Investment Policy

An investment policy describes the parameters for investing government funds and identifies the investment objectives, preferences or tolerance for risk, constraints on the investment portfolio, and how the investment program will be managed and monitored. The document itself serves as a communication tool for the staff, elected officials, the public, rating agencies, bondholders, and any other stakeholders on investment guidelines and priorities. An investment policy enhances the quality of decision making and demonstrates a commitment to the fiduciary care of public funds, making ensuring safety and managing risk of public funds and that the government can meet its liquidity requirements.

The investment policy should be reviewed and updated at least annually and adhere to state law and other government policies. The policy should at a minimum address:

• Scope and investment objectives: Identify the scope and investment objectives of safety of public funds, being able to meet liquidity needs of the government, and to preserve principal. Additionally, the policy should declare what types of funds the policy applies to (example: operating funds, bond proceeds, pool participants).
• Roles, responsibilities, and standards of care: Identify the roles of all persons involved in the investment program by title and responsibility. Standards of care should include language on prudence (i.e., the prudent person/investor rule), due diligence, ethics and conflicts of interest, delegation and authority, and knowledge and qualifications.
• Suitable and authorized investments: Include guidelines on selecting investment types, maturities, credit quality, along with any collateralization requirements. The policy should reference permissible investments per state codes and whether the government further restricts utilizing investment products.
• Risk Management: The policy should address how the government manages various types of risks (interest rate, credit, liquidity) that apply to its investment program.
• Investment diversification: State the government’s approach to investment diversification, identifying the method that will be used to create a mix of assets that will achieve and maintain the government’s investment objectives and ensure that all aspects of risk management are being addressed.
• Internal controls, safekeeping, and custody: State how the government addresses separation of duties (same person is not authorizing, trading and booking investments) and reducing the risk of fraud, loss and misuse. State the government's commitment to utilizing the delivery versus payment method, performing due diligence of its investment professionals and institutions, and that parties (including internal investment staff) are independent of conflicts between trading, holding and custodial services.
• Authorized financial institutions, investment advisors, and broker/dealers: Establish a process for selecting creating a list of financial institutions (depositories), investment advisers, and broker/dealers that will provide the primary services necessary for executing the investment program. This process should address the minimum qualification standards, term and performance review of professionals/institutions and how they are added or deleted from the government’s authorized list of investment program providers, and mandating that professionals and institutions attest to have read the government’s investment policy.
• Risk and performance standards: State how the government’s investment portfolio will be measured/benchmarked to demonstrate its performance.
• Reporting and disclosure standards: Define the frequency, information, and type (internal and external) of reporting to the governing body and the government’s management team.
• Implementing the Policy: State that the government has procedures to implement all elements of its investment policy.