This example may be best suited for a large organization and may be compared with and used for the development of your investment policy and guidelines.
Within the spectrum of activities of this organization, it is necessary to provide a framework for the regular and continuous management of investment funds. Because there is currently no formal Investment Committee, the Directors will assume this responsibility.
The policy shall be to invest excess cash in short-term and floating-rate intermediate-term fixed-income instruments, earning a market rate of interest without assuming undue risk to principal. The primary objectives of such investments in order of importance shall be preservation of capital, maintenance of liquidity, and yield.
Investments are the responsibility of the Vice President of Finance. This responsibility includes the authority to select an investment advisor, open three accounts with brokers, establish safekeeping accounts or other arrangements for the custody of securities, and execute such documents as necessary.
Those authorized to execute transactions include: (1) Vice President of Finance, (2) Director of Accounting, and (3) Cash Manager. The Vice President of Finance shall ensure that one qualified individual is always available to execute the organization's investments.
The Treasurer shall be responsible for reporting the status of investments to the Directors on a quarterly basis. Those reports should include a complete listing of securities held, verified (audited) by parties either inside or outside this organization who have no connection with the investment activities.
(a) OBLIGATIONS OF THE US GOVERNMENT OR ITS AGENCIES. Specifically, these refer to the obligations of the U.S. government (Treasury securities and Government National Mortgage Agency, or “Ginnie Mae” securities) and government-sponsored enterprises: US Treasury, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, Federal Farm Credit Bank, Federal Agricultural Mortgage Corporation, and Government National Mortgage Association. Note: When-issued items must be paid for before they may be sold.
(b) BANKS – DOMESTIC. The organization may invest in negotiable CDs (including Eurodollar-denominated deposits), Eurodollar time deposits (with branches domiciled in Cayman, Nassau, or London), and bankers' acceptances (BAs) of the 50 largest US banks ranked by deposit size. Thrift institutions whose parent has long-term debt rated A by Moody's Investors Service or Standard & Poor's are acceptable. Exceptions may be local banks or thrift institutions that have lent the corporation money or that would be appropriate to use for some other reason. (These banks and institutions should be listed, along with the maximum dollar amount of exposure allowable for each.)
(c) BANKS – FOREIGN. The organization may invest in negotiable CDs (including Eurodollar-denominated deposits), Eurodollar time deposits (with branches domiciled in Cayman, Nassau, or London), and bankers' acceptances (BAs) of the 50 largest foreign banks ranked by deposit size. However, the issuing institution's parent must have a Moody's or Standard & Poor's rating of at least A.
(d) COMMERCIAL PAPER. All commercial paper must be prime quality by both Standard & Poor's and Moody's standards (i.e., A-1 by Standard & Poor's, P-1 by Moody's, and F-1 by Fitch).
(e) CORPORATE NOTES AND BONDS. Instruments of this type are acceptable if rated at least A by both Moody's and Standard & Poor's credit rating services.
(f) MUNICIPALS. Municipal or tax-exempt instruments are suitable only if your organization pays federal income tax. Only tax-exempt notes with a Moody's Investment MIG 1/VMIG 1 rating, or bonds that are rated by both Moody's Investors Service and Standard & Poor's as A, may be purchased. Not more than 15 percent of the total issue size should be purchased, and issues of at least $20 million in total size must be selected.
(g) REPURCHASE AGREEMENTS. Repurchase agreements (repos) are acceptable, using any of the securities listed above, as long as such instruments are negotiable/marketable and do not exceed other limitations as to exposure per issuer. The firm with which the repo is executed must be a credit-acceptable bank or a primary dealer (reporting to the Federal Reserve). Collateral must equal 102 percent of the dollars invested, and the collateral must be delivered to the organization's safekeeping bank and priced to market weekly (to ensure correct collateral value coverage) if the repo has longer than a seven-day maturity.
(h) MONEY MARKET FUNDS. Acceptable funds are non-prime funds, those whose asset size place them among the 30 largest according to the Morningstar Report and that are rated Aaa by Moody's Investors Service or rated AAA by Standard & Poor's Corporation.
(i) SAFEKEEPING ACCOUNTS. Securities purchased should be delivered against or held in a custodian safekeeping account at the organization's safekeeping bank. Exceptions shall be: (1) repos made with approved (see above) banks or dealers for one week or less, and (2) Eurodollar time deposits, for which no instruments are created. This safekeeping account will be audited quarterly by an entity that is not related to the investment function of this organization, and the results of that audit shall be provided to the Vice President of Finance.
(j) DENOMINATION. All investments shall be in US dollars.
(k) DIVERSIFICATION OF INVESTMENTS. In no case shall more than 15 percent of the total portfolio be invested in obligations of any particular issuer except the US Treasury.
Overall, maximum weighted average maturity shall be two years. However, on “put” instruments, which may be redeemed (or put) at par, the put date shall be the maturity date.
The Vice President of Finance shall be responsible for reviewing and modifying investment guidelines as conditions warrant, subject to approval by the Directors at least on an annual basis. However, the Vice President of Finance may at any time further restrict the items approved for purchase when appropriate.
Source: Alan Seidner.