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HomeMy WebLinkAbout12 - Council Investment Policy F-1�r�W,oQT CITY OF NEWPORT B EAC City Council Staff Report 12 Agenda Item No. October 9, 2012 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FRONT: Finance Department Dan Matusiewicz, Finance Director/Treasurer 949 - 644 - 3123, danm @newportbeachca.gov PREPARED BY: Sandra Wilcox, Sr. Accountant APPROVED: c�— �_(, —l-/)m Q�� TITLE: Amend and Reaffirm Council Investment Policy (F -1) ABSTRACT: Council Policy (F -1), Statement of Investment Policy, must be reviewed annually to ensure its consistency with the overall investment objectives and market conditions. The policy was reviewed by staff, investment advisers and Finance Committee. With the Finance Committee and City Manager's consent, Council is being asked to adopt the attached investment policy as amended. The submitted changes streamline and clarify administrative procedures and improve the clerical presentation of the policy. No changes are proposed to the allowable investments or maximum concentration of investments. RECOMMENDATION: Adopt Resolution No. 2012 -90 approving proposed amendments to, and reaffirming Council Policy (F -1) Statement of Investment Policy as presented. FUNDING REQUIREMENTS: There is no fiscal impact related to this item. DISCUSSION: As required by Council Policy (F -1), the City's Investment policy was reviewed to ensure its consistency with the overall investment objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. On September 10, 2012, Finance Committee met and reviewed several proposed changes to the investment policy which clarify and streamline several administrative procedures contained within the current policy. Below is an outline highlighting the more substantive proposed changes to the investment policy: Amend and Reaffirm Council Investment Policy (F -1) October 09, 2012 Page 2 Section C.3. Delegation of Authority — We have proposed that our investment advisors are allowed to use their own professional discretion in selecting broker /dealers consistent with their selection process described in SEC Form ADV 2A. Form ADV is a uniform filing used by investment advisors to register with the Securities and Exchange Commission (SEC) and state securities authorities. It is used for regulatory purposes and represents the primary disclosure document that investment advisers provide to their clients. Financial advisors are required to file this form annually with the SEC, or anytime a material change occurs in their business practice. The disclosures are available to the public on the SEC's Investment Adviser Public Disclosure (IAPD) website at www.adviserinfo.sec.gov. Section E. Broker /Dealers — We have proposed additional language that that clarifies that the broker /dealer selection criteria stated in the current policy are applicable to transactions placed directly by City staff rather than those transactions that are directed by the City's professional investment advisors. Section HA. Investment Parameters — Competitive Transactions — We have proposed additional language that allow the investment advisor to consider factors other than lowest commission for transactions involving specialized services on the part of the broker /dealer. Broker /dealers will be selected on a combination of the most favorable price, and their ability to best execute a transaction. For routine transactions, competitive pricing will be the driving factor. However, for less generic transactions, factors related to the broker /dealer's ability to obtain a specific security and execute the transaction will also be considered. Examples of more specialized transactions might include a mortgage backed security with a final maturity under five years or a small public offering of a lesser known credit name. Section I. Portfolio Performance — For sake of consistency and efficiency, we have also proposed to measure investment performance using the Global Investment Performance Standard (GIPS). This standard compares performance, gross of fees instead of net of fees. However, Finance staff will continue to track related fees and expenditures on a separate line item on the City's general ledger. Section J. Reporting — We have also proposed language to clarify the City's current practice of posting monthly Treasury/Portfolio Performance reports on the City's website, rather than submitting hardcopy reports to the City Council. Section K.I. Investment Policy Compliance — We have proposed that instances of non - compliance would be first reported to the Finance Committee and that Finance Committee can determine whether the technical compliance violation was worthy of further Council discussion. For instance, if a security was downgraded below an investment credit rating threshold, staff would discuss the credit alert with the Finance z Amend and Reaffirm Council Investment Policy (F -1) October 09, 2012 Page 3 Committee and Finance Committee could determine if the matter warranted further Council discussion. While many securities have been downgraded in recent years, including U.S. Treasuries, no downgrades resulted in an instance of non - compliance with the City's Investment policy. Section K.2. Investment Policy Adoption — We have also proposed that the requirement for City Council to affirm the City Investment Policy annually be removed if no changes are proposed. Staff will still review the investment policy annually with the Finance Committee each year. If no changes are recommended during Finance Committee review, no further action is required. However, if any policy changes are recommended, the proposed amendments will be submitted to City Council for consideration and will not become effective until approved by City Council. ENVIRONMENTAL REVIEW: Staff recommends the City Council find this action is not subject to the California Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. NOTICING: The agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers the item). Prepared by: Sandra Wilcox Sr. Accountant Submitted by: Dan Matusiewicz Finance Director A. Council Investment Policy (F -1) redlined Attachments: B. Sample SEC form ADV 2A for Investment Advisors C. Resolution No. 2012- 3 ATTACHMENT A F -1 STATEMENT OF INVESTMENT POLICY PURPOSE: The City Council has adopted this Investment Policy (the Policy) in order to establish the scope of the investment policy, investment objectives, standards of care, authorized investments, investment parameters, reporting, investment policy compliance and adoption, and the safekeeping and custody of assets. This Policy is organized in the following sections: A. Scope of Investment Policy 1. Pooling of Funds 2. Funds Included in the Policy 3. Funds Excluded from the Policy B. Investment Objectives 1.. Safety 2. Liquidity 3. Yield C. Standards of Care 1. Prudence 2. Ethics and Conflicts of interest 3. Delegation of Authority 4. Internal Controls D. Banking Services E. Broker /Dealers F. Safekeeping and. Custody of Assets G. Authorized Investments 1. Investments Specifically Pernvtted 2. Investments Specifically Not Permitted 3. Exceptions to Prohibited and Restricted Investments H. Investment Parameters 1.. Diversification 2. Maximum Maturities 3. Credit Quality 4. Competitive Transactions 1. Portfolio Performance J. Reporting K. Investment Policy Compliance and Adoption 1. Compliance 2. Adoption 1 4 F -1 A. SCOPE OF INVESTMENT POLICY 1. Pooling of Funds All cash shall be pooled for investment purposes. The investment income derived from the pooled investment shall be allocated to the contributing funds, net of all banking and investing expenses, based upon the proportion of the respective average balances relative to the total pooled balance. Investment income shall be distributed to the individual funds not less than annually. 2. Funds Included. in the Policy The provisions of this Policy shall apply to all financial assets of the City as accounted for in the City's Comprehensive Annual Financial Report listed beleks, including -; a) General Fund b) Special Revenue Funds c) Capital Project Funds d) Enterprise Funds e) Internal Service Funds f) Trust and Agency Funds g) Permanent Endowment Funds h) Any new fund created unless specifically exempted If the City invests funds on behalf of another agency and, if that agency does not have its own investment policy, this Policy shall govern the agency's investments. 