- Support for Model Legislation on Investments by State and Local Governmental Agencies (1983)
- Use and Importance of Pledging Requirements for Public Deposits (1984)
- Federal Involvement in the Money Markets (1985)
- Repurchase Agreements (1986)
- Regulation of U.S. Government Securities Dealers' Sales Practices (1988)
- Endorsement of National Association of State Treasurers' Statement in Favor of Full Disclosure (1990)
- Reauthorization of the Government Securities Act (1991)
- Federal Regulation of Investment Advisers (1992)
- Fees for Use of Credit Cards in Payment of State Local Government Charges (1993)
- Regulation of Derivative Products (1994)
- Capital Markets Deregulation (1996)
- Endorsement of National Association of State Treasurers' Guidelines for Local Government Investment Pools (1996)
- Front-Running, Trading Ahead and the Best Execution Obligation (1996)
- Postmark as Payment Date (1996)
- Deregulation of Futures Exchanges (1997)
- Local Restrictions on Banks and Investments (1997)
- Mark-up Rules for the Government Securities Market (1997)
- State and Local Laws Concerning Investment Practices (1997)
- Merit-Based Selection of SEC Regulated Investment Advisers (1999)
- Maintaining the Stable Net Asset Value Feature of Money Market Funds (2010)
Support for Model Legislation on Investments by State and Local Governmental Agencies
GFOA supports the development and adoption of model legislation concerning the investment practices by state agencies, entities and their political subdivisions.
Adopted: June 14, 1983 - back to top
Use and Importance of Pledging Requirements for Public Deposits
The Government Finance Officers Association (GFOA) is aware of the extensive use and major importance of pledging requirements, whereby state and local government deposits in financial institutions must be secured by governmental obligations pledged for that purpose.
Because these requirements protect state and local depositors, the Government Finance Officers Association is in favor of the use of pledging requirements either as protection for state and local governments either as incentives for use state and local obligations in the satisfaction of such pledges. The Association continues to oppose legislation that would directly or indirectly diminish the use and value of pledging requirements as protection for state and local government deposits. Consistent with the foregoing, the Association further favors and encourages state and local governments to establish adequate and efficient administrative systems to monitor and maintain such pledged collateral, including state or locally administered collateral pledging or collateral pools.
Adopted: April 17, 1984 - back to top
Financial insolvencies in the banking sector and the government securities industry have resulted in investment losses for several governmental entities. While deregulation of the financial services industry has improved market efficiency, the resulting volatility and instability of markets and participating institutions have created unprecedented threats to public funds.
In order to preserve efficient money markets, the Government Finance Officers Association (GFOA) encourages Congress and federal agencies to use restraint in adopting additional legislation and regulations. The GFOA encourages the financial services industry to voluntarily comply with capital adequacy guidelines and other measures that would protect public funds.
GFOA recognizes that no amount of regulation can replace good management. Thus, the Association strongly urges public finance professionals to be cognizant of the responsibilities and risks inherent in the investment of funds through the financial services industry. Governments are encouraged to conduct business only with those parties that comply with capital adequacy guidelines and other prudential standards.
GFOA urges federal agencies to encourage meaningful disclosure and dissemination of financial information by financial service industry participants in the money markets, accompanied by education regarding its uses and limitations.
Adopted: May 28, 1985 - back to top
Repurchase agreements (repos) are the sale by a bank or dealer of a government security with the simultaneous agreement to repurchase the security on a later date. Repos are commonly used by public entities to secure money market rates of interest.
The Government Finance Officers Association (GFOA) affirms that repurchase agreements are an integral part of an investment program of state and local governments. Furthermore, public finance officers are encouraged to develop policies and procedures to insure the safety of such investments.
Governmental entities and investment officers should exercise special caution in selecting parties with whom they will conduct repurchase transactions, and be able to identify the parties acting as principals to the transaction.
Proper collateralization practices are necessary to protect the public funds invested in repurchase agreements. Risk is significantly reduced by delivery of underlying securities through physical delivery or safekeeping with the purchaser's custodian. Over- collateralization, commonly called "haircuts," or marking-to-market practices should be mandatory procedures.
