HomeMy WebLinkAboutRes 05-08 WA Approving the Annual review of the Investment Policy WESTLAKE ACADEMY
RESOLUTION NO. 05-08
A RESOLUTION OF THE BOARD OF DIRECTORS OF WESTLAKE
ACADEMY, APPROVING THE ANNUAL REVIEW OF THE WESTLAKE
ACADEMY INVESTMENT POLICY AS ATTACHED EXHIBIT "A".
BE IT RESOLVED BY THE BOARD OF DIRECTORS OF WESTLAKE
ACADEMY:
WHEREAS, Chapter 2256 of the Government Code, commonly known as the
"Public Funds Investment Act," requires the Academy to adopt an investment policy by
rule, order, ordinance or resolution and review and approve annually; and
WHEREAS, the Public Funds Investment Act requires the investment officer of
the Academy to attend investment training; and
WHEREAS, the investment officer of the Academy has attended an investment
training course to comply in previous years and is scheduled to take the required training
on October 7th and Wh of the current year as required by the Public Funds Investment Act;
and
WHEREAS, the attached investment policy and incorporated strategy comply
with the Public Funds Investment Act, as amended, and authorize the investment of
Academy funds in safe and prudent investments.
NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF
DIRECTORS OF WESTLAKE ACADEMY:
SECTION 1: That Westlake Academy has complied with the requirements of the
Public Funds Investment Act and the Board of Directors does hereby approve the annual
review of the Westlake Academy Investment Policy, as proposed in the attached Exhibit
"A".
SECTION 2: That this Resolution shall become effective upon the date of its
passage.
PASSED AND APPROVED ON THIS 26th DAY OF SEPTEMBER, 2005.
ATTEST: Scott Bradlef, President
J Dwinnell, Secretary Trent O. Petty, C
APPROVED AS TO FORM:
L. Stanton Lowry, Town Attorney
WESTLAKE ACADEMY WA��°� ��-
INVESTMENT POLICY
I. POLICY STATEMENT
It is the policy of Westlake Academy (the "Academy") that the administration of its funds and the
investment of those funds shall be handled as its highest public trust. Investments shall be made in a
manner which will provide the maximum security of principal invested through limitations and
diversification while meeting the daily cash pow needs of the Academy and conforming to all applicable
state and Academy statutes governing the investment of public finds. The receipt of a market rate of return
will be secondary to the requirements for safety and liquidity.
It is the intent of the Academy to be in complete compliance with local law and the Texas Public Funds
Investment Act(the "Act", Texas Government Code:2256). The earnings from investments will be used in
a manner that best serves the public trust and interests of the Academy.
II. SCOPE
This Investment Policy applies to all the financial assets and funds held of the Academy.
Any new funds created by the Academy will be managed under the provisions of this Policy unless
specifically exempted by the Academy Board of Trustees and this Policy.
III. OBJECTIVES AND STRATEGY
It is the policy of the Academy that all funds shall be managed and invested with four primary objectives,
listed in order of their priority: safety, liquidity, diversification and yield. These objectives encompass the
following.
Safety of Principal
Safety of principal is the foremost objective of the Academy. Investments shall be undertaken in a manner
that seeks to insure the preservation of capital in the overall portfolio.The suitability of each investment
decision will be made on the basis of safety.
Liquidity
The Academys investment portfolio will remain sufficiently liquid to enable it to meet all operating
requirements which might be reasonably anticipated. Investment decisions will be based on cash flow
analysis of anticipated expenditures.
Diversification
Diversification is required in the portfolio's composition. Diversification of the portfolio will include
diversification by maturity and market sector and will include the use of a number of broker/dealers or
banks for diversification and market coverage. Competitive bidding will be used on each sale or purchase.
Yield
The Academy's investment portfolio shall be designed with the objective of attaining a reasonable market
yield, taking into account the Academy's risk constraints and cash flow needs. A reasonable market yield
for the portfolio will be defined as the six month (180 day) U.S. Treasury Bill which compares to the
portfolio's maximum weighted average maturity of six months.
The authorized investment purchased will be of the highest credit quality and marketability supporting the
objectives of safety and liquidity. Securities, when not matched to a specific liability,will be short term to
provide adequate liquidity. The portfolio shall be diversified to protect against market and credit risk in any
one sector.
Westlake Academy
The maximum weighted average maturity of the portfolio will be no more that 180 days and the maximum
stated maturity of any security will not exceed two years. The funds are combined for investment purposes
but the unique needs of all the funds in the portfolio are recognized and represented.
Effective cash management is recognized as essential to good fiscal management. Cash management is
defined as the process of managing monies in order to ensure maximum cash availability. The Academy
shall maintain a cash management program which includes timely collection of accounts receivable,prudent
investment,disbursement of payments within invoice terms and the management of banking services.
IV. LEGAL LIMITATIONS,RESPONSIBILITIES AND AUTHORITY
Specific investment parameters for the investment of public funds in Texas are stipulated in the Public
Funds Investment Act, Chapter 2256, Texas Government Code, (the "Act"). The Act is attached as Exhibit
A.
The Public Funds Collateral Act, Chapter 2257, Texas Government Code, specifies collateral requirements
for all public funds deposits. The Collateral Act is attached as Exhibit B.
The Interlocal Cooperation Act, Chapter 791, Texas Government Code, authorizes local governments in
Texas to participate in a Texas investment pool established thereunder.
