CBF(LEGAL) - REVENUE SOURCES: INVESTMENTS

Definitions

Investment Pool

Pooled Fund Group

Separately Invested Asset

Gov't Code 2256.002(6), (9), (12)

Repurchase Agreement

Corporate Bond

Written Policies

  1. A list of the types of authorized investments in which the ESC's funds may be invested;
  2. The maximum allowable stated maturity of any individual investment owned by the ESC;
  3. For pooled fund groups, the maximum dollar-weighted average maturity allowed based on the stated maturity date of the portfolio;
  4. Methods to monitor the market price of investments acquired with public funds;
  5. A requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis; and
  6. Procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the provisions of Government Code 2256.021 [see Loss of Required Rating, below].

Gov't Code 2256.005(b)

Annual Review

Annual Audit

Investment Strategies

  1. Understanding of the suitability of the investment to the financial requirements of the ESC;
  2. Preservation and safety of principal;
  3. Liquidity;
  4. Marketability of the investment if the need arises to liquidate the investment before maturity;
  5. Diversification of the investment portfolio; and
  6. Yield.

Gov't Code 2256.005(d)

Investment Officer

Investment Training

Initial

Ongoing

Standard of Care

  1. Preservation and safety of principal;
  2. Liquidity; and
  3. Yield.
  1. The investment of all funds, or funds under the ESC's control, over which the officer had responsibility rather than the prudence of a single investment; and
  2. Whether the investment decision was consistent with the ESC's written investment policy.

Gov't Code 2256.006

Personal Interest

  1. The investment officer owns ten percent or more of the voting stock or shares of the business organization or owns $5,000 or more of the fair market value of the business organization;
  2. Funds received by the investment officer from the business organization exceed ten percent of the investment officer's gross income for the previous year; or
  3. The investment officer has acquired from the business organization during the previous year investments with a book value of $2,500 or more for the personal account of the investment officer.

Gov't Code 2256.005(i)

Quarterly Reports

  1. Describe in detail the investment position of the ESC on the date of the report;
  2. Be prepared jointly and signed by all ESC investment officers;
  3. Contain a summary statement of each pooled fund group that states the:
    1. Beginning market value for the reporting period;
    2. Ending market value for the period; and
    3. Fully accrued interest for the reporting period;
  4. State the book value and market value of each separately invested asset at the end of the reporting period by the type of asset and fund type invested;
  5. State the maturity date of each separately invested asset that has a maturity date;
  6. State the account or fund or pooled group fund in the ESC region for which each individual investment was acquired; and
  7. State the compliance of the investment portfolio of the ESC as it relates to the investment strategy expressed in the ESC's investment policy and relevant provisions of the Public Funds Investment Act.

Gov't Code 2256.023

Selection of Broker

Authorized Investments

Obligations of Governmental Entities

  1. Obligations, including letters of credit, of the United States or its agencies and instrumentalities; including the Federal Home Loan Banks;
  2. Direct obligations of this state or its agencies and instrumentalities;
  3. Collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States;
  4. Other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the state of Texas, the United States, or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation (FDIC) or by the explicit full faith and credit of the United States;
  5. Obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent;
  6. Bonds issued, assumed, or guaranteed by the state of Israel;
  7. Interest-bearing banking deposits that are guaranteed or insured by the FDIC or its successor, or the National Credit Union Share Insurance Fund or its successor; and
  8. Interest-bearing banking deposits other than those described at item 7, above if:
    1. The funds are invested through a broker with a main office or a branch office in this state that the ESC selects from a list the board or designated investment committee of the ESC adopts as required at Selection of Broker, above, or a depository institution with a main office or a branch office in this state and that the ESC selects;
    2. The broker or depository institution selected as described above arranges for the deposit of the funds in the banking deposits in one or more federally insured depository institutions, regardless of where located, for the ESC's account;
    3. The full amount of the principal and accrued interest of the banking deposits is insured by the United States or an instrumentality of the United States; and
    4. As the ESC's custodian of the banking deposits issued for the ESC's account, the ESC appoints the depository institution selected as described above, an entity described by Government Code 2257.041(d) (regarding a custodian with which to deposit securities), or a clearing broker-dealer registered with the Securities and Exchange Commission and operating under Rule 15c3-3 (17 C.F.R. Section 240.15c3-3).