To protect public funds, the GFOA will work with securities dealers, banks, and their respective associations, to promote improved repurchase agreement procedures through master repurchase agreements that protect purchasers' interests, universal standards for delivery procedures, and written risk disclosures.
GFOA recommends general use of master repurchase agreements, subject to appropriate legal and technical review. Governments using the prototype agreement developed by the Public Securities Association should include appropriate supplemental provisions regarding delivery, substitution, margin maintenance, margin amounts, seller representations and governing law.
Despite contractual agreements to the contrary, receivers, bankruptcy courts and federal agencies have interfered with the liquidation of repurchase agreement collateral. Therefore, the GFOA encourages Congress to eliminate statutory and regulatory obstacles to perfected security interests and liquidation of repurchase collateral in the event of default.
Adopted: June 3, 1986 - back to top
State and local governments represent one of the largest sources of investment funds available to purchase U.S. Government securities. Without broad participation by state and local government investors, the government securities market would lack liquidity and the Treasury's cost of borrowing would increase.
In 1986, Congress created the Government Securities Dealer Act, Public Law 99-571, which imposed a regulatory structure and net capital requirements for all dealers in U.S. Government securities. The 1986 Act, however, did not establish regulatory authority to control the sales practices of government securities brokers/dealers. As a result, state and local government entities have not been protected from aggressive or unscrupulous sales practices and price markups.
Ironically, a federal regulatory structure governing dealer sales practices has been imposed in the tax-exempt market for state and local government securities while the federal government has failed to police the market in its own securities.
The Government Finance Officers Association (GFOA) encourages competitive bidding in all securities purchases. In the event that a governmental unit does not obtain competitive price bids, investors are urged to obtain written documentation of price markups prior to completing the transaction.
The GFOA will work in cooperation with other interested groups to encourage development of investor-protection guidelines regarding standards of practice, securities selection suitability, and price markups.
The GFOA supports federal legislation to facilitate self-regulation and surveillance of sales practices of all securities dealers who conduct transactions involving U.S. Government securities and money market instruments.
Adopted: May 3, 1988 - back to top
Endorsement of National Association of State Treasurers' Statement in Favor of Full Disclosure
On December 4, 1989, members of the National Association of State Treasurers (NAST) adopted a Statement in Favor of Full Disclosure for state-operated local government investment pools. The Government Finance Officers Association (GFOA) endorses the NAST statement. In addition, GFOA encourages NAST to continue working with its members to implement these disclosure policies within state-operated pools as soon as practical.
NAST and GFOA recognize that potential pool participants have several alternative investment vehicles from which to choose. The goal of a disclosure statement is to ensure that local government investment officials, when choosing among their available investment options, are fully aware of significant investment and administrative policies, practices, and restrictions of the pool and thereby are able to make informed investment decisions on behalf of their local governments.
The GFOA urges further that that the NAST Statement in Favor of Full Disclosure be adopted and implemented by all local government investment pools. The GFOA will work further in this area and invites the continued participation and support of the National Association of State Treasurers.
Adopted: May 1, 1990 - back to top
Reauthorization of the Government Securities Act
In order to achieve adequate investor protection in the government securities market, the Government Finance Officers Association (GFOA) supports federal legislation amending the Government Securities Act (GSA) to include sales practice rules for government securities dealers. The Association supports the adoption of sales practice rules that are appropriately similar to those in other regulated securities markets. The GFOA further recommends the granting of explicit enforcement authority to bank and non-bank regulators including self-regulatory organizations (SROs) and a meaningful role for the Securities and Exchange Commission. A sunset provision should be included in the Government Securities Act to provide an opportunity to review the rules and the regulatory structure.
Adopted: June 4, 1991 - back to top
Federal Regulation of Investment Advisers
Some state and local governments have augmented their investment programs by retaining investment advisers to perform various portfolio services ranging from advice-only consultation to fully discretionary management. In many cases, the results of these engagements have been favorable, but there have also been cases of reported investment losses resulting from governmental units transacting business with certain investment advisers. Unlike the highly regulated bank trust and mutual fund sectors, federal regulatory inspection of independent investment advisers is presently infrequent and relatively superficial.