V. DELEGATION OF INVESTMENT AUTHORITY
The Finance Director of the Town of Westlake, acting on behalf of the Board of Trustees, is designated as
the Investment Officer of the Academy and is responsible for all investment management decisions and
activities. The Board of Trustees is responsible for considering the quality and capability of staff,
investment advisors, and consultants involved in investment management and procedures. All participants
in the investment process shall seek to act responsibly as custodians of the public trust.
The Investment Officer shall develop and maintain written administrative procedures for the operation of
the investment program which are consistent with this Investment Policy. Procedures will include
safekeeping,wire transfers,banking services contracts,and other investment related activities.
The Investment Officer shall be responsible for all transactions undertaken and shall establish a system of
controls to regulate the activities of subordinate officials and staff.
The Investment Officer shall designate a staff person as a liaison/deputy in the event circumstances require
timely action and the Investment Officer is not available.
No officer or designee may engage in an investment transaction except as provided under the terms of this
Policy and the procedures established by the Investment Officer and approved by the CEO.
VI. PRUDENCE
The standard of prudence to be used in the investment function shall be the "prudent person" standard and
shall be applied in the context of managing the overall portfolio. This standard 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 expected income to be derived."
Limitation of Personal Liability
The Investment Officer and those delegated investment authority, when acting in accordance with the
written procedures and this Policy and in accord with the Prudent Person Rule, shall be relieved of personal
liability in the management of the portfolio provided that deviations from expectations for a specific
security's credit risk or market price change are reported in a timely manner and that appropriate action is
taken to control adverse market effects.
Westlake Academy
VII. INTERNAL CONTROLS
The Investment Officer shall establish a system of written internal controls which will be reviewed annually
with the independent auditor of the Academy. The controls shall be designed to prevent loss of public
funds due to fraud, employee error, misrepresentation by third parties, or imprudent actions by employees
of the Academy.
VIIL AUTHORIZED INVESTMENTS
Acceptable investments under this policy shall be limited to the instruments listed below. The choice of
high-grade government investments and high-grade, money market instruments are designed to assure the
marketability of those investments should liquidity needs arise.
A. Obligations of the United States Government, its agencies and instrumentalities,not to exceed two
(2)years to stated maturity, and excluding mortgage backed securities;
B. Fully insured or collateralized certificates of deposit from a bank doing business in the State of
Texas and under the terms of a written depository agreement with that bank, not to exceed one year
to stated maturity;
C. No-load, SEC registered money market mutual funds. No more than 80% of the entity's monthly
average balance may be invested in money market funds; and
D. Constant dollar, AAA-rated Texas Local Government Investment Pools as defined by the Public
Funds Investment Act.
If additional types of securities are approved for investment by public funds by state statute,they will not be
eligible for investment until this Policy has been amended and the amended version adopted by the Board of
Aldermen.
Delivery versus Payment
All investment security transactions shall be conducted on a delivery versus payment(DVP)basis to assure
that the Academy has control of its assets and/or funds at all times.
IX. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
Securities broker/dealers may be primary or regional broker/dealers and will meet other criteria as
determined by the Investment Officer including state registration and completion of a Academy
Broker/Dealer questionnaire (attached as Exhibit D). The following criteria must be met by authorized
firms.
- annual provision of an audited financial statement,
- proof of certification by the National Association of Securities Dealers(NASD)
- proof of current registration with the Texas State Securities Commission,and
- completion of the Academy's broker/dealer questionnaire.
Every bank and broker/dealer with whom the Academy transacts business will be provided a copy of this
Investment Policy to assure that they are familiar with the goals and objectives of the investment program.
The firm will be required to return a signed copy of the Certification Form(attached as Exhibit C)certifying
that the Policy has been received and reviewed and only those securities approved by the Policy will be sold
to the Academy.
X. DIVERSIFICATION AND MATURITY LIMITATIONS
It is the policy of the Academy to diversify its investment portfolio. Invested funds shall be diversified to
minimize risk or loss resulting from over-concentration of assets in a specific maturity, specific issuer, or
specific class of securities. Diversification strategies shall be established and periodically reviewed.
Westlake Academy
XI. SAFEKEEPING AND COLLATERALIZATION
The laws of the State and prudent treasury management require that all purchased securities be bought on a
delivery versus payment(DVP) basis and be held in safekeeping by either an approved, independent third
party financial institution or the Academy's designated depository.
Securities Owned by the Academy
All safekeeping arrangements shall be approved by the Investment Officer and an agreement of the terms
executed in writing. The safekeeping bank may not be within the same holding company as the bank from
with the securities are purchased. The custodian shall be required to issue original safekeeping receipts to
the Academy Iisting each specific security, rate, description, maturity, cusip number, and other pertinent
information.
Collateral
Collateralization shall be required on all bank time and demand deposits for principal and accrued interest
amounts over the FDIC insurance coverage of $100,000 (by tax identification number). In order to
anticipate market changes and provide a level of additional security for all funds, collateral with a market
value equal to 102%of the total deposits are required. The pledging bank will be made contractually liable
for monitoring and maintaining the collateral levels at all times. All collateral will be held by an
independent third party bank outside the holding company of the bank,pledged to the Academy.
Authorized collateral will include only:
- Obligations of the US Government, its agencies and instrumentalities to include mortgage
backed securities which pass the bank test,
- Municipal obligations rated at least A by two nationally recognized rating agencies.
The custodian shall be required to provide original safekeeping receipts clearly marked that the security is
pledged to the Academy.