3. Funds Excluded from this Policy Bond Proceeds - Investment of bond proceeds will be made in accordance with applicable bond indentures. B. INVESTMENT OBJECTIVES The City's funds shall be invested in accordance with all applicable City policies and codes, State statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order: 1. Safety Preservation of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective shall be to mitigate credit risk and interest rate risk. To attain this 2 5 F -1 objective, the City shall diversify its investments by investing funds among several financial institutions and a variety of securities offering independent returns. a) Credit Risk The City shall minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by: • Limiting investments in securities that have higher credit risks, pre - qualifying the financial institutions, broker /dealers, intermediaries, and adviseradvisors with which the City will do business • Diversifying the investment portfolio so as to minimize the impact any one industry/ investment class can have on the Portfolio b) Interest Rate Risk To minimize the negative impact of material changes in the market value of securities in the portfolio, the City shall: ® Structure the investment portfolio so that securities mature concurrent with cash needs to meet anticipated demands, thereby avoiding the need to sell securities on the open market prior to maturity Invest in securities of varying maturities 2. Liquidity The City's investment portfolio shall remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated without requiring a sale of securities. Since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets. A portion of the portfolio also may be placed in money market mutual funds or LAID which offer same -day liquidity for short -term funds. 3. Yield The City's investment portfolio shall be designed with the objective of attaining a benchmark rate of return throughout budgetary and economic cycles, commensurate with the City's investment risk constraints and the liquidity characteristics of the portfolio. 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. 3 2 F -1 C. STANDARDS OF CARE 1. Prudence The standard of prudence to be used for managing the City's investment program is California Government Code Section 53600.3, the prudent investor standard, which states that "when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person 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 agency." The City's overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City recognizes that no investment is totally without risk and that the investment activities of the City are a matter of public record. Accordingly, the City recognizes that occasional measured losses may occur in a diversified portfolio and shall be considered within the context of the overall portfolio's return, provided that adequate diversification has been implemented and that the sale of a security is in the best long -term interest of the City. The Finance Director and authorized investment personnel acting in accordance with established 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 a timely fashion to the City Council and appropriate action is taken to control adverse developments. 2. Ethics and Conflicts of Interest Elected officials and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the City's investment program or could impair or create the appearance of an impairment of their ability to make impartial investment decisions. Employees and investment officials shall subordinate their personal investment transactions to those of the City. In addition, City Council members, the City Manager, and the •DireettcsFina�aeeFinance Director shall file a Statement of Economic Interests each year as required n 7 F -1 by California Government Code Section 87203 and regulations of the Fair Political Practices Commission. 3. Delegation of Authority Authority to manage the City's investment program is derived from the Charter of the City of Newport Beach section 605 (j). The Dii -eeter a l inanee.Fina.nce. Director shall assume the title of and act as City Treasurer and with the approval of the City Manager appoint deputies annually as necessary to act under the provisions of any law requiring or permitting action by the City Treasurer. The —Di+ �� i-naiieeFi.nance Director may then delegate the authority to conduct investment transactions and to manage the operation of the investment portfolio to other specifically authorized staff members. No person may engage in an investment transaction except as expressly provided under the terms of this Policy. The City may engage the support services of outside investment advisors with respect to its investment program, so long as it can be demonstrated that these services produce a net financial advantage or necessary financial protection of the City's financial resources. Such companies must be well - established and exceptionally reputable. Members of the staff of such companies who will have primary responsibility for managing the City's investments must have a working familiarity with the special requirements and constraints of investing municipal funds in general and this City's funds in particular. These firms must insure that the portion of the portfolio under their management complies with various concentration and other constraints specified herein, and contractually agree to conform to all provisions of governing law and the collateralization and other requirements of this Policy. Selection and retention of broker /dealers by investment advisors shall be at their sole discretion and dependent upon selection and retention criteria as stated, in the Uniform Application for hlvestment Advisor Registration and related Amendments (SEC Form ADV 2A). 4. Internal Controls The Finance Director is responsible for establishing and maintaining a system of internal controls. The internal controls shall be designed to prevent losses of public funds arising from fraud, employee error, and misrepresentation by third parties, unanticipated changes in financial markets, or imprudent action by City employees and officers. The internal structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) 5 D F -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. D. BANKING SERVICES Banking services for the City shall be provided by FDIC insured banks approved to provide depository and other banking services. To be eligible, a bank shall qualify as a depository of public funds in the State of California as defined in California Government Code Section 53630.5 and shall secure deposits in excess of FDIC insurance coverage in accordance with California Govermment Code Section 53652. E.. BROKER/ DEALERS hn the event that an investinent advisor is not used to purchase securities, the Citv will select bBroker /dBealers N- Alltea. be selected on the basis of their expertise in public cash management and their ability to provide service to the City's account. Each approved broker /dealer must possess an authorizing certificate from the California Commissioner of Corporations as required by Section 25210 of the California Corporations Code. To be eligible, a firm must meet at least one of the following criteria 1.. Bbe recognized as Primary Dealers by the Federal Reserve Bank of New York or have a primary dealer within their holding company structure, or 2. Rreport voluntarily to the Federal Reserve Bank of New York, or 3. Qqualify under Securities and Exchange Commission (SEC) Rule 15c3 -1 (Uniform Net Capital Rule). F. SAFEKEEPING AND CUSTODY OF ASSETS The Directei— ef- l4nai4eeFinance Director shall select one or more banks to provide safekeeping and custodial services for the City. A Safekeeping Agreement approved by the City shall be executed with each custodian bank prior to utilizing that bank's safekeeping services. Custodian banks will be selected on the basis of their ability to provide services for the City's account and the competitive pricing of their safekeeping related services. 2 9 F -1 The purchase and sale of securities and repurchase agreement transactions shall be settled on a delivery versus payment basis. All securities shall be perfected in the name of the City. Sufficient evidence to title shall be consistent with modern investment, banking and commercial practices. All investment securities, except non- negotiable Certificates of Deposit, Money Market Funds and local government investment pools, purchased by the City will be delivered by either book entry or physical delivery and will be held in third -party safekeeping by a City approved custodian bank, its correspondent bank or its Depository Trust Company (DTC) participant account. All Fed wireable book entry securities owned by the City shall be held in the Federal Reserve system in a customer account for the custodian bank which will name the City as "customer." All DTC eligible securities shall be held in the custodian bank's DTC participant account and the custodian bank shall provide evidence that the securities are held for the City as "customer." G. AUTHORIZED INVESTMENTS All investments and deposits of the City shall be made in accordance with California Government Code Sections 1.6429.1, 53600 -53609 and 53630- 53686. Any revisions or extensions of these code sections will be assumed to be part of this Policy immediately upon being enacted. The City has further restricted the eligible types of securities and transactions. The foregoing list of authorized securities and transactions shall be strictly interpreted. Any deviation from this list must be pre- approved by resolution of the City Council. 