The Government Finance Officers Association (GFOA) has consistently recommended that state and local governments exercise caution in their selection of investment advisers and implement an ongoing risk control management program. The Association urges governmental entities considering or retaining independent investment advisers to carefully review the credentials, procedures, and controls of firms offering investment advisory services. Recommended precautionary measures include delivery versus payment, third-party custody arrangements, prohibitions against self-dealing, audits, timely reconciliations, and other appropriate internal control measures.
GFOA supports federal legislation amending the Investment Advisers Act of 1940 to provide the additional resources and authority required by the Securities and Exchange Commission to perform more frequent inspections and more thorough oversight of advisers who conduct transactions involving governmental funds. GFOA further recommends that such legislation include express suitability and bonding requirements for investment advisers.
Adopted: June 23, 1992 - back to top
Fees for Use of Credit Cards in Payment of State Local Government Charges
The use of credit cards is a convenient and increasingly popular method of payment of state and local government taxes, fines and other charges. Acceptance of credit card payments is one of several payment options offered by many state and local governments as a service to citizens and as a way to accelerate collection of amounts owed to those governments.
Credit card companies do not allow governments and businesses to pass on the usage fees imposed by credit card vendors to citizens and customers utilizing this payment option. State and local governments, unlike businesses, however, collect taxes, fines, forfeitures and other involuntary assessments and are unable to adjust their "pricing" to cover the costs of collections. State and local governments are not permitted to deduct such usage fees from the amount of taxes owed. Accordingly, they should not be required to absorb usage fees in their entirety for involuntary assessments, and thereby force all taxpayers to bear the cost of the use of credit cards.
The Government Finance Officers Association (GFOA) strongly encourages efforts to have credit card vendors either voluntarily or under appropriate legislation modify their present prohibitions on state and local governments from collecting usage fees for involuntary assessments paid by credit cards.
Adopted: May 4, 1993 - back to top
Regulation of Derivative Products
Changes in global financial markets have led both the private and public sectors to search for new methods to protect against risks associated with foreign exchange and interest rates as well as equity and commodity prices. In order to address this demand, many institutions are using derivative products. Derivatives are financial instruments created from, or whose value depends on (is derived from) the value of an underlying asset, reference rate or index.
Participants in the derivatives markets are dealers and end-users. End-users include financial institutions, businesses, mutual and pension funds and government entities. Dealers are usually large commercial banks or securities firms and insurance companies and their affiliates. Derivatives can be traded through established exchanges. Derivatives can also be traded through contracts negotiated privately between two parties, called over-the-counter (OTC) derivatives. While payments between counterparties of exchange-traded derivatives are guaranteed, those between counterparties of OTC derivatives are not.
Recent reports about losses by some derivatives end-users have raised numerous issues of concern to state and local government finance officers. These include concerns about the risks incurred with the use of derivatives, such as legal, credit, market, settlement, interest rate, and operating risks, as well as concerns regarding the appropriate use of derivative products and the marketing of these products. Indeed, some public jurisdictions have already experienced losses because of their use of derivative products.
The Government Finance Officers Association (GFOA) is concerned about the increasing complexity of new derivative products used for debt, cash and pension management purposes. There are various vehicles available to address these concerns, including legislation, regulation, better enforcement of existing rules, improved oversight and educational initiatives. Accordingly, GFOA supports appropriate federal action that would accomplish the following:
- Close regulatory gaps related to securities firms and insurance companies that are dealers of derivative products. While financial institutions are subject to periodic regulatory examinations regarding their use of derivatives, there are no federal regulations regarding derivative activities by securities and insurance firm affiliates, and there is little or no state oversight of derivatives activities of insurance company affiliates. In addition, while banks and affiliates of securities firms are required to submit reports to regulators on their derivatives activities, there is no independent reporting requirement for insurance company affiliates. Closing these gaps will result in greater assurance that potential problems will be identified and addressed on a timely basis.
- Ensure investor protection by clarifying suitability rules for derivatives brokers, dealers, and investment managers and promulgating new rules as necessary. State and local governments must be assured that the product recommended for their use is appropriate and that the broker or dealer has disclosed his or her own position with regard to the derivatives contract.