XII. REPORTING
The Investment Officer shall submit quarterly reports to the Board of Trustees containing sufficient
information to permit an informed outside reader to evaluate the performance of the investment program
and in full compliance with the Act. At a minimum the report shall contain:
- Beginning and ending market value of the portfolio by market sector and total portfolio
- Beginning and ending book value of the portfolio by market sector and total portfolio
- Change in market value during the period
- Detail on each asset(book,market,description,par ad maturity date)
- Earnings for the period
- Overall weighted average maturity of the portfolio
The report will be prepared jointly by all involved in the investment activity and be signed by the
Investment Officer. It will contain all elements as required by the Act and be signed by the Investment
Officers as in compliance with the Act and this Policy. Market prices for assignment of market values will
be obtained from an independent source. The three month Treasury Bill average yield for the reporting
period will be reported as a gauge of performance and risk.
XIII. DEPOSITORIES
The Academy will designate one banking institution through a competitive process as its central banking
services provider at least every five years. This institution will be used for normal banking services
including disbursements, deposits, and safekeeping of Academy owned securities. Other banking
institutions from which the Academy may purchase only certificates of deposit will also be designated as a
depository.
All banking arrangements will be in written form in accordance with FIRREA which requires a resolution of
approval of the agreement by the Bank Council or Bank Loan Committee.
Westlake Academy
XIV. INVESTMENT POLICY ADOPTION BY BOARD
The Academy's Investment Policy and its incorporated strategies shall be adopted by resolution annually by
the Board. The approval and any changes made to the Policy will be noted in the approving resolution.
Westlake Academy
CHAPTER 2257.COLLATERAL FOR PUBLIC FUNDS
SUBCHAPTER A.GENERAL PROVISIONS
Effective as of September?, 2003
4 2257.001.Short Title
This chapter may be cited as the Public Funds Collateral Act.
Added by Acts 1993, 73rd Leg,ch.268, §1,eff.Sept. 1, 1993,Acts 2003,78'h Leg,eff Sept 1,2003.
S 2257.002. Definitions In this chapter:
(1)"Bank holding company"has the meaning assigned by Section 31.002(x), Finance Code.
(2)"Control"has the meaning assigned by Section 31.002(a), Finance Code.
(3)"Deposit of public funds"means public funds of a public entity that:
(A)the comptroller does not manage under Chapter 404; and
(B)are held as a demand or time deposit by a depository institution expressly authorized by law to accept a public entity's
demand or time deposit.
(4)"Eligible security"means:
(A)a surety bond;
(B)an investment security;
(C)an ownership or beneficial interest in an investment security, other than an option contract to purchase or sell an
investment security;
(D)a fixed-rate collateralized mortgage obligation that has an expected weighted average life of 10 years or less and does
not constitute a high-risk mortgage security;or
(E)a floating-rate collateralized mortgage obligation that does not constitute a high-risk mortgage security.
(5)"investment security"means:
(A)an obligation that in the opinion of the attorney general of the United States is a general obligation of the United States
and backed by its full faith and credit;
(B)a general or special obligation issued by a public agency that is payable from taxes, revenues,or a combination of
taxes and revenues;or
(C)a security in which a public entity may invest under Subchapter A, Chapter 2256.
(6)"Permitted institution"means:
(A)a Federal Reserve Bank;
(B)a clearing corporation, as defined by Section 8.102, Business&Commerce Code;
(C)a bank eligible to be a custodian under Section 2257.041; or
(D)a state or nationally chartered bank that is controlled by a bank holding company that controls a bank eligible to be a
custodian under Section 2257.041.
(7)"Public agency"means a state or a political or governmental entity, agency, instrumentality,or subdivision of a state,including a.
municipality,an institution of higher education, as defined by Section 61.003, Education Code,a junior college, a district created
under Article XVI,Section 59,of the Texas Constitution,and a public hospital.
(8)"Public entity"means a public agency in this state, but does not include an institution of higher education, as defined by Section
61.003,Education Code.
(9)"State agency"means a public entity that:
(A)has authority that is not limited to a geographic portion of the state;and
(B)was created by the constitution or a statute.
(10)"Trust receipt"means evidence of receipt, identification,and recording, including:
(A)a physical controlled trust receipt;or
(B)a written or electronically transmitted advice of transaction.
Added by Acts 1993,73rd Leg,ch.268, §1, eff.Sept. 1, 1993.Amended by Acts 1995,74th Leg.,ch,76, §5.48(a), eff.Sept, 1,
1995;Acts 1995,74th Leg., ch.914,§5,eff. Sept. 1, 1995;Acts 1997, 75th Leg., ch.254,§ 1,eff.Sept. 1, 1997;Acts 1997,75th
Leg.,ch. 891,§3.22(4),eff.Sept. 1, 1997;Acts 1997,75th Leg.,ch. 1423, §8.70,eff.Sept. 1, 1997;Acts 1999,76th Leg., ch.62,§
7.63,eff.Sept. 1, 1999.
4 2257.0025.High-Risk Mortgage Security
(a)_For purposes of this chapter,a fixed-rate collateralized mortgage obligation is a high-risk mortgage security if the security:
(1)has an average life sensitivity with a weighted average life that:
(A)extends by more than four years,assuming an immediate and sustained parallel shift in the yield curve of
plus 300 basis points; or
(B)shortens by more than six years,assuming an immediate and sustained parallel shift in the yield curve of
minus 300 basis points; and
(2)is price sensitive;that is,the estimated change in the price of the mortgage derivative product is more than 17 percent,
because of an immediate and sustained parallel shift in the yield curve of plus or minus 300 basis points.
