6.20 – Investments

C. Procedures

Pooling of Funds

Except for cash in certain restricted and special funds, the college will consolidate cash balances from all funds to maximize investment earnings. Unless restricted, such as by a grant award, investment income will be allocated to the general operating fund and, upon the direction of the chancellor, other eligible college-designated funds.

External Management of Funds

Investment through external programs, facilities and professionals operating in a manner consistent with this policy will constitute compliance.

The primary objectives, in priority order, of the college investment activities shall be safety, liquidity and return on investment:

1. Safety: Safety of principal is the foremost objective of the investment program. College investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio.  The objective will be to mitigate credit risk and interest rate risk.
   1. Credit Risk: The college will minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by:
      1. Pre-qualifying the financial institutions, broker/dealers, intermediaries and advisors with
         which the college will do business (see section Investment Transactions).
      2. Diversifying the portfolio so that potential losses on individual securities will be minimized.
   2. Interest Rate Risk: The college will minimize the risk that the market value of securities in the portfolio will fall due to changes in general interest rates by:
      1. Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity.
      2. Investing operating funds primarily in shorter-term securities.
2. Liquidity: The college investment portfolio shall remain sufficiently liquid to meet the anticipated cash flow needs of the college. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands. A portion of the portfolio may also be placed in bank deposits or repurchase agreements that offer same-day liquidity for short-term funds.
3. Return on Investment: The college investment portfolio shall be designed with the objective of attaining a market rate of return within the constraints of the allowable investment types and liquidity needs Return on investment is of secondary importance compared to the safety and liquidity objectives described above.Securities shall not be sold prior to maturity with the following exceptions:
   • A security with declining credit may be sold early to minimize loss of principal;
   • A security swap would improve the quality, return, or target duration in the portfolio; or
   • Liquidity needs of the portfolio require that the security be sold.

Standard of Care

Prudence: All participants in the investment process shall act responsibly as custodians of the public trust.  The standard of prudence to be applied is the “prudent investor” rule, which states: “Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment considering the probable safety of their capital as well as the probable income to be derived.”

Ethics and Conflicts of Interest: College officials involved in the investment process shall refrain from personal business activity that could conflict with proper execution and management of the investment program, or which could impair their ability to make impartial investment decisions. These officials shall disclose annually to the Board of Trustees any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. These officials shall refrain from undertaking personal investment transactions with the same individual with which business is conducted on behalf of the college.

Investment Transactions

Authorized Financial Dealers and Institutions: A list will be maintained of financial institutions authorized to provide investment transactions. In addition, a list will be maintained of approved security broker/dealers as determined by the Treasurer and approved by the Board of Trustees. These may include “primary” dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule).

All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following, as appropriate:

• Proof of registration or certification with appropriate regulatory agency.
• Proof of secretary of state registration.
• Certification of having read, understood and agreed to comply with the college’s investment policy.

An annual review of the financial condition and registration of qualified financial institutions and broker/dealers will be conducted by management.

Internal Controls

The chief financial officer and/or designee(s) is responsible for establishing and maintaining an internal control structure related to the management of the college’s investment portfolio. The college will adopt an internal control structure taking into consideration the risks identified by the Office of the Missouri State Treasurer in the Model Investment Policy.

Delivery vs. Payment

All trades, where applicable, will be executed by delivery vs. payment (DVP) to ensure that securities are deposited in eligible financial institutions prior to the release of funds. All securities shall be perfected in the name for the account of the college and shall be held by a third-party custodian as evidenced by safekeeping receipts.

Suitable and Authorized Investments

In accordance with and subject to restrictions imposed by current statutes, the following list represents the entire range of investments that the college will consider, and which shall be authorized for the investments of funds by the college.