Unauthorized Obligations

  1. Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal.
  2. Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest.
  3. Collateralized mortgage obligations that have a stated final maturity date of greater than ten years.
  4. Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index.

Certificates of Deposit and Share Certificates

  1. Guaranteed or insured by the FDIC or its successor or the National Credit Union Share Insurance Fund or its successor;
  2. Secured by obligations described at Obligations of Governmental Entities, above, including mortgage-backed securities directly issued by a federal agency or instrumentality that have a market value of not less than the principal amount of the certificates, but excluding those mortgage-backed securities described at Unauthorized Obligations, above; or
  3. Secured in accordance with Government Code Chapter 2257 (Public Funds Collateral Act) or in any other manner and amount provided by law for the deposits of the ESC.

Gov't Code 2256.010(a)

  1. The funds are invested by the ESC through a broker that has its main office or a branch office in this state and is selected from a list adopted by the ESC as required at Selection of Broker, above, or a depository institution that has its main office or a branch office in this state and that is selected by the ESC;
  2. The broker or depository institution selected by the ESC arranges for the deposit of the funds in certificates of deposit in one or more federally-insured depository institutions, wherever located, for the account of the ESC;
  3. The full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States; and
  4. The ESC appoints the depository institution selected by the ESC, an entity described by Government Code 2257.041(d) (regarding a custodian with which to deposit securities), or a clearing broker/dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the ESC with respect to the certificates of deposit issued for the account of the ESC entity.

Repurchase Agreements

  1. Has a defined termination date;
  2. Is secured by a combination of cash and obligations described at Obligations of Governmental Entities, above;
  3. Requires the securities being purchased by the ESC or cash held by the ESC to be pledged to the ESC, held in the ESC's name, and deposited at the time the investment is made with the ESC or a third party selected and approved by the ESC; and
  4. Is placed through a primary government securities dealer, as defined by the Federal Reserve or a financial institution doing business in Texas.

Securities Lending Program

  1. The value of securities loaned is not less than 100 percent collateralized, including accrued income;
  2. A loan allows for termination at any time;
  3. A loan is secured by:
    1. Pledged securities described at Obligations of Governmental Entities, above;
    2. Pledged irrevocable letters of credit issued by a bank that is organized and existing under the laws of the United States or any other state, and continuously rated by at least one nationally recognized investment rating firm at not less than A or its equivalent; or
    3. Cash invested in accordance with Government Code 2256.009 (obligations of governmental entities), 2256.013 (commercial paper), 2256.014 (mutual funds), or 2256.01 (investment pools);
  4. The terms of a loan require that the securities being held as collateral be pledged to the ESC, held in the ESC's name, and deposited at the time the investment is made with the ESC or with a third party selected by or approved by the ESC; and
  5. A loan is placed through a primary government securities dealer, as defined by 5 C.F.R. Section 6801.102(f), as that regulation existed on September 1, 2003, or a financial institution doing business in this state.

Gov't Code 2256.0115

Banker's Acceptance

  1. Has a stated maturity of 270 days or fewer from the date of issuance;
  2. Will be, in accordance with its terms, liquidated in full at maturity;
  3. Is eligible for collateral for borrowing from a Federal Reserve Bank; and
  4. Is accepted by a bank organized and existing under the laws of the United States or any state, if the short-term obligations of the bank, or of a bank holding company of which the bank is the largest subsidiary, are rated not less than A-1 or P-1 or an equivalent rating by at least one nationally recognized credit rating agency.

Gov't Code 2256.012

Commercial Paper

  1. Two nationally recognized credit rating agencies; or
  2. One nationally recognized credit rating agency and is fully secured by an irrevocable letter of credit issued by a bank organized and existing under the laws of the United States law or any state.