1. Investments Specifically Permitted a) United States Treasury bills, notes, or bonds with a final maturity not exceeding five years from the date of trade settlement. b) Federal Instrumentality (government- sponsored enterprise) debentures, discount notes, callable and step -up securities, with a final maturity not exceeding five years from the date of trade settlement. c) Federal Agency mortgage- backed securities and debentures with a final maturity not exceeding five years from the date of trade settlement. 7 19 F -1 d) Mortgage- backed Securities and Asset - backed Securities limited to mortgage - backed pass- through securities issued by a US government agency, or consumer receivable pass - through certificates or bonds with a final maturity not exceeding five years from the date of trade settlement. Securities eligible for investment under this subdivision shall be issued by an issuer whose debt is rated at least A or the equivalent by a Nationally Recognized Statistical Rating Organization (NRSRO). The security itself shall be rated at least AAA or the equivalent by an NRSRO. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer of mortgage- backed and asset - backed securities listed above, and the aggregate investment in mortgage- backed and asset - backed securities shall not exceed twenty percent (20 %) of the City's total portfolio. e) Medium -Term Notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States, with a final maturity not exceeding four years from the date of trade settlement, and rated at least A or the equivalent by an NRSRO. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer of medium -term notes, and the aggregate investment in medium -term notes shall not exceed thirty percent (30 %) of the City's total portfolio. In addition, AAA rated FDIC - guaranteed corporate bonds are herein authorized, within the aforementioned diversification and maturity requirements. f) Municipal Bonds: General and Revenue obligations of the State of California and local agencies within the State. Municipal bonds must be rated at least AA by two NRSROs with maturities not exceeding three years. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer and the aggregate investment in municipal bonds shall not exceed fifteen percent (15 %) of the City's total portfolio. g) Non - negotiable Certificates of Deposit and savings deposits with a maturity not exceeding two years from the date of trade settlement, in FDIC insured state or nationally chartered banks or savings banks that qualify as a depository of public funds in the State of Q 11 F -1 California as defined in California Government Code Section 53630.5. Deposits exceeding the FDIC insured amount shall be secured pursuant to California Government Code Section 53652. No one issuer shall exceed more than five percent (5 %) of the portfolio, and investment in negotiable and nonnegotiable certificates of deposit shall be limited to thirty percent (30 %) of the portfolio combined. h) Negotiable Certificates of Deposit only with U.S. Banks whose underlying securities are rated A -1 or the equivalent by an NRSRO and having assets in excess of $10 billion, so as to insure security and a large, well - established secondary market. Ease of subsequent marketability is further ascertained prior to initial investment by examining currently quoted bids by primary dealers and the acceptability of the issuer by these dealers. No one issuer shall exceed more than five percent (5 %) of the portfolio, and maturity shall not exceed two years. Investment in negotiable and non- negotiable certificates of deposit shall be limited to thirty percent (30 %) of the portfolio combined. i) Prime Commercial Paper with a maturity not exceeding 270 days from the date of trade settlement with the highest letter and number rating as provided for by an NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either sub - paragraph i. or sub - paragraph ii. below: i. The entity shall (1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of $500,000,000 and (3) have debt other than commercial paper, if any, that is rated at least A or the equivalent by an NRSRO. ii. The entity shall (1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program wide credit enhancements, including, but not limited to, over collateralization, letters of credit or surety bond and (3) have commercial paper that is rated at least A -1 or the equivalent by an NRSRO. iii. No more than five percent (5 %) of the City's total portfolio shall be invested in the commercial paper of any one issuer, Vj 12 F -1 and the aggregate investment in commercial paper shall not exceed twenty five percent (25 %) of the City's total portfolio. j) Eligible Banker's Acceptances with a maturity not exceeding 180 days from the date of trade settlement, drawn on and accepted by a commercial bank whose senior long -term debt is rated at least A or the equivalent by an NRSRO at the time of purchase. Banker's Acceptances shall be rated at least A -1, P -1. or the equivalent at the time of purchase by an NRSRO. If the bank has senior debt outstanding, it must be rated at least A or the equivalent by an NRSRO. The aggregate investment in banker's acceptances shall not exceed twenty percent (20 %) of the City's total portfolio, and no more than five percent (5 %) of the City's total portfolio shall be invested in banker's acceptances of any one bank. k) Repurchase Agreements and Reverse Repurchase Agreements with a final termination date not exceeding 30 days collateralized by U.S. Treasury obligations or Federal Instrumentality securities listed in items 1. and 2 above with the maturity of the collateral not exceeding ten years. For the purpose of this section, the term collateral shall mean purchased securities under the terms of the City's approved Master Repurchase Agreement. The purchased securities shall have a minimum market value including accrued interest of one hundred and two percent (102 %) of the dollar value of the funds borrowed. Collateral shall be held in the City's custodian bank, as safekeeping agent, and the market value of the collateral securities shall be marked -to- the - market daily. Repurchase Agreements and Reverse Repurchase Agreements shall be entered into only with broker /dealers and who are recognized as Primary Dealers with the Federal Reserve Bank of New York, or with firms that have a Primary Dealer withnt their holding company structure. Primary Dealers approved as Repurchase Agreement counterparties shall have a short -term credit rating of at least A -1 or the equivalent and a long -term credit rating of at least A or the equivalent. Repurchase agreement counterparties shall execute a City approved Master Repurchase Agreement with the City. The Finance Director shall maintain a copy of the City's approved Master Repurchase Agreement and a list of the broker/ dealers who have executed same. 10 13 F -1 In addition, the City must own assets for more than 30 days before they can be used as collateral for a reverse repurchase agreement. No more than ten percent (10 %) of the portfolio can be involved. in reverse repurchase agreementses. 1) State of California's Local Agency Investment Fund (LAIF), pursuant to California Government Code Section 16429.1. m) County Investment Funds: Los Angeles County provides a service similar to LAIF for municipal and other government entities outside of Los Angeles County, including the City. Investment in this pool is intended to be used as a temporary repository for short - term funds used for liquidity purposes. The Finance Director shall maintain on file appropriate information concerning the county pool's current investment policies, practices, and performance, as well as its requirements for participation, including, but not limited to, limitations on deposits or withdrawals and the composition of the portfolio. At no time shall more than five percent (5 %) of the City's total investment portfolio be placed in tlus pool. n) Money Market Funds registered under the Investment Company Act of 1940 that (1) are "no- load" (meaning no commission or fee shall be charged on purchases or sales of shares); (2) have a constant net asset value per share of $1.00; (3) invest only in the securities and obligations authorized in the applicable California statutes and (4) have a rating of at least AAA or the equivalent by at least two NRSROs. The aggregate investment in money market funds shall not exceed twenty percent (20 %) of the City's total portfolio. 