- Accelerate the Financial Accounting Standards Board (FASB) accounting standard-setting process for derivative products and disclosure by derivatives brokers and dealers. Investors, creditors, regulators and other users of financial reports must be able to rely on consistent reporting of material information. Lack of accounting rules can result in inconsistent and misleading reporting on derivative products.
- Examine and set reasonable capital requirements for derivative brokers and dealers. Capital requirements are imposed to provide protection from unexpected losses, reduce the likelihood of failure of an institution or firm, and protect clients and creditors. Currently, only banks have capital requirements. There are no capital requirements for securities firms or insurance companies affiliate derivative dealers.
GFOA believes that greater federal government involvement in the regulation of derivative products is warranted to avoid market disruption and the loss of scarce taxpayer funds.
Adopted: June 7, 1994 - back to top
Capital Markets Deregulation
The Government Finance Officers Association (GFOA), which supports the efficient and effective functioning of capital markets, is concerned about the growing trend toward weakening public investor protections. Various legislative, regulatory and voluntary initiatives are underway that seek to reduce or eliminate the protection currently provided by existing laws, regulations and industry standards to state and local government investors, including public pension systems as well as state and local government employees who, in some cases, individually direct their own pension fund investments.
The GFOA opposes these efforts to reduce existing protections for public investors and specifically opposes any attempts to diminish the existing standard of responsibility on the part of broker-dealers to make suitable recommendations to state and local government investors or to place the burden for such recommendations on the state or local government investor. The GFOA further opposes federal efforts to preempt state authority for investor protection by superseding state securities and investment adviser laws and regulations, attempts to dilute the existing investor protection authority granted to federal regulators, and the repeal of statutes intended to provide material information to state and local government investors.
Adopted: May 21, 1996 - back to top
Endorsement of National Association of State Treasurers' Guidelines for Local Government Investment Pools
In 1989, the National Association of State Treasurers (NAST) released its first suggested guidelines for local government investment pools (LGIPs). The guidelines provided the framework for the formulation of disclosure policies for LGIPs. In response to the growing use and interest in LGIPs, NAST has recently updated these guidelines.
NAST and the Government Finance Officers Association (GFOA) recognize that potential pool participants have several alternative investment vehicles from which to choose. The goal of a disclosure statement, which is outlined in the NAST Guidelines, is to ensure that local government investment officials, when choosing among their available investment options, are fully aware of significant investment and administrative policies, practices, and restrictions of the pool and thereby are able to make informed investment decisions.
The GFOA endorses the NAST Guidelines. GFOA encourages NAST to continue working with its members to implement these disclosure policies within state-operated pools as soon as practical. The GFOA urges further that the NAST Guidelines for Local Government Investment Pools be adopted and implemented by all local government investment pools. The GFOA will work further in this area and invites the continued participation and support of the National Association of State Treasurers.
Adopted: May 21, 1996 - back to top
Front-Running, Trading Ahead and the Best Execution Obligation
Under the Government Securities Act Amendments of 1993 (PL 103-202), bank and non-bank securities regulators were authorized to write sales practice rules to govern the activities of those entities under their respective jurisdictions that trade in government securities. The focus of the initial rulemaking has been on suitability. Regulators and industry analysis have indicated that there are other sales practices that should receive consideration as well, including front-running, trading ahead and best execution.
Front-running is a practice in which a dealer executes a trade for itself based upon impending nonpublic information about a pending customer order. Brokers or dealers that have advance knowledge of a block transaction in a particular security may improperly benefit from that knowledge by predicting the effect of the transaction on the price of the security.
Limit orders are orders placed with a broker-dealer on which the customer has placed price restrictions. Trading ahead of customer limit orders is the practice of having received an order and then trading at prices equal to or better than the limit order without executing that order. It is closely related to the practice of front-running.
Trading ahead of research reports is a variation on the use of nonpublic information for the benefit of the broker-dealer's own account, whereby the knowledge that the content of an unreleased report will have an effect on the price of a security is used to undertake a favorable transaction.