(b)For purposes of this chapter,a floating-rate collateralized mortgage obligation is a high-risk mortgage security if the security:
(1)bears an interest rate that is equal to the contractual cap on the instrument;or
(2)is price sensitive;that is,the estimated change in the price of the mortgage derivative product is more than 17 percent,
because of an immediate and sustained parallel shift in the yield curve of plus or minus 300 basis points.
Added by Acts 1997,75th Leg,ch.254, §2, eff. Sept. 1, 1997.
2257.003.Chapter Not Applicable to Deferred Compensation Plans This chapter does not apply to funds that a public entity
maintains or administers under a deferred compensation plan,the federal income tax treatment of which is governed by Section
401(k)or 457 of the Internal Revenue Code of 1986(26 U.S.C.Sections 401(k)and 457).
Added by Acts 1993,73rd Leg., ch. 268,§ 1,eff.Sept. 1, 1993.
§2257.004.Conflict With Other Law This chapter prevails over any other law relating to security for a deposit of public funds to
the extent of any conflict.
Added by Acts 1993, 73rd Leg,ch.268,§1,eff.Sept. 1, 1993.
§2257.005.Contract Governs Legal Action A legal action brought by or against a public entity that arises out of or in connection
with the duties of a depository,custodian, or permitted institution under this chapter must be brought and maintained as provided by
the contract with the public entity.
Added by Acts 1993, 73rd Leg,ch.268,§1,eff.Sept. 1, 1993,
SUBCHAPTER B. DEPOSITORY;SECURITY FOR DEPOSIT OF PUBLIC FUNDS
2257.021.Collateral Required A deposit of public funds shall be secured by eligible security to the extent and in the manner
required by this chapter.
Added by Acts 1993,73rd Leg,ch.268,§1,eff.Sept. 1, 1993.
§2257.022.Amount of Collateral
(a)Except as provided by Subsection(b),the total value of eligible security to secure a deposit of public funds must be in an amount
not less than the amount of the deposit of public funds:
(1) increased by the amount of any accrued interest;and
(2) reduced to the extent that the United States or an instrumentality of the United States insures the deposit.
(b)The total value of eligible security described by Section 45.201(4)(D), Education Code,to secure a deposit of public funds of a
school district must be in an amount not less than 110 percent of the amount of the deposit as determined under Subsection(a).
The total market value of the eligible security must be reported at least once each month to the school district.
(c)The value of a surety bond is its face value.
(d)The value of an investment security is its market value.
Added by Acts 1993,73rd Leg,ch.268,§1,eff.Sept. 1, 1993,Acts of 78th Leg eff.Sept. 1, 2003.
§2257.023.Collateral Policy
(a) In accordance with a written policy approved by the governing body of the public entity,a public entity shall determine if an
investment security is eligible to secure deposits of public funds.
(b)The written policy may include:
(1)the security of the institution that obtains or holds an investment security;
(2)the substitution or release of an investment security;and
(3)the method by which an investment security used to secure a deposit of public funds is valued.
Added by Acts 1993,73rd Leg,ch.268,§ 1,eff.Sept. 1, 1993.
§2257.024.Contract for Securing Deposit of Public Funds
(a)A public entity may contract with a bank that has its main office or a branch office in this state to secure a deposit of public funds.
(b)The contract may contain a term or condition relating to an investment security used as security for a deposit of public funds,
including a term or condition relating to the:
(1)possession of the collateral;
(2)substitution or release of an investment security;
(3)ownership of the investment securities of the bank used to secure a deposit of public funds;and
(4)method by which an investment security used to secure a deposit of public funds is valued.
Added by Acts 1993,73rd Leg,ch.268, §1,eff.Sept. 1, 1993.Amended by Acts 1999,76th Leg.,ch. 344,§5.006,eff.Sept. 1,
1999.
2257.025.Records of Depository
(a)A public entity's depository shall maintain a separate, accurate, and complete record relating to a pledged investment security,a
deposit of public funds,and a transaction related to a pledged investment security.
(b)The comptroller or the public entity may examine and verify at any reasonable time a pledged investment security or a record a
depository maintains under this section.
Added by Acts 1993, 73rd Leg,ch.268, § 1,eff. Sept. 1, 1993.Amended by Acts 1997, 75th Leg.,ch.891, §316,eff.Sept. 1,
1997.
2257.026.Change in Amount or Activity of Deposits of Public Funds A public entity shall inform the depository for the public
entity's deposit of public funds of a significant change in the amount or activity of those deposits within a reasonable time before the
change occurs.
Added by Acts 1993, 73rd Leg,ch.268,§1, eff.Sept. 1, 1993.
SUBCHAPTER C.CUSTODIAN;PERMITTED INSTITUTION
§2257.041.Deposit of Securities With Custodian
(a)In addition to other authority granted by law,a depository for a public entity other than a state agency may deposit with a
custodian a security pledged to secure a deposit of public funds.
(b)At the request of the public entity,a depositary for a public entity other than a state agency shall deposit with a custodian a
security pledged to secure a deposit of public funds.
(c)A depository for a state agency shall deposit with a custodian a security pledged to secure a deposit of public funds.The
custodian and the state agency shall agree in writing on the terms and conditions for securing a deposit of public funds.