United States Treasury Securities

United States Agency Securities:

• U.S. Govt. Agency Coupon and Zero-Coupon Securities
• U.S. Govt. Agency Discount Notes
• U.S. Govt. Agency Callable Securities
• U.S. Govt. Agency Step-up Securities

Insured Investments and Investments Secured by Collateral:

• Repurchase Agreements
• Collateralized Public Deposits (Certificates of Deposit)
• Insured Cash Sweep accounts (ICS) and CDARS
• Money Market Deposit Accounts (MMDA)
• Demand Deposit Accounts (DDA)

Insured Investments and Investments Secured by Collateral:

• Repurchase Agreements
• Collateralized Public Deposits (Certificates of Deposit)
• Insured Cash Sweep accounts (ICS) and CDARS
• Money Market Deposit Accounts (MMDA)
• Demand Deposit Accounts (DDA)

Investment Restrictions

To provide for the safety and liquidity of the college’s funds, the investment portfolio will be subject to the
following restrictions:

• Borrowing for investment purposes (“Leverage”) is prohibited.
• Instruments known as variable rate demand notes, floaters, inverse floaters, leveraged floaters, and equity-linked securities are not permitted. Investment in any instrument, which is commonly considered a “derivative” instrument (e.g. options, futures, swaps, caps, floors, and collars), is prohibited.
• Contracting to sell securities not yet acquired in order to purchase other securities for purpose of speculating on developments or trends in the market is prohibited.
• Bankers’ Acceptance and Commercial Paper are prohibited.

Collateralization

Collateralization will be required on certificates of deposit, demand deposits and repurchase agreements (including accrued interest). Collateralization of securities will be limited to those eligible per state statute.

For certificates of deposit and demand deposits, the market value of collateral must be at least 100% or greater of the amount of certificates of deposits and demand deposits (plus accrued interest) with the depository, less the amount, if any, which is insured by Federal Deposit Insurance Corporation (FDIC) or the National Credit Unions Share Insurance Fund; or Federal Home Loan Bank (FHLB) Letters of Credit (LOC) at 100% of the same.

All securities which serve as collateral against the deposits of a depository institution must be held in safekeeping at a non-affiliated custodial facility.

The college shall have a depository contract and pledge agreement with each safekeeping bank that will comply with the Financial Institutions, Reform, Recovery, and Enforcement Act of 1989 (FIRREA). This will ensure that the college’s security interest in collateral pledged to secure deposits is enforceable against the receiver of a failed financial institution.

The only securities acceptable as collateral for repurchase agreements are U.S. treasury and government agency securities. The market value must be at least 100 or greater of the repurchase account balance plus accrued interest. Securities will be delivered to the designated custodial agent.

Investment Parameters

Diversification: Investments shall be diversified to minimize the risk of loss resulting from over concentration of
assets in specific maturity, specific issuer, or specific class of securities. Diversification strategies shall be
established and periodically reviewed. At a minimum, diversification standards by security type and issuer shall be:

• U.S. treasuries and securities having principal and/or interest guaranteed by the U.S. government: No more than 50%.
• Collateralized time, demand deposits accounts (DDA); money market deposit accounts (MMDA); ICS; and CDARS: up to 100%.
• U.S. Government agencies and government sponsored enterprises: No more than 50%.
• Collateralized repurchase agreements: No more than 50%.
• U.S. Government agency callable securities: No more than 50%.

Maximum Maturities: To the extent possible, the college shall attempt to match its investments with anticipated cash flow requirements. Investments in repurchase agreements shall mature and become payable not more than ninety days (90) from the date of purchase. For other investment types, maturities shall not exceed five (5) years. Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds such as bank deposits, insured cash sweep accounts (ICS) or overnight repurchase agreements to ensure that appropriate liquidity is maintained to meet ongoing obligations. The college’s weighted average maturity of the portfolio shall not exceed three (3) years, and in all instances individual securities shall
align with the investment objectives.

Reporting

Investment reports describing the portfolio in terms of investment securities, maturities, rates, characteristics and other features shall be prepared monthly. In addition, a quarterly investment report shall be prepared, including a summary that provides an analysis of the status of the current investment portfolio and transactions made over the last quarter. Reports will be provided to the Board of Trustees and include, but may not be limited to, the following:

• Listing of individual securities held at the end of the reporting period.
• Average weighted yield-to-maturity of portfolio investments as compared to applicable benchmarks.
• Listing of investments by maturity date.

Percentage of the total portfolio which each type of investment represents.

Market Value

As may be applicable, the college will revalue investments to reflect the market prices of the portfolio.  This shall be calculated at least quarterly and a statement of the market value of the portfolio shall be issued at least annually to the college board of trustees. Investments which are downgraded below the minimum acceptable rating levels shall be reviewed for possible sale within a reasonable time period.