The best execution obligation requires that a broker-dealer attempt to obtain the most favorable prevailing market price on a security for a customer when executing a trade. It requires a broker-dealer to use reasonable diligence to ascertain the best deal in the security and buy or sell in such a market.
The prohibitions on front-running, trading ahead of customer limit orders, trading ahead of research reports and the best execution obligation already apply in the equities market, and are generally considered to be obligations under rules of fair practice. Regulators are considering whether and how to specifically apply these same rules, or appropriate modifications of each, to transactions in the government securities market.
The Government Finance Officers Association (GFOA) views such regulation as necessary to assure just and equitable trading in order to preserve the integrity of the marketplace and to reduce the costs of investing for all investors, including state and local governments and their taxpayers. The Association urges regulators to carry out the intent of Congress and supports efforts to write appropriately crafted sales practice rules to curb front-running, trading ahead of customer limit orders, trading ahead of research reports and best execution abuses when they occur.
Adopted: May 21, 1996 - back to top
Postmark as Payment Date
State and local governments receive payments for income and property taxes, license fees, user fees, fines, utility charges, and various other receipts owed by residents, property owners or those doing business in these jurisdictions. These payments constitute much of the revenue for a government necessary to provide vital public services and fulfill its financial obligations.
The continued efficient functioning of public services and the timely payment of a government's obligations depend on the prompt receipt of payments due the government. Most governmental payments have a specific due date and are credited to the proper account as of a date determined by statute or at the discretion of the state or local government.
Federal legislative proposals have been advanced that would direct that payment required to be made on or before a prescribed due date shall be considered to have been received by the payee as of the date of the postmark stamped on the envelope instead of the date of actual physical receipt. Such a requirement would impinge on the rights of state and local governments to establish business terms with their customers and taxpayers and could create the following cash management and compliance difficulties for state and local governments:
- Due dates for many specific payments are currently mandated by state or local law, and are legally deemed paid at the time as determined by the jurisdiction. This proposal would either require legislative bodies to change these dates or would amount to an unfunded federal mandate.
- Increased manual handling of payments would be required in order to demonstrate compliance. For example, envelopes may have to be retained and attached to payments so that determination of the promptness of the payment could be made at a later date. Postmarks and statements may have to be manually reconciled. In addition, postmarks are often illegible or missing, creating additional compliance problems. Where only a partial payment is made after the deadline, the calculation of penalties or interests will be difficult.
- The increased cost of compliance that would be required by adding staff, reprogramming computers, and purchasing new equipment would be passed on to all state and local taxpayers, not just those who choose to mail their payments on or near the deadline.
- Interest income of the state or local government could decrease due to the delay in receipts. Even a short delay in payments, when exercised by even a small percentage of payors, will result in missed opportunities for short-term investments because the government will have less cash on hand to invest. These missed opportunities will result in a loss of income to the government and its taxpayers.
- Cash-flow forecasting could become less accurate as the timing of payments becomes more uncertain which, in turn, could result in less than optimal short-term investment or borrowing decisions.
- Because a certain percentage of state or local government payments are made late, thereby incurring penalties and interest, a reduction in the number of late payments would result in a loss of revenue to the government.
The Government Finance Officers Association (GFOA) understands the concerns of consumers who encounter problems with the postal service that affect the timely receipt and crediting of their governmental payments. However, GFOA believes that corrective remedies should be developed at the state and local level that do not result in the loss of revenue to and administrative burdens on state and local governments and their citizens. GFOA opposes any federal regulation of payment procedures that constitutes an unfunded mandate on state and local governments.
Adopted: May 21, 1996 - back to top
Deregulation of Futures Exchanges
Background The Futures Trading Practices Act of 1992 authorized the Commodity Futures Trading Commission (CFTC) to permit less regulated "professionals only" futures trading in the United States. For this purpose, professionals are considered to be entities and individuals with assets that tend to exclude the general public from participation. In 1993, the CFTC exempted a number of "professionals only" markets from its regulatory structure, including the over-the-counter (OTC) derivatives market. The futures exchanges were not exempted.