(d)A custodian must be approved by the public entity and be:
(1)a state or national bank that:
(A)is designated by the comptroller as a state depository;
(B)has its main office or a branch office in this state;and
(C)has a capital stock and permanent surplus of$5 million or more;
(2)the Texas Treasury Safekeeping Trust Company;
(3)a Federal Reserve Bank or a branch of a Federal Reserve Bank;or
(4)a federal home loan bank.
(e)A custodian holds in trust the securities to secure the deposit of public funds of the public entity in the depository pledging the
securities.
Added by Acts 1993,73rd Leg,ch.268,§1,eff.Sept. 1, 1993.Amended by Acts 1995,74th Leg.,ch. 1010,§1,eff.June 17, 1995;
Acts 1997,75th Leg.,ch.891,§3.17,eff.Sept. 1, 1997;Acts 1999,76th Leg.,ch.344, §5.007,eff.Sept. 1, 1999.
4 2257.042.Deposit of Securities With Permitted Institution
(a)A custodian may deposit with a permitted institution an investment security the custodian holds under Section 2257.041.
(b)If a deposit is made under Subsection(a):
(1)the permitted institution shall hold the investment security to secure funds the public entity deposits in the depository
that pledges the investment security;
(2)the trust receipt the custodian issues under Section 2257.045 shall show that the custodian has deposited the security
in a permitted institution;and
(3)the permitted institution,on receipt of the investment security,shall immediately issue to the custodian an advice of
transaction or other document that is evidence that the custodian deposited the security in the permitted institution.
Added by Acts 1993,73rd Leg,ch.268, §1,eff.Sept. 1, 1993.
4 2257.043.Depository as Custodian or Permitted Institution
(a)A public entity other than a state agency may prohibit a depository or an entity of which the depository is a branch from being the
custodian of or permitted institution for a security the depository pledges to secure a deposit of public funds.
(b)A depository or an entity of which the depository is a branch may not be the custodian of or permitted institution for a security the
depository pledges to secure a deposit of public funds by a state agency.
Added by Acts 1993,73rd Leg,ch.268, §1,eff. Sept. 1, 1991
4 2257.044.Custodian as Bailee
(a)A custodian under this chapter or a custodian of a security pledged to an institution of higher education,as defined by Section
61.003, Education Code,whether acting alone or through a permitted institution,is for all purposes the bailee or agent of the public
entity or institution depositing the public funds with the depository.
(b)To the extent of any conflict,Subsection (a)prevails over Chapter 8 or 9, Business&Commerce Code.
Added by Acts 1993,73rd Leg,ch.268, §1,eff.Sept. 1, 1993.
2257.045.Receipt of Security by Custodian On receipt of an investment security, a custodian shail:
(1)immediately identify on its books and records,by book entry or another method,the pledge of the security to the public entity;
and
(2)promptly issue and deliver to the appropriate public entity officer a trust receipt for the pledged security.
Added by Acts 1993,73rd Leg,ch.268,§1, eff.Sept. 1, 1993.
4 2257.046.Books and Records of Custodian; Inspection
(a)A public entity's custodian shall maintain a separate,accurate,and complete record relating to each pledged investment security
and each transaction relating to a pledged investment security.
(b)The comptroller or the public entity may examine and verify at any reasonable time a pledged investment security or a record a
custodian maintains under this section.The public entity or its agent may inspect at any time an investment security evidenced by a
trust receipt.
(c)The public entity's custodian shall file a collateral report with the comptroller in the manner and on the dates prescribed by the
comptroller.
Added by Acts 1993,73rd Leg,ch.268,§1,eff.Sept. 1, 1993.Amended by Acts 1997,75th Leg.,ch. 891,§3.18,eff.Sept. 1,
1997.
4 2257.047. Books and Records of Permitted Institution
(a)A permitted institution may apply book entry procedures when an investment security held by a custodian is deposited under
Section 2257.042.
(b)A permitted institution's records must at all times state the name of the custodian that deposits an investment security in the
permitted institution.
Added by Acts 1993, 73rd Leg,ch.268, §1,eff.Sept. 1, 1993.
4 2257.048.Attachment and Perfection of Security Interest
(a)A security interest that arises out of a depository's pledge of a security to secure a deposit of public funds by a public entity or an
institution of higher education, as defined by Section 61.003, Education Code, is created,attaches,and is perfected for all purposes
under state law from the time that the custodian identifies the pledge of the security on the custodian's books and records and
issues the trust receipt.
(b)A security interest in a pledged security remains perfected in the hands of a subsequent custodian or permitted institution.
Added by Acts 1993, 73rd Leg, ch.268, §1, eff.Sept. 1, 1993.
SUBCHAPTER D.AUDITS AND EXAMINATIONS; PENALTIES
4 2257.061.Audits and Examinations As part of an audit or regulatory examination of a public entity's depository or custodian,the
auditor or examiner shall:
(1)examine and verify pledged investment securities and records maintained under Section 2257.025 or 2257.046; and
(2) report any significant or material noncompliance with this chapter to the comptroller.
Added by Acts 1993, 73rd Leg,ch,268, §1, eff.Sept. 1, 1993.Amended by Acts 1997,75th Leg.,ch.891, §3.19,eff.Sept. 1,
1997.
6 2257.062.Penalties
(a)The comptroller may revoke a depository's designation as a state depository for one year if,after notice and a hearing,the
comptroller makes a written finding that the depository,while acting as either a depository or a custodian:
(1)did not maintain reasonable compliance with this chapter; and
(2)failed to remedy a violation of this chapter within a reasonable time after receiving written notice of the violation.