2. Investments Specifically Not Permitted Any security type or structure not specifically approved by this policy is hereby prohibited. Security types, which are thereby prohibited include, but are not limited to: "exotic" derivative structures such as range notes, dual index notes, inverse floating rate notes, leveraged or de- leveraged floating rate notes, interest only strips that are derived from a pool of mortgages and any security that could result in zero interest accrual if held to maturity, or any other complex variable or structured note with an unusually high degree of volatility risk. The City shall not invest funds with the Orange County Pool. 11 14 F -1 3. Exceptions to Prohibited and Restricted Investments The City shall not be required to sell securities prohibited or restricted in this policy, or any future policies, or prohibited or restricted by new State regulations, if purchased prior to their prohibition and /or restriction. Insofar as these securities provided no notable credit risk to the City, holding of these securities until maturity is approved. At maturity or liquidation, such monies shall be reinvested eii as provided by this policy. INVESTMENT PARAMETERS 1. Diversification The City shall diversify its investments to avoid incurring unreasonable risks inherent in over - investing in specific instruments, individual financial institutions or maturities. As such, no more than five percent (5 %) of the City's portfolio may be invested in the instruments of any one non - governmental issuer. This restriction does not apply to any type of Federal Instrumentality or Federal Agency Security listed in Sections G1 b and G1 c above. Nevertheless, the asset allocation in the investment portfolio should be flexible depending upon the outlook for the economy, the securities markets and the City's anticipated cash flow needs. 2. Maximum Maturities To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities. The City will not invest in securities maturing more than five years from the date of trade settlement, unless the City Council has by resolution granted authority to make such an investment at least three months prior to the date of investment. 3. Credit Quality The City shall not purchase any security rated Al. and / or A+ or below if that security has been placed on "credit watch" for a possible downgrade by an NRSRO. In the event a security held by the City is the subject of a rating downgrade which brings it below accepted minimums specified herein, or the security is placed on negative credit watch, where downgrade could result in a rate drop below acceptable levels, the investment advisor who purchased the security will immediately notify the 134eete3 =4 hina+neel?i.nance Director. The City shall not be required to immediately sell such securities. The course of action to be followed will then be decided on a case by case basis, considering such factors as 12 1s F -1 the reason for the rate drop, prognosis for recovery or further drop, and market price of the security. The City Council will be advised of the situation and intended course of action. 4. Competitive Transactions All ilnvestment advisors shall make best effort to price investment transactions shah be eGRd 1Eted- on a competitively basis with atrthvred broker /dealers selected consistent with their practices disclosed in form ADV 2A filed with the STC. At least three broker /dealers shall be contacted for each transaction and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, the investment advisor shall make their best efforts to document quotations for comparable or alternative securities will be dec- ti..,,.. ^'. If qualitative characteristics of a transaction, including, but not limited to, complexity of the transaction, or sector expertise of the broker,2revent a competitive selection process, inveshnent advisors shall use brokerage selection practices as described above. 13 M F -1 I. PORTFOLIO PERFORMANCE The investment portfolio shall be designed to attain a market rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flow requirements. The performance of the City's investments shall be compared to the average yield on the U.S. Treasury security that most closely corresponds to the portfolio's weighted average effective maturity. When comparing the performance of the City's portfolio, its rate of return will be computed net of all fees - anal-- (-xpeNsesconsistent with Global Investment Performance Standards GfPS . J. REPORTING Monthly, the ; reetei- efFi; a;eeFinance Director shall submi* 44 the Q#Y produce a treasury report of the investment portfolio balances, risk characteristics, earnings, and performance results of the City's investment portfolio available to Cih7 Council and the P-public on the City's Website. The report shall include the following information: 1. Investment type, issuer, date of maturity, par value and dollar amount invested in all securities, and investments and monies held by the City; 2. A description of the funds, investments and programs; 3. A market value as of the date of the report (or the most recent valuation as to assets not valued monthly) and the source of the valuation; 4. A statement of compliance with this Policy or an explanation for non- compliance 14 17 F -1 K. INVESTMENT POLICY COMPLIANCE AND ADOPTION Compliance Any deviation from the policy shall be reported to Finance Committee as soon as practical, but no later than the at -the -next scheduled Finance Committee meeting. Upon recommendation of the Finance Committee, the Finance Director shall review deviations from policy with the and to City Council, as paft '_ tt>r- e4lmF•inancef inance Director shall City CE>uncRaterial n change t tlae peilicy aracl a+�yodiicatieis -te by_. ________ ___________ _._._. -_.J 2. Adoption TheBireetof -f i•naneeFina:nce Director shall review the - -ender- a-wr- ittea-Statement of Investment Policy with the Finance Committee t-iaat &kal,- ;e reviewed at least annually by Finn ee r-01,.4:Rkt,,,, and Gity Cou- i-w4.1—to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. The Dii:ec- tear- e�PinanceFinance Director shall review the Investment Policy with City Council at a public meeting only if there are changes recommended to the Investment Policv.shall —c-c n .der- the annual gt teme„t —ef f ,.F.. ent Pell a any eh...-.ges— there; — public meetin� This Policy was endorsed and adopted by the City Council of the City of Newport Beach on -September 28- 2838October 9, 2012. It replaces any previous investment policy or investment procedures of the City. Adopted a_-April 6,1959 Amended - — November 9,1970 Amended - — February 11, 1974 Amended - - February 9,1981 Amended_ October 27,1986 Rewritten_ October 22, 1990 Amended=—January 28,1991 Amended - January 24,1994 Amended - January 9,1995 15 M Amended - April 22,1996 Corrected - January 27, 1997 Amended - February 24,1997 Amended - May 26,1998 Reaffirmed - March 22, 1999 Reaffirmed - March 14, 2000 .Amended & Reaffirmed - May 8, 2001 Amended & Reaffirmed - April 23, 2002 Amended & Reaffirmed - April 8, 2003 Amended & Reaffirmed April 13, 2004 Amended & Reaffirmed - September 13, 2005 Amended - August 11, 2009 Amended & Reaffirmed- - August 10, 2010 Amended -& Reaffirmed - September 28, 2010 Reaffirmed - June 28, 2011 Amended & Reaffirmed - Septembei-25- 241-20ctober 9, 2012 F -1 16 M ATTACHMENT B EXAMPLE — Excerpts from Form ADV 2a stem 12 - BROKERAGE PRACTICES ITEM 12A: BROKER- DEALER SELECTION. COMPENSATION & TRADE AGGREGATION FIXED INCOME & MULTI -ASSET CLASS PORTFOLIO MANAGEMENT The investment adviser requires discretionary clients to provide us with written authority to determine broker - dealer selection and commission costs that will be charged to these clients for transactions placed in their account(s). Broker - dealers are selected by the investment adviser on the basis of best execution, a combination of most favorable price and the quality of execution. In selecting a broker to execute a transaction for a client, The investment adviser may consider a variety of other factors, including (but not limited to) the following: the broker - dealer's capital depth; the broker - dealer's market access; the nature of the security or instrument being traded; the size and type of transaction; the nature and character of the markets for the security or instrument to be purchased or sold; the desired timing of the transaction; the execution, clearance and settlement capabilities of the broker - dealer selected and others considered; the reputation and perceived soundness of the broker- dealer and others considered; the investment adviser's knowledge of any actual or apparent operational problems with the broker- dealer; and the reasonableness of the commission for specific transactions. While the investment adviser generally seeks competitive commission rates and dealer spreads, it may not necessarily pay the lowest commission. Transactions may involve specialized services on the part of the broker - dealer and thereby justify higher commissions than would be the case with other transactions requiring more routine services. In regard to commission rates paid, the investment adviser's fixed income transactions are generally executed by the broker - dealer on a net basis, which means the execution costs (e.g., commissions) are included in the purchase or sale price of the security. Equity and ETF transactions will be charged commissions. ITEM 12A.1: RESEARCH AND OTHER SOFT DOLLAR BENEFITS The investment adviser's soft dollar policy prohibits us from entering into third party soft dollar arrangements. ITEM 12A.2: BROKERAGE FOR CLIENT REFERRALS The investment adviser does not direct brokerage in exchange for client referrals. ITEM 12A.3: DIRECTED BROKERAGE The investment adviser's policy and practice is not to accept advisory clients' instructions for directing client's brokerage transactions. ITEMI2B: AGGREGATING CLIENT TRADES Order aggregation is the process of adding together or "blocking" orders to purchase and sell the same security as one large order. The investment adviser will aggregate or "block" trades where possible and when advantageous to clients. This blocking of trades permits the trading of aggregate blocks of securities composed of assets from multiple client accounts, and in some cases, employees, so long as transaction costs are shared equally and on a prorata (or other fair and reasonable) basis between all accounts included in any such block. Block trading may allow us to execute trades in a timelier, more equitable manner, at a better overall price. The investment adviser may aggregate trades for itself or for its associated persons with client trades, providing that the several conditions are met. Additionally, Portfolio managers may choose not to aggregate trades under various situations. 317 ATTACHMENT C RESOLUTION NO. 2012m A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH FINDING CONSISTENCY WITH STATED INVESTMENT OBJECTIVES AND AMENDING CITY COUNCIL POLICY F -1, STATEMENT OF INVESTMENT POLICY, TO CLARIFY AND STREAMLINE ADMINISTRATIVE PROCEDURES WHEREAS, the City Council of the City of Newport Beach ( "City ") through City Council Policy F -1 adopted a Statement of Investment Policy; WHEREAS, City Council Policy F -1 requires the Director of Finance/Treasurer to submit a written Statement of Investment Policy at least annually to the Finance Committee and City Council to ensure consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends; WHEREAS, the Finance Committee reviewed the written Statement of Investment Policy at its September 10, 2012 meeting and found consistency with the stated objectives; WHEREAS, the Director of Finance/Treasurer has reviewed the written Statement of Investment Policy and recommends changes to clarify and streamline several administrative procedures; and WHEREAS, the City Manager reviewed the recommended revisions suggested by the Director of Finance/Treasurer and pursuant to City Council Policy D -3 recommends the City Council amend the City's written Statement of Investment Policy. NOW, THEREFORE, the City Council of the City of Newport Beach resolves as follows: Section 1: After considering the City's written Statement of Investment Policy at a public meeting, and reviewing all associated written and oral testimony, the City Council finds the City's written Statement of Investment Policy is consistent with the overall objectives of preservation of principal, liquidity and return, and is relevant to current law and financial and economic trends; Section 2: City Council Policy F -1, Statement of Investment Policy is hereby amended in its entirety and replaced with the attached Statement of Investment Policy, which is incorporated by reference into this resolution. This amendment clarifies and streamlines the administrative procedures associated with the City's written Statement of Investment Policy. Section 3: The City Council finds this action is not subject to the California Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. 21 Section 4: This resolution shall take effect immediately upon its adoption by the City Council, and the City Clerk shall certify the vote adopting the resolution. ADOPTED this 9th day of October 2012. Nancy Gardner, Mayor ATTEST: Leilani Brown, City Clerk Attachment: Amended Statement of Investment Policy 22 F -1 STATEMENT OF INVESTMENT POLICY PURPOSE: The City Council has adopted this Investment Policy (the Policy) in order to establish the scope of the investment policy, investment objectives, standards of care, authorized investments, investment parameters, reporting, investment policy compliance and adoption, and the safekeeping and custody of assets. This Policy is organized in the following sections: A. Scope of Investment Policy 1. Pooling of Funds 2. Funds Included in the Policy 3. Funds Excluded from the Policy B. Investment Objectives 1. Safety 2. Liquidity 3. Yield C. Standards of Care 1. Prudence 2. Ethics and Conflicts of Interest 3. Delegation of Authority 4. Internal Controls D. Banking Services E. Broker /Dealers F. Safekeeping and Custody of Assets G. Authorized Investments 1. Investments Specifically Permitted 2. Investments Specifically Not Permitted 3. Exceptions to Prohibited and Restricted Investments H. Investment Parameters 1. Diversification 2. Maximum Maturities 3. Credit Quality 4. Competitive Transactions I. Portfolio Performance J. Reporting K. Investment Policy Compliance and Adoption 1. Compliance 2. Adoption 1 F -1 A. SCOPE OF INVESTMENT POLICY 1. Pooling of Funds All cash shall be pooled for investment purposes. The investment income derived from the pooled investment shall be allocated to the contributing funds, net of all banking and investing expenses, based upon the proportion of the respective average balances relative to the total pooled balance. Investment income shall be distributed to the individual funds not less than annually. 2. Funds Included in the Policy The provisions of this Policy shall apply to all financial assets of the City as accounted for in the City's Comprehensive Annual Financial Report, including; a) General Fund b) Special Revenue Funds c) Capital Project Funds d) Enterprise Funds e) Internal Service Funds f) Trust and Agency Funds g) Permanent Endowment Funds h) Any new fund created unless specifically exempted If the City invests funds on behalf of another agency and, if that agency does not have its own investment policy, this Policy shall govern the agency's investments. 3. Funds Excluded from this Policy Bond Proceeds - Investment of bond proceeds will be made in accordance with applicable bond indentures. B. INVESTMENT OBJECTIVES The City's funds shall be invested in accordance with all applicable City policies and codes, State statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order: 1. Safety Preservation of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective shall be to mitigate credit risk and interest rate risk. To attain this 2 F -I objective, the City shall diversify its investments by investing funds among several financial institutions and a variety of securities offering independent returns. a) Credit Risk The City shall minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by: • Limiting investments in securities that have higher credit risks, pre - qualifying the financial institutions, broker /dealers, intermediaries, and advisors with which the City will do business • Diversifying the investment portfolio so as to minimize the impact any one industry/ investment class can have on the portfolio b) Interest Rate Risk To minimize the negative impact of material changes in the market value of securities in the portfolio, the City shall: ■ Structure the investment portfolio so that securities mature concurrent with cash needs to meet anticipated demands, thereby avoiding the need to sell securities on the open market prior to maturity • Invest in securities of varying maturities 2. Liquidity The City's investment portfolio shall remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated without requiring a sale of securities. Since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets. A portion of the portfolio also may be placed in money market mutual funds or LAIF which offer same -day liquidity for short -term funds. 