While trading in derivatives occurs both on exchanges and in OTC transactions, there are differences between these markets. Exchanges are organized public marketplaces in a centralized environment. The exchanges are noted for the following characteristics: open and competitive trading; publicly available price transparency; clearing firm financial requirements; and clearing systems that eliminate counterparty risk. OTC transactions involve privately negotiated contracts between institutional customers. Each party to the transaction must take the credit risk of the counterparty and the price of the trade is confidential. In many cases, OTC products may prove to be better risk management tools than standardized exchange-traded products. OTC dealers frequently hedge their risks using exchange-traded products.
Recent legislative proposals would amend the Commodities Exchange Act to permit the futures exchanges to operate a "professional market." This would be a largely unregulated market designed for trading by "appropriate persons." Federal regulators would retain their anti-fraud and anti-manipulation authority, but this authority would be limited by their inability to enforce certain recordkeeping and reporting requirements that exist under current law. Futures exchanges point to competitive pressures from the deregulated OTC market in urging a similar relaxation of rules for the commodities exchanges.
While most state and local governments are precluded from trading directly in futures, this option is available for public pension funds. In addition, state and local governments often use derivative products for risk management purposes. For example, debt and investment transactions often involve swaps based on futures products prices and might include interest rate derivatives that are used to hedge against interest rate movements. Although used less frequently, debt and investment transactions also might involve currency derivatives used to hedge against changes in foreign exchange rates and commodity derivatives that are used to hedge against future price changes.
GFOA Policy The Government Finance Officers Association (GFOA) opposes legislative proposals to relax standards for exchange-traded derivatives and those provisions that would create a "professional trading market." It is clear that even a market composed primarily of institutional investors or those with a particular asset threshold must have a means of ensuring market integrity, price dissemination and adequate protections against fraud, manipulation, and other trading abuses. GFOA believes that deregulating commodities futures exchanges could put public pension funds and other state and local government funds at risk. GFOA urges Congress to consider carefully the potentially negative effects that the deregulation of futures exchanges could have on the integrity of the financial markets, including the perception that they are less safe or stable than under the current environment.
Adopted: June 3, 1997 - back to top
Local Restrictions on Banks and Investments
State and local governments have a wide range of banking requirements and investment responsibilities. Local ordinances and charters often place restrictions on the locations of financial organizations with which governments may conduct business. These restrictions, in turn, often result in uncompetitive banking fees, below-market investment returns, and inferior or unavailable services.
The Government Finance Officers Association (GFOA) encourages local governments to remove artificial restrictions upon the investment of public funds and the use of banking services by:
- authorizing and encouraging professional investments by removing geographical restrictions on eligible financial entities,
- allowing the use of banks and other financial institutions anywhere permitted by state law, and
- allowing the use of custodians anywhere in the country.
Adopted: June 3, 1997 - back to top
Mark-up Rules for the Government Securities Market
Under the Government Securities Act Amendments of 1993 (P.L. 103-202), bank and nonbank securities regulators were authorized to write sales practice rules to govern the activities of those entities under their respective jurisdictions that trade in government securities. Among the rules that were expected to be issued were those relating to markups.
Markup is defined as the difference between the broker-dealer's cost of purchasing an instrument and the selling price to the customer, relative to the current price of the security. The question of fair markups, or spreads, frequently depends on a particular circumstance. In addition to the price of the security, other criteria to be considered in determining whether a markup is fair are: the type of security involved; the availability of the security in the market; the amount of money involved in a transaction; pattern of markups; expenses involved in effecting the transaction; the fact that a broker-dealer is entitled to a profit; and the nature of the broker-dealer's services.
For registered securities (equities), the National Association of Securities Dealers (NASD) has adopted a 5 percent mark-up guideline for its members. The Securities and Exchange Commission (SEC) has taken the position that markups in excess of 5 percent are questionable, while any undisclosed markup in excess of 10 percent of the price of the security is fraudulent because it is far in excess of industry norms. The SEC also takes the position that markups smaller than 5 percent can also be considered fraudulent if they are undisclosed and in excess of industry norms.
The Municipal Securities Rulemaking Board (MSRB) has not adopted a specific mark-up guideline, but requires that Ano broker, dealer or municipal securities dealer shall purchase or sell municipal securities as agent for a customer for a commission or service charge in excess of a fair and reasonable amount, taking into consideration all relevant factors.