(b)The comptroller may permanently revoke a depository's designation as a state depository if the comptroller makes a written
finding that the depository:
(1)has not maintained reasonable compliance with this chapter;and
(2)has acted in bad faith by not remedying a violation of this chapter.
Added by Acts 1993,73rd Leg,ch.268, §1, eff.Sept. 1, 1993.Amended by Acts 1997,75th Leg.,ch.891, §3.19,eff.Sept. 1,
1997.
4 2257.053.Mitigating Circumstances
(a)The comptroller shall consider the total circumstances relating to the performance of a depository or custodian when the
comptroller makes a finding required by Section 2257.062, including the extent to which the noncompliance is minor, isolated,
temporary,or nonrecurrent.
(b)The comptroller may not find that a depository or custodian did not maintain reasonable compliance with this chapter if the
noncompliance results from the public entity's failure to comply with Section 2257.026.
(c)This section does not relieve a depository or custodian of the obligation to secure a deposit of public funds with eligible security
in the amount and manner required by this chapter within a reasonable time after the public entity deposits the deposit of public
funds with the depository.
Added by Acts 1993,73rd Leg,ch,268, §1, eff.Sept. 1, 1993.Amended by Acts 1997,75th Leg.,ch. 891,§3.19,eff.Sept. 1,
1997.
4 2257.064. Reinstatement The comptroller may reinstate a depository's designation as a state depository if:
(1)the comptroller determines that the depository has remedied all violations of this chapter;and
(2)the depository assures the comptroller to the comptroller's satisfaction that the depository will maintain reasonable compliance
with this chapter.
Added by Acts 1993, 73rd Leg,ch.268, § 1,eff. Sept. 1, 1993.Amended by Acts 1997,75th Leg.,ch.891, §3.19,eff.Sept. 1,
1997.
SUBCHAPTER E.EXEMPT INSTITUTIONS
2257.081. Definition In this subchapter,"exempt institution"means:
(1)a public retirement system,as defined by Section 802.001;or
(2)the permanent school fund, as described by Section 43.001, Education Code.
Added by Acts 1993, 73rd Leg,ch.268,§1,eff.Sept. 1, 1993.Amended by Acts 1997,75th Leg.,ch. 165, §6,31,eff.Sept. 1,
1997.
2257.082. Funds of Exempt Institution An exempt institution is not required to have its funds fully insured or collateralized at all
times if:
(1)the funds are held by:
(A)a custodian of the institution's assets under a trust agreement;or
(8)a person in connection with a transaction related to an investment;and
(2)the governing body of the institution, in exercising its fiduciary responsibility, determines that the institution is adequately
protected by using a trust agreement,special deposit,surety bond,substantial deposit insurance,or other method an exempt
institution commonly uses to protect itself from liability.
Added by Acts 1993, 73rd Leg,ch.268, §1, eff.Sept. 1, 1993.
§2257.083.Investment;Selection of Depository This chapter does not:
(1)prohibit an exempt institution from prudently investing in a certificate of deposit; or
(2)restrict the selection of a depository by the governing body of an exempt institution in accordance with its fiduciary duty.
Added by Acts 1993, 73rd Leg,ch.268, §1,eff.Sept. 1, 1993.
PUBLIC FUNDS INVESTMENT ACT
Chapter 2256,Texas Government Code
Effective as of September 1,2003
SUBCHAPTER A. AUTHORIZED INVESTMENTS FOR GOVERNMENTAL ENTITIES
Sec. 2256.001 Short Title.
This chapter may be cited as the Public Funds Investment Act.
Sec.2256.002 Definitions.
In this chapter:
(1) 'Bond Proceeds" means the proceeds from the sale of bonds,notes, and other obligations issued by an
entity,and reserves and funds maintained by an entity for debt service purposes.
(2) "Book Value" means the original acquisition cost of an investment plus or minus the accrued
amortization or accretion.
(3) "Funds"means public funds in the custody of a state agency or local government that:
(A) are not required by law to be deposited in the state treasury;and
(B) the investing entity has authority to invest.
(4) "Institution of higher education"has the meaning assigned by Section 61.003,Education Code.
(5) "Investing entity" and "entity" mean an entity subject to this chapter and described by Section
2256.003.
(6) "Investment pool" means an entity created under this code to invest public funds jointly on behalf of the
entities that participate in the pool and whose investment objectives in order of priority are:
(A) preservation and safety of principal;
(B) liquidity;and
(C) yield.
(7) "Local government" means a municipality, a county, a school district, a district or authority created
under Section 52(b)(1) or (2), Article III, or Section 59, Article XVI, Texas Constitution, a fresh water
supply district, a hospital district, and any political subdivision, authority, public corporation, body politic,
or instrumentality of the State of Texas, and any nonprofit corporation acting on behalf of any of those
entities.
(8) "Market value" means the current face or par value of an investment multiplied by the net selling price
of the security as quoted by a recognized market pricing source quoted on the valuation date.
(9) "Pooled fund group" means an internally created fund of an investing entity in which one or more
institutional accounts of the investing entity are invested.