3. Yield The City's investment portfolio shall be designed with the objective of attaining a benchmark rate of return throughout budgetary and economic cycles, commensurate with the City's investment risk constraints and the liquidity characteristics of the portfolio. 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. 3 F -1 C. STANDARDS OF CARE 1. Prudence The standard of prudence to be used for managing the City's investment program is California Government Code Section 53600.3, the prudent investor standard, which states that "when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person 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 agency:' The City's overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City recognizes that no investment is totally without risk and that the investment activities of the City are a matter of public record. Accordingly, the City recognizes that occasional measured losses may occur in a diversified portfolio and shall be considered within the context of the overall portfolio's return, provided that adequate diversification has been implemented and that the sale of a security is in the best long -term interest of the City. The Finance Director and authorized investment personnel acting in accordance with established 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 a timely fashion to the City Council and appropriate action is taken to control adverse developments. 2. Ethics and Conflicts of Interest Elected officials and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the City's investment program or could impair or create the appearance of an impairment of their ability to make impartial investment decisions. Employees and investment officials shall subordinate their personal investment transactions to those of the City. In addition, City Council members, the City Manager, and the Finance Director shall file a Statement of Economic Interests each year as required by California 11 F -1 Government Code Section 87203 and regulations of the Fair Political Practices Commission. 3. Delegation of Authority Authority to manage the City's investment program is derived from the Charter of the City of Newport Beach section 605 (j). The Finance Director shall assume the title of and act as City Treasurer and with the approval of the City Manager appoint deputies annually as necessary to act under the provisions of any law requiring or permitting action by the City Treasurer. The Finance Director may then delegate the authority to conduct investment transactions and to manage the operation of the investment portfolio to other specifically authorized staff members. No person may engage in an investment transaction except as expressly provided under the terms of this Policy. The City may engage the support services of outside investment advisors with respect to its investment program, so long as it can be demonstrated that these services produce a net financial advantage or necessary financial protection of the City's financial resources. Such companies must be well- established and exceptionally reputable. Members of the staff of such companies who will have primary responsibility for managing the City's investments must have a working familiarity with the special requirements and constraints of investing municipal funds in general and this City's funds in particular. These firms must insure that the portion of the portfolio under their management complies with various concentration and other constraints specified herein, and contractually agree to conform to all provisions of governing law and the collateralization and other requirements of this Policy. Selection and retention of broker /dealers by investment advisors shall be at their sole discretion and dependent upon selection and retention criteria as stated in the Uniform Application for Investment Advisor Registration and related Amendments (SEC Form ADV 2A). 4. Internal Controls The Finance Director is responsible for establishing and maintaining a system of internal controls. The internal controls shall be designed to prevent losses of public funds arising from fraud, employee error, and misrepresentation by third parties, unanticipated changes in financial markets, or imprudent action by City employees and officers. The internal structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) 5 F -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. D. BANKING SERVICES Banking services for the City shall be provided by FDIC insured banks approved to provide depository and other banking services. To be eligible, a bank shall qualify as a depository of public funds in the State of California as defined in California Government Code Section 53630.5 and shall secure deposits in excess of FDIC insurance coverage in accordance with California Government Code Section 53652. E. BROKER /DEALERS In the event that an investment advisor is not used to purchase securities, the City will select broker /dealers on the basis of their expertise in public cash management and their ability to provide service to the City's account. Each approved broker /dealer must possess an authorizing certificate from the California Commissioner of Corporations as required by Section 25210 of the California Corporations Code. To be eligible, a firm must meet at least one of the following criteria: 1. Be recognized as Primary Dealers by the Federal Reserve Bank of New York or have a primary dealer within their holding company structure, or 2. Report voluntarily to the Federal Reserve Bank of New York, or 3. Qualify under Securities and Exchange Commission (SEC) Rule 15c3 -1 (Uniform Net Capital Rule). F. SAFEKEEPING AND CUSTODY OF ASSETS The Finance Director shall select one or more banks to provide safekeeping and custodial services for the City. A Safekeeping Agreement approved by the City shall be executed with each custodian bank prior to utilizing that bank's safekeeping services. Custodian banks will be selected on the basis of their ability to provide services for the City's account and the competitive pricing of their safekeeping related services. The purchase and sale of securities and repurchase agreement transactions shall be settled on a delivery versus payment basis. All securities shall be perfected in I. F -1 the name of the City. Sufficient evidence to title shall be consistent with modern investment, banking and commercial practices. All investment securities, except non - negotiable Certificates of Deposit, Money Market Funds and local government investment pools, purchased by the City will be delivered by either book entry or physical delivery and will be held in third -party safekeeping by a City approved custodian bank, its correspondent bank or its Depository Trust Company (DTC) participant account. All Fed wireable book entry securities owned by the City shall be held in the Federal Reserve system in a customer account for the custodian bank which will name the City as "customer." All DTC eligible securities shall be held in the custodian bank's DTC participant account and the custodian bank shall provide evidence that the securities are held for the City as "customer." G. AUTHORIZED INVESTMENTS All investments and deposits of the City shall be made in accordance with California Government Code Sections 16429.1, 53600 -53609 and 53630- 53686. Any revisions or extensions of these code sections will be assumed to be part of this Policy immediately upon being enacted. The City has further restricted the eligible types of securities and transactions. The foregoing fist of authorized securities and transactions shall be strictly interpreted. Any deviation from this list must be pre- approved by resolution of the City Council. 1. Investments Specifically Permitted a) United States Treasury bills, notes, or bonds with a final maturity not exceeding five years from the date of trade settlement. b) Federal Instrumentality (government- sponsored enterprise) debentures, discount notes, callable and step -up securities, with a final maturity not exceeding five years from the date of trade settlement. c) Federal Agency mortgage- backed securities and debentures with a final maturity not exceeding five years from the date of trade settlement. 