In addition, there are no requirements that markups be disclosed to customers prior to their undertaking a securities transaction in any market. Excessive markups can be generated by the size of the lot or lots purchased. Purchases of smaller or odd lots will result in a higher markup and higher costs to an investor than a purchase of a single large lot. This is a cost that should be available to the customer upon request and that may influence a customer=s decision to purchase particular instruments or purchase them from a particular broker-dealer.
Excessive markups in the government securities market are considered to be a violation of the NASD=s Rules of Fair Practice. Disclosure of markups is not covered by any NASD rule. Although a proposed mark-up rule was issued by the NASD in August 1994, no action has been taken on it since that time by either the NASD or the SEC. Recent charges alleging that U.S.Treasury securities have been sold at greater than fair-market value at fraudulently excessive markups by broker-dealers in connection with the investment of bond proceeds has highlighted the absence of mark-up rules in the government securities market.
The Government Finance Officers Association (GFOA) views the adoption by market regulators of mark-up guidelines for the government securities market and the requirement to disclose markups, if requested, as well as the use of competitive selection process, as essential to assure just and equitable trading in order to preserve the integrity of the marketplace and to reduce the costs of investing for all investors, including state and local governments and their taxpayers. GFOA supports efforts to write appropriate rules based on readily ascertainable and verifiable information so that investors are able to determine if a markup is reasonable and to compare prices. GFOA urges regulators to carry out the intent of Congress to curb market abuses expeditiously.
Adopted: June 3, 1997 - back to top
State and Local Laws Concerning Investment Practices
(Replaces 1992 Policy Statement on State Statutes Concerning Investment Practices)
The authority of state and local governments to invest in public funds is derived through the power of state and local legislative bodies and state and local laws that reflect public policies. Some state and local laws and practices may permit investments that are inappropriate for local government, while others may be overly restrictive with regard to permissible instruments or eligible financial entities. Many state and local governments have modified their cash management and investment laws and policies to improve the safety of their investments while obtaining a favorable rate of return on invested public funds.
The Government Finance Officers Association (GFOA) encourages state and local legislative bodies to remove artificial restrictions upon the efficient investment of public funds by:
- Amending state and local laws regulating local government investment authority to permit prudent investment of public funds in prime money market instruments and investment securities, such as
- U.S. government obligations, U.S. government agency obligations, and U.S. government instrumentality obligations, which have a liquid market with a readily determinable market value;
- Canadian government obligations (payable in local currency)certificates of deposit and other evidences of deposit at financial institutions, bankers= acceptances, and commercial paper, rated in the highest tier (e.g., A1, P1, F1 or D1 or higher) by a nationally recognized rating agency;
- investment-grade obligations of state, provincial and local governments and public authorities;
- repurchase agreements whose underlying purchased securities consist of the foregoing; and
- money market mutual funds regulated by the Securities and Exchange Commission and whose portfolios consist only of dollar-denominated securities.
- Investment in derivatives of the above instruments shall require authorization by the appropriate governing authority. (See GFOA Recommended Practice on AUse of Derivatives by State and Local Governments,@ 1994.)
- Authorizing and encouraging the efficient, professional investment of public funds in local government investment pools, either state-administered or through joint powers statutes and other intergovernmental agreement legislation, to take advantage of portfolio diversification and liquidity.
- Authorizing and encouraging professional investments by removing geographical restrictions on eligible financial entities.
Adopted: June 3, 1997 - back to top
Merit-Based Selection of SEC Regulated Investment Advisers
The selection of investment advisers and money managers by public entities and their pension plans should be merit-based and not influenced by political contributions. Finance officers and plan administrators are concerned about any improper linkage, whether perceived or actual, between political contributions and the selection of investment advisers. Even the appearance of such linkage erodes the confidence of the taxpayers and beneficiaries of involved state and local governments and public pension funds.