Gov't Code 2256.013

Mutual Funds

  1. Is registered with and regulated by the Securities and Exchange Commission;
  2. Provides the ESC with a prospectus and other information required by the Securities and Exchange Act of 1934 (15 U.S.C. 78a et seq.) or the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); and
  3. Complies with federal Securities and Exchange Commission Rule 2a-7 (17 C.F.R. Section 270.2a-7), promulgated under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.).

Gov't Code 2256.014(a)

  1. Is registered with the Securities and Exchange Commission;
  2. Has an average weighted maturity of less than two years; and
  3. Either has a duration of less than one year or more and is invested exclusively in obligations approved by the Public Funds Investment Act, or has a duration of less than one year and the investment portfolio is limited to investment grade securities, excluding asset-backed securities.

Gov't Code 2256.014(b)

Limitations

  1. Invest in the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in mutual funds described in Government Code 2256.014(b);
  2. Invest any portion of bond proceeds, reserves, and funds held for debt service, in mutual funds described in Government Code 2256.014(b); or
  3. Invest its funds or funds under its control, including bond proceeds and reserves and other funds held for debt service, in any one mutual fund described in Government Code 2256.014(a) or (b) in an amount that exceeds ten percent of the total assets of the mutual fund.

Gov't Code 2256.014(c)

Guaranteed Investment Contracts

  1. Has a defined termination date;
  2. Is secured by obligations described at Obligations of Governmental Entities, above, excluding those obligations described at Unauthorized Obligations, in an amount at least equal to the amount of bond proceeds invested under the contract; and
  3. Is pledged to the ESC and deposited with the ESC or with a third party selected and approved by the ESC.
  1. The board must specifically authorize guaranteed investment contracts as eligible investments in the order, ordinance or resolution authorizing the issuance of bonds;
  2. The ESC must receive bids from at least three separate providers with no material financial interest in the bonds from which proceeds were received;
  3. The ESC must purchase the highest yielding guaranteed investment contract for which a qualifying bid is received;
  4. The price of the guaranteed investment contract must take into account the reasonably expected drawdown schedule for the bond proceeds to be invested; and
  5. The provider must certify the administrative costs reasonably expected to be paid to third parties in connection with the guaranteed investment contract.

Investment Pools

Corporate Bonds

  1. Invest in the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds, reserves, and other funds held for the payment of debt service, in corporate bonds; or
  2. Invest more than 25 percent of the funds invested in corporate bonds in any one domestic business entity, including subsidiaries and affiliates of the entity.
  1. Amends its investment policy to authorize corporate bonds as an eligible investment;
  2. Adopts procedures to provide for monitoring rating changes in corporate bonds acquired with public funds and liquidating the investment in corporate bonds; and
  3. Identifies the funds eligible to be invested in corporate bonds.
  1. Issues a release that places the corporate bonds or the domestic business entity that issued the corporate bonds on negative credit watch or the equivalent, if the corporate bonds are rated "AA-" or the equivalent at the time the release is issued; or
  2. Changes the rating on the corporate bonds to a rating lower than "AA-" or the equivalent.

Gov't Code 2256.0204

Prohibited Investments

Note: As an "investing entity" under Government Code 2270.0001(7)(A), an ESC must comply with Chapter 2270, including reporting requirements, regarding prohibited investments in scrutinized companies listed by the comptroller in accordance with Government Code 2270.0201.

Loss of Required Rating

Sellers of Investments

  1. Received and reviewed the ESC investment policy; and
  2. Acknowledged that the business organization has implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the ESC and the organization that are not authorized by the ESC's investment policy, except to the extent that this authorization:
    1. Is dependent on an analysis of the makeup of the ESC's entire portfolio;
    2. Requires an interpretation of subjective investment standards; or
    3. Relates to investment transactions of the entity that are not made through accounts or other contractual arrangements over which the business organization has accepted discretionary investment authority.

Gov't Code 2256.005(k)–(l)

Business Organization

Donations

Electronic Funds Transfer

Region III Education Service Center

CBF(LEGAL)-ESCA

UPDATE 24

DATE ISSUED: 5/20/2019