7 F -1 d) Mortgage- backed Securities and Asset - backed Securities limited to mortgage- backed pass - through securities issued by a US government agency, or consumer receivable pass - through certificates or bonds with a final maturity not exceeding five years from the date of trade settlement. Securities eligible for investment under this subdivision shall be issued by an issuer whose debt is rated at least A or the equivalent by a Nationally Recognized Statistical Rating Organization (NRSRO). The security itself shall be rated at least AAA or the equivalent by an NRSRO. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer of mortgage- backed and asset - backed securities listed above, and the aggregate investment in mortgage- backed and asset - backed securities shall not exceed twenty percent (20 %) of the City's total portfolio. e) Medium -Term Notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States, with a final maturity not exceeding four years from the date of trade settlement, and rated at least A or the equivalent by an NRSRO. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer of medium -term notes, and the aggregate investment in medium -term notes shall not exceed thirty percent (30 %) of the City's total portfolio. In addition, AAA rated FDIC - guaranteed corporate bonds are herein authorized, within the aforementioned diversification and maturity requirements. f) Municipal Bonds: General and Revenue obligations of the State of California and local agencies within the State. Municipal bonds must be rated at least AA by two NRSROs with maturities not exceeding three years. No more than five percent (5 %) of the City's total portfolio shall be invested in any one issuer and the aggregate investment in municipal bonds shall not exceed fifteen percent (15 %) of the City's total portfolio. g) Non - negotiable Certificates of Deposit and savings deposits with a maturity not exceeding two years from the date of trade settlement, in FDIC insured state or nationally chartered banks or savings banks that qualify as a depository of public funds in the State of California as defined in California Government Code Section F -1 53630.5. Deposits exceeding the FDIC insured amount shall be secured pursuant to California Government Code Section 53652. No one issuer shall exceed more than five percent (5 %) of the portfolio, and investment in negotiable and nonnegotiable certificates of deposit shall be limited to thirty percent (30 %) of the portfolio combined. h) Negotiable Certificates of Deposit only with U.S. Banks whose underlying securities are rated A -1 or the equivalent by an NRSRO and having assets in excess of $10 billion, so as to insure security and a large, well - established secondary market. Ease of subsequent marketability is further ascertained prior to initial investment by examining currently quoted bids by primary dealers and the acceptability of the issuer by these dealers. No one issuer shall exceed more than five percent (5 %) of the portfolio, and maturity shall not exceed two years. Investment in negotiable and non- negotiable certificates of deposit shall be limited to thirty percent (30 %) of the portfolio combined. i) Prime Commercial Paper with a maturity not exceeding 270 days from the date of trade settlement with the highest letter and number rating as provided for by an NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either sub - paragraph i. or sub - paragraph ii. below: i. The entity shall (1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of $500,000,000 and (3) have debt other than commercial paper, if any, that is rated at least A or the equivalent by an NRSRO. ii. The entity shall (1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program wide credit enhancements, including, but not limited to, over collateralization, letters of credit or surety bond and (3) have commercial paper that is rated at least A -1 or the equivalent by an NRSRO. iii. No more than five percent (5 %) of the City's total portfolio shall be invested in the commercial paper of any one issuer, I F -1 and the aggregate investment in commercial paper shall not exceed twenty five percent (25 %) of the City's total portfolio. j) Eligible Banker's Acceptances with a maturity not exceeding 180 days from the date of trade settlement, drawn on and accepted by a commercial bank whose senior long -term debt is rated at least A or the equivalent by an NRSRO at the time of purchase. Banker's Acceptances shall be rated at least A -1, P -1 or the equivalent at the time of purchase by an NRSRO. If the bank has senior debt outstanding, it must be rated at least A or the equivalent by an NRSRO. The aggregate investment in banker's acceptances shall not exceed twenty percent (20 %) of the City's total portfolio, and no more than five percent (5 %) of the City's total portfolio shall be invested in banker's acceptances of any one bank. k) Repurchase Agreements and Reverse Repurchase Agreements with a final termination date not exceeding 30 days collateralized by U.S. Treasury obligations or Federal Instrumentality securities listed in items 1 and 2 above with the maturity of the collateral not exceeding ten years. For the purpose of this section, the term collateral shall mean purchased securities under the terms of the City's approved Master Repurchase Agreement. The purchased securities shall have a minimum market value including accrued interest of one hundred and two percent (102 %) of the dollar value of the funds borrowed. Collateral shall be held in the City's custodian bank, as safekeeping agent, and the market value of the collateral securities shall be marked -to- the - market daily. Repurchase Agreements and Reverse Repurchase Agreements shall be entered into only with broker /dealers and who are recognized as Primary Dealers with the Federal Reserve Bank of New York, or with firms that have a Primary Dealer within their holding company structure. Primary Dealers approved as Repurchase Agreement counterparties shall have a short -term credit rating of at least A -1 or the equivalent and a long -term credit rating of at least A or the equivalent. Repurchase agreement counterparties shall execute a City approved Master Repurchase Agreement with the City. The Finance Director shall maintain a copy of the City's approved Master Repurchase Agreement and a list of the broker/ dealers who have executed same. 10 F -1 In addition, the City must own assets for more than 30 days before they can be used as collateral for a reverse repurchase agreement. No more than ten percent (10 %) of the portfolio can be involved in reverse repurchase agreements. 1) State of California's Local Agency Investment Fund (LAIF) pursuant to California Government Code Section 16429.1. m) County Investment Funds: Los Angeles County provides a service similar to LAIF for municipal and other government entities outside of Los Angeles County, including the City. Investment in this pool is intended to be used as a temporary repository for short - term funds used for liquidity purposes. The Finance Director shall maintain on file appropriate information concerning the county pool's current investment policies, practices, and performance, as well as its requirements for participation, including, but not limited to, limitations on deposits or withdrawals and the composition of the portfolio. At no time shall more than five percent (5 %) of the City's total investment portfolio be placed in this pool. n) Money Market Funds registered under the Investment Company Act of 1940 that (1) are "no- load" (meaning no commission or fee shall be charged on purchases or sales of shares); (2) have a constant net asset value per share of $1.00; (3) invest only in the securities and obligations authorized in the applicable California statutes and (4) have a rating of at least AAA or the equivalent by at least two NRSROs. The aggregate investment in money market funds shall not exceed twenty percent (20 %) of the City's total portfolio. 