(10) "Qualified representative' means a person who holds a position with a business organization, who is
authorized to act on behalf of the business organization,and who is one of the following:
(A) for a business organization doing business that is regulated by or registered with a securities
commission, a person who is registered under the rules of the National Association of
Securities Dealers;
(B) for a state or federal bank, a savings bank or a state or federal credit union, a member of the
loan committee for the bank or branch of the bank or a person authorized by corporate
resolution to act on behalf of and bind the banking institution;
(C) for an investment pool,the person authorized by the elected official or board with
authority to administer the activities of the investment pool to sign the written instrument on
behalf of the investment pool, or
(D) for an investment management firm registered under the Investment Advisers Act of 1940.
(15 U.S.C. Section 80b-1 et seq.) or, if not subject to registration under that Act, registered
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with the State Securities Board, a person who is an officer or principal of the investment
management firm.
(11) "School district"means apublic school district.
(12) "Separately invested asset" means an account or fund of a state agency or local government that is not
invested in a pooled fund group.
(13) "State agency" means an office, department, commission, board, or other agency that is part of any
branch of state government, an institution of higher education, and any nonprofit corporation acting on
behalf of any of those entities.
See.2256.003 Authority to Invest Funds; Entities Subject to this Chapter
(a) Each governing body of the following entities may purchase, sell, and invest its funds and funds under
its control in investments authorized under this subchapter in compliance with investment policies approved
by the governing body and according to the standard of care prescribed by Section 2256.006:
(1) a local government;
(2) a state agency;
(3) a nonprofit corporation acting on behalf of a local government or a state agency;or
(4) an investment pool acting on behalf of two or more local governments, state
agencies,or a combination of those entities.
(b) In the exercise of its powers under Subsection (a), the governing body of an investing entity may
contract with an investment management firm registered under the Investment Advisers Act of 1940
(15 U.S.C. Section 80b-I et seq.) or with the State Securities Board to provide for the investment and
management of its public funds or other funds under its control. A contract made under authority of
this subsection may not be for a term longer than two years. A renewal or extension of the contract
must be made by the governing body of the investing entity by order,ordinance or resolution.
(c) This chapter does not prohibit an investing entity or investment officer from using the entity's
employees or the services of a contractor of the entity to aid the investment officer in the execution of
the officer's duties under this chapter.
Sec.2256.004 Applicability
(a) This subchapter does not apply to:
(1) a public retirement system as defined by Section 802.001;
(2) state funds invested as authorized by Section 404.024;
(3) an institution of higher education having total endowments of at least $95 million in book value
on May 1, 1995
(4) funds invested by the Veterans Land Board as authorized by Chapter 161, 162, or 164, Natural
Resources Code,
(5) registry funds deposited with the county or district clerk under Chapter 117, Local Government
Code, or
(6) a deferred compensation plan that qualifies under either Section 401(k) or 457 of the Internal
Revenue Code of 1986 (26 U.S.C. Section 1 et seq.)as amended.
(b) This subchapter does not apply to an investment donated to an investing entity for a particular purpose
or under terms of use specified by the donor.
Sec.2256.005 Investment Policies; Investment'Strategies; Investment Officer.
(a) The governing body of an investing entity shall adopt by rule, order, ordinance, or resolution, as
appropriate,a written investment policy regarding the investment of its funds and funds under its control.
(b) The investment policies must:
(1) be written;
(2) primarily emphasize safety of principal and liquidity;
(3) address investment diversification, yield, and maturity and the quality and capability of
investment management;and
(4) include:
(A)a list of the types of authorized investments in which the investing entity's funds
may be invested;
(B)the maximum allowable stated maturity of any individual investment owned by the
entity;
(C) for pooled fund groups, the maximum dollar-weighted average maturity allowed
based on the stated maturity date for the portfolio.
(D)methods to monitor the market price of investments acquired with public funds;and
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(E)a requirement for settlement of all transactions, except investment pool funds and
mutual funds, on a delivery versus payment basis.
(c) The investment policies may provide that bids for certificates of deposit be solicited:
(1) orally;
(2) in writing;
(3) electronically; or
(4) in any combination of those methods.
(d) As an integral part of an investment policy, the governing body shall adopt a separate written
investment strategy for each of the funds or group of funds under its control. Each investment strategy must
describe the investment objectives for the particular fund using the following priorities in order of
importance:
(1) understanding of the suitability of the investment to the financial requirements of the entity;
(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.
(e) The governing body of an investing entity shall review its investment policy and investment strategies
not less than annually. The governing body shall adopt a written instrument by rule, order, ordinance or
resolution stating that it has reviewed the investment policy and investment strategies and that the written
instrument so adopted shall record any changes made to either the investment policy or investment
strategies.
(f) Each investing entity shall designate, by rule, order, ordinance, or resolution, as appropriate, one or
more officers or employees of the state agency, local government, or investment pool as investment officer
to be responsible for the investment of its funds consistent with the investment policy adopted by the entity.
If the governing body of an investing entity has contracted with another investing entity to invest its funds,
the investment officer of the other investing entity is considered to be the investment officer of the first
investing entity for purposes of this chapter. Authority granted to a person to invest an entity's funds is
effective until rescinded by the investing entity until the expiration of the officer's term or the_termination
of the person's employment by the investing entity, or if an investment management firm, until expiration of
the contract with the investing entity. In the administration of the duties of an investment officer,the person
designated as investment officer shall exercise the judgment and care, under prevailing circumstances,that a
prudent person would exercise in the management of the person's own affairs,but the governing body of the
investing entity retains ultimate responsibility as fiduciaries of the assets of the entity. Unless authorized by
law, a person may not deposit,withdraw, transfer, or manage in any other manner the funds of the investing
entity.
