final maturities of three (3) years or less.
Investment Restrictions and Prohibited Transactions: To provide for the safety and liquidity of the college’s funds, the investment portfolio will be subject to the following restrictions:
Borrowing for investment purposes (“Leverage”) is prohibited.
Instruments known as variable rate demand notes, floaters, inverse floaters, leveraged floaters, and equity-linked securities are not permitted. Investment in any instrument, which is commonly considered a “derivative” instrument (e.g. options, futures, swaps, caps, floors, and collars), is prohibited.
Contracting to sell securities not yet acquired in order to purchase other securities for purpose of speculating on developments or trends in the market is prohibited.
Bankers’ Acceptance and Commercial Paper are prohibited.
Collateralization: Collateralization will be required on certificates of deposit, demand deposits and repurchase agreements (including accrued interest). Collateralization of securities will be limited to those eligible per state statute.
For certificates of deposit and demand deposits, the market value of collateral must be at least 110% or greater of the amount of certificates of deposits and demand deposits (plus accrued interest) with the depository, less the amount, if any, which is insured by Federal Deposit Insurance Corporation (FDIC) or the National Credit Unions Share Insurance Fund; or Federal Home Loan Bank Letters of Credit at 100% of the same.
All securities, which serve as collateral against the deposits of a depository institution, must be held in safekeeping at a non-affiliated custodial facility.
The college shall have a depository contract and pledge agreement with each safekeeping bank that will comply with the Financial Institutions, Reform, Recovery, and Enforcement Act of 1989 (FIRREA). This will ensure that the college’s security interest in collateral pledged to secure deposits is enforceable against the receiver of a failed financial institution.
The only securities acceptable as collateral for repurchase agreements are U.S. treasury and government agency securities. The market value must be at least 110% or greater of the repurchase account balance plus accrued interest. Securities will be delivered to the designated custodial agent.
Investment Parameters:
Diversification: The investments shall be diversified to minimize the risk of loss resulting from over concentration of assets in specific maturity, specific issuer, or specific class of securities. Diversification strategies shall be established and periodically reviewed. At a minimum, diversification standards by security type and issuer shall be:
U.S. treasuries and securities having principal and/or interest guaranteed by the U.S. government: No more than 50%.
Collateralized time, demand deposits accounts; money market deposit accounts; ICS; and CDARS: up to 100%.
U.S. Government agencies and government sponsored enterprises: No more than 50%.
Collateralized repurchase agreements: No more than 50%.
U.S. Government agency callable securities: No more than 50%.
Maximum Maturities: To the extent possible, the college shall attempt to match its investments with anticipated cash flow requirements. Investments in repurchase agreements shall mature and become payable not more than ninety days (90) from the date of purchase. The college shall adopt maturity limitations that should not exceed three (3) years and are consistent with the investment objectives. Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds such as bank deposits, insured cash sweep accounts (ICS) or overnight repurchase agreements to ensure that appropriate liquidity is maintained to meet ongoing obligations.
Reporting:
Investment reports describing the portfolio in terms of investment securities, maturities, rates, characteristics and other features shall be prepared monthly. In addition, a quarterly investment report shall be prepared, including a management summary that provides an analysis of the status of the current investment portfolio and transactions made over the last quarter. This management summary will be prepared in a manner that will allow the college to ascertain whether investment activities during the reporting period have conformed to the investment policy. The quarterly report will include the following:
Listing of individual securities held at the end of the reporting period.
Average weighted yield-to-maturity of portfolio investments as compared to applicable benchmarks.
Listing of investments by maturity date.
Percentage of the total portfolio which each type of investment represents.
All reports shall be provided to the college Board of Trustees.
Market Value:
As it may be applicable, the college will revalue investments to reflect the market prices of the portfolio. This shall be calculated at least quarterly and a statement of the market value of the portfolio shall be issued at least annually to the college board of trustees. Investments which are downgraded below the minimum acceptable rating levels shall be reviewed for possible sale within a reasonable time period.
Policy Considerations:
Any investment currently held that does not meet the guidelines of this policy shall be exempt from the requirements of this policy. At maturity or liquidation, such monies shall be reinvested only as provided by this policy.
D. Definitions
E. Authority
This policy is maintained under the authority of the Vice Chancellor for Finance.
F. Related Policies
3.60 Code of Conduct and Disciplinary Procedures
1.02 Duties of Office
6.09 Accounting of Funds
G. Implementation
Purpose, Procedures, Definitions, Authority and Related Policies sections approved and adopted by the Chancellor’s Cabinet on 4/21/2020.
Policy approved and adopted by the Board of Trustees on 04/10/1999 and revised 04/13/2006, 4/19/2010, 3/23/2011, 5/6/2012, 5/13/2013, 05/12/2014, and 10/12/2020. Set for review on an annual basis.