2. Investments Specifically Not Permitted Any security type or structure not specifically approved by this policy is hereby prohibited. Security types, which are thereby prohibited include, but are not limited to: "exotic' derivative structures such as range notes, dual index notes, inverse floating rate notes, leveraged or de- leveraged floating rate notes, interest only strips that are derived from a pool of mortgages and any security that could result in zero interest accrual if held to maturity, or any other complex variable or structured note with an unusually high degree of volatility risk. The City shall not invest funds with the Orange County Pool. 11 F -1 3. Exceptions to Prohibited and Restricted Investments The City shall not be required to sell securities prohibited or restricted in this policy, or any future policies, or prohibited or restricted by new State regulations, if purchased prior to their prohibition and /or restriction. Insofar as these securities provided no notable credit risk to the City, holding of these securities until maturity is approved. At maturity or liquidation, such monies shall be reinvested as provided by this policy. H. INVESTMENT PARAMETERS 1. Diversification The City shall diversify its investments to avoid incurring unreasonable risks inherent in over - investing in specific instruments, individual financial institutions or maturities. As such, no more than five percent (5 %) of the City's portfolio may be invested in the instruments of any one non - governmental issuer. This restriction does not apply to any type of Federal Instrumentality or Federal Agency Security listed in Sections G1 b and G1 c above. Nevertheless, the asset allocation in the investment portfolio should be flexible depending upon the outlook for the economy, the securities markets and the City's anticipated cash flow needs. 2. Maximum Maturities To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities. The City will not invest in securities maturing more than five years from the date of trade settlement, unless the City Council has by resolution granted authority to make such an investment at least three months prior to the date of investment. 3. Credit Quality The City shall not purchase any security rated Al and / or A+ or below if that security has been placed on "credit watch" for a possible downgrade by an NRSRO. In the event a security held by the City is the subject of a rating downgrade which brings it below accepted minimums specified herein, or the security is placed on negative credit watch, where downgrade could result in a rate drop below acceptable levels, the investment advisor who purchased the security will immediately notify the Finance Director. The City shall not be required to immediately sell such securities. The course of action to be followed will then be decided on a case by case basis, considering such factors as the reason for the rate drop, prognosis for 12 F -1 recovery or further drop, and market price of the security. The City Council will be advised of the situation and intended course of action. 4. Competitive Transactions Investment advisors shall make best effort to price investment transactions on a competitive basis with broker /dealers selected consistent with their practices disclosed in form ADV 2A filed with the SEC. At least three broker /dealers shall be contacted for each transaction and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, the investment advisor shall make their best efforts to document quotations for comparable or alternative securities. If qualitative characteristics of a transaction, including, but not limited to, complexity of the transaction, or sector expertise of the broker, prevent a competitive selection process, investment advisors shall use brokerage selection practices as described above. I. PORTFOLIO PERFORMANCE The investment portfolio shall be designed to attain a market rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flow requirements. The performance of the City's investments shall be compared to the average yield on the U.S. Treasury security that most closely corresponds to the portfolio's weighted average effective maturity. When comparing the performance of the City's portfolio, its rate of return will be computed consistent with Global Investment Performance Standards (GIPS). J. REPORTING Monthly, the Finance Director shall produce a treasury report of the investment portfolio balances, risk characteristics, earnings, and performance results of the City's investment portfolio available to City Council and the public on the City's Website. The report shall include the following information: 1. Investment type, issuer, date of maturity, par value and dollar amount invested in all securities, and investments and monies held by the City; 2. A description of the funds, investments and programs; 3. A market value as of the date of the report (or the most recent valuation as to assets not valued monthly) and the source of the valuation; 4. A statement of compliance with this Policy or an explanation for non- compliance 13 F -1 K. INVESTMENT POLICY COMPLIANCE AND ADOPTION 1. Compliance Any deviation from the policy shall be reported to Finance Committee as soon as practical, but no later than the next scheduled Finance Committee meeting. Upon recommendation of the Finance Committee, the Finance Director shall review deviations from policy with the City Council. Finance Director 2. Adoption The Finance Director shall review the Investment Policy with the Finance Committee at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. The Finance Director shall review the Investment Policy with City Council at a public meeting only if there are changes recommended to the Investment Policy. This Policy was endorsed and adopted by the City Council of the City of Newport Beach on October 9, 2011 It replaces any previous investment policy or investment procedures of the City. Adopted - April 6,1959 Amended - November 9,1970 Amended - February 11, 1974 Amended - February 9,1981 Amended - October 27,1986 Rewritten - October 22, 1990 Amended - January 28,1991 Amended - January 24,1994 Amended - January 9,1995 Amended - April 22,1996 Corrected - January 27,1997 Amended - February 24,1997 Amended - May 26,1998 Reaffirmed - March 22,1999 Reaffirmed - March 14, 2000 Amended & Reaffirmed - May 8, 2001 14 Amended & Reaffirmed - April 23, 2002 Amended & Reaffirmed - April 8, 2003 Amended & Reaffirmed - April 13, 2004 Amended & Reaffirmed - September 13, 2005 Amended - August 11, 2009 Amended & Reaffirmed - August 10, 2010 Amended & Reaffirmed - September 28, 2010 Reaffirmed - June 28, 2011 Amended & Reaffirmed - October 9, 2012 F -1 15 AMENDED F -1 _la the reason for the rate drop, prognosis for recovery or further drop, and market price of the security. The City Co— Finance Committee will be advised of the situation and intended course of action. 4. Competitive Transactions Investment advisors shall make best effort to price investment transactions shall be ,.,.,.a. ete on a competitively basis with aiiherized broker /dealers selected consistent with their practices disclosed in form ADV 2A filed with the SEC. At least three broker/ dealers shall be contacted for each transaction and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, the investment advisor shall make their best efforts to document quotations for comparable or alternative securities ivill be a^^i•w e a. If qualitative characteristics of a transaction, including but not limited to complexity of the transaction, or sector expertise of the broker, prevent a competitive selection process, investment advisors shall use brokerage selection practices as described above. 13 AMENDED F_1 K. INVESTMENT POLICY COMPLIANCE AND ADOPTION 1. Compliance Any deviation from the policy shall be reported to Finance Committee as soon as practical, but no later than the at -the --next scheduled Finance Committee_ meeting. Upon recommendation of the Finance Committee the Finance Director shall review deviations from policy with the aR to City Council, as part of the mental y review of the pertfolie. The Pireete r r > > must be appreyed FiRanee Gemamktee d Q-- C '1 2. Adoption The . D:. ' eFinance Director shall review the render a written c+..+,....,.,.+ ,.c Investment Policy with the Finance Committee that shall be ' at least annually by Fin a-Ree genuu itt d rte;+., Ito ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends. The Piro, ter of >;inaneeFinance Director shall review the Investment Policy with City Council at a public meeting2t�ly�-if there are changes recommended to the Investment Policv.shall eensider tlte— a=�an� tatemeRt ef investment in and ,,es +L. + l.l' g Policy „J „1,.,,.,b This Policy was endorsed and adopted by the City Council of the City of Newport Beach on Septemb ''�oloOctober 9, 2012. It replaces any previous investment policy or investment procedures of the City. Adopted _ April 6,1959 Amended_ November 9,1970 Amended - — February 11, 1974 Amended - - February 9,1981 Amended - — October 27,1986 Rewritten - — October 22,1990 Amended =— January 28,1991 Amended - January 24,1994 Amended - January 9,1995 15