(g) Subsection (f) does not apply to a state agency, local government, or investment pool for which an
officer of the entity is assigned by law the function of investing its funds.
(h) An officer or employee of a commission created under Chapter 391, Local Government Code, is
ineligible to be designated as an investment officer under Subsection (f) for any investing entity other than
for that commission. An officer or employee of a commission created under Chapter 391, Local
Government Code, is ineligible to be an investment officer for the commission under Subsection (f) if the
officer or employee is an investment officer designated under Subsection(f)for another local government.
(i) An investment officer of an entity who has a personal business relationship with a business
organization offering to engage in an investment transaction with the entity shall file a statement disclosing
that personal business interest. An investment officer who is related within the second degree by affinity or
consanguinity, as determined under Chapter 573, to an individual seeking to sell an investment to the
investment officer's entity shall file a statement disclosing that relationship. A statement required under this
subsection must be filed with the Texas Ethics Commission and the governing body of the entity. For
purposes of this subsection, an investment officer has a personal business relationship with a business
organization if
(1) the investment officer owns 10 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 10
percent of the investment officer's gross income for the previous year; or
3
(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.
(j) The governing body of an investing entity may specify in its investment policy that any investment
authorized by this chapter is not suitable.
(k) A written copy of the investment policy shall be presented to any person offering to engage in an
investment transaction with an investing entity or to an investment management firm under contract with an
investing entity to invest or manage the entity's investment portfolio. For purposes of this subsection, a
business organization includes investment pools and an investment management firm under contract with an
investing entity to invest or manage the entity's investment portfolio. Nothing in this subsection relieves the
investing entity of the responsibility for monitoring the investments made by the investing entity to
determine that they are in compliance with the investment policy. The qualified representative of the
business organization offering to engage in an investment transaction with an investing entity shall execute a
written instrument in a form acceptable to the investing entity and the business organization substantially to
the effect that the business organization has:
(1) received and reviewed the investment policy of the entity; and
(2) acknowledged that the business organization has implemented reasonable procedures and
controls in an effort to preclude investment transactions conducted between the entity and the
organization that are not authorized by the entity's investment policy, except to the extent that
this authorization is dependent on an analysis of the makeup of the entity's entire portfolio or
requires an interpretation of subjective investment standards.
(1) The investment officer of an entity may not acquire or otherwise obtain any authorized investment
described in the investment policy of the investing entity from a person who has not delivered to the entity
the instrument required by Subsection(k).
(m) An investing entity other than a state agency, in conjunction with its annual financial audit, shall
perform a compliance audit of management controls on investments and adherence to the entity's
established investment policies.
(n) Except as provided by Subsection(o), at least once every two years a state agency shall arrange for a
compliance audit of management controls on investments and adherence to the agency's established
investment policies. The compliance audit shall be performed by the agency's internal auditor or by a
private auditor employed in the manner provided by Section 321.020. Not later than January 1 of each
even-numbered year, a state agency shall report the results of the most recent audit performed under this
subsection to the state auditor. A state agency also shall report to the state auditor other information the
state auditor determines necessary to assess compliance with laws and policies applicable to state agency
investments. A report under this subsection shall be prepared in a manner the state auditor prescribes.
(o) The audit requirements of Subsection (n) do not apply to assets of a state agency that are invested by
the comptroller under Section 404.024.
Sec.2256.006 Standard of Care.
(a) Investments shall be made with judgment and care, under prevailing circumstances, that a person of
prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for
speculation, but for investment, considering the probable safety of capital and the probable income to be
derived. Investment of funds shall be governed by the following investment objectives, in order of priority:
(1) preservation and safety of principal;
(2) liquidity;and
(3) yield.
(b) In determining whether an investment officer has exercised prudence with respect to an investment
decision,the determination shall be made taking into consideration:
(1) the investment of all funds, or funds under the entity's control, over which the officer had
responsibility rather than a consideration as to the prudence of a single investment;and
(2) whether the investment decision was consistent with the written investment policy of the entity.
Sec.2256.007 Investment Training; State Agency Board Members and Officers.
(a) Each member of the governing board of a state agency and its investment officer shall attend at least
one training session relating to the person's responsibilities under this chapter within six months after taking
office or assuming duties.
4
(b) The Texas Higher Education Coordinating Board shall provide the training under this section.
(c) Training under this section must include education in investment controls, security risks,strategy risks,
market risks, diversification of investment portfolio,and compliance with this chapter.
(d) An investment officer shall attend a training session not less than once in a two-year period and may
receive training from any independent source approved by the governing body of the state agency. The
investment officer shall prepare a report on this subchapter and deliver the report to the governing body of
the state agency not later than the 180 day after the last day of each regular session of the legislature.
Sec.2256.008 Investment Training; Local Governments.
(a) Except as provided by Subsections(b)and(e),the-treasurer,the chief financial officer if the treasurer is
not the chief financial officer,and the investment officer of a local government shall_
(1) attend at least one training session from an independent source approved by the governing body of
the local government or a designated investment committee advising the investment officer as
provided for in the investment policy of the local government and containing at least 10 hours of
instruction relating to the treasurer's or officer's responsibilities under this subchapter within 12
months after taking office or assuming duties; and
(2) except as provided by Subsection(b), attend an investment training session not less than once in a
two-year period and receive not less than 10 hours of instruction relating to investment
responsibilities under this subchapter from an independent source approved by the governing body
of the local government or a designated investment committee advising the investment officer as
provided