The Government Finance Officers Association (GFOA) strongly supports the use of an open, competitive, merit-based process for the selection of investment advisers. In response to allegations of questionable practices concerning the selection of investments advisers by public funds, GFOA also supports reforms that are narrowly targeted to specific abuses and are developed on a consensual basis by all affect market participants. To facilitate this process, the Securities and Exchange Commission (SEC) should make the results of its investigations into the selection of investment advisers available in order to better identify and substantiate the nature and extent of problems.
GFOA believes that the disclosure and reporting of campaign contributions is one of the most effective ways to deal with perceived or actual improper linkages between campaign contributions and the awarding of investment adviser contracts. Furthermore, GFOA believes that the regulation and reporting of contributions made to state and local elected officials and candidates for public office is best regulated at the state and local levels of governments, but recognizes that improvements may be needed to ensure that sufficient information is easily accessible on a timely basis. GFOA supports the development of model state statutes that follow the design of those states that have already undertaken such actions. GFOA urges the SEC to cooperate with all market participants to develop workable and equitable improvements for the selection and regulation of investment advisers.
Any proposed rule developed by the SEC relating to political contributions and prohibitions on investment adviser business should contain the following:
- Any limitation place on political contributions by investment advisers to public funds should be consistent with the limitations place on all other political contributions under federal election law, which is $1,000 per individual to a candidate or candidate committee per election and, consistent with federal election law, should not include any geographic restrictions.
- Consistent with the National Securities Markets Improvement Act, any rule promulgated by the SEC regarding political contributions to public funds by investment advisers should apply only to those investment advisers required to be registered with the SEC.
- The designation of who is an official or employee of a state or local government or public pension fund for purposes of any prohibition on political contributions by investment advisers must be clear and narrowly defined.
- The meaning of the term "contribution" as it applies to prohibitions or limitations on the political contributions of investment advisers to public funds must be clearly and narrowly defined.
- If the SEC determines that political contributions to an employee or official of a state or local government or public pension fund should be disclosed and reported by the contributing investment adviser to the SEC, this disclosure should be required on no more than an annual basis.
Adopted: May 25, 1999 - back to top
Maintaining the Stable Net Asset Value Feature of Money Market Funds
The stable net asset value (NAV) is the predominant safety feature of money market funds. A stable NAV means that the chance of the fund losing principal or breaking a buck is minimized because it always maintains a $1.00 value (investors will receive $1.00 back for every $1.00 invested). The fund is managed towards that goal.
State and local governments are a major purchaser of money market funds holding $92 billion in stable NAV money market funds in 2009. Many governments choose to use or are required to use as directed by state statutes, federal restrictions, and policies - money market funds as a cash management tool, as they carry little credit risk.
Additionally, money market funds hold 65% of outstanding short-term municipal debt, making them the largest holder of short-term tax-exempt debt.
The Securities and Exchange Commission is expected to propose changes to its Rule 2a-7. Rule 2a-7 under the Investment Company Act of 1940 sets forth the regulatory framework for money market funds. The anticipated proposed changes would mandate that money market funds use a floating NAV rather than a stable NAV by eliminating their ability to use the amortized cost method of valuation. A floating NAV would strip away this key safety trait of the funds for investors - a dollar in-dollar out investment tool. This proposal could eliminate the entire stable NAV money market fund market, which would adversely affect state and local governments. Additionally, while state investment pools are not covered under Rule 2a-7, they use it as a guide for their own pools, so a change to the Rule would expose funds in many state pools across the country as well.
The Government Finance Officers Association (GFOA) strongly opposes changes to SEC Rule 2a-7 that would require or allow funds to use a floating NAV rather than the current stable NAV. Governments depend on the safety and liquidity of money market funds for their constantly flowing operating funds and as part of their cash management strategy. Without being able to invest in these funds, governments would have to look to other investment vehicles that would be less attractive, less liquid and may carry greater risks. Furthermore, if this major purchasing power of municipal bond were to exit the market, state and local governments would suffer higher borrowing costs on their short-term debt.
The GFOA also strongly believes that the SEC should consult with state and local governments regarding any changes to this market, and allow the opportunity for GFOA and others in our community to comment and provide analysis on any SEC changes to Rule 2a-7 that will have an effect on the public sector.
Policy adopted by the GFOA Membership, June 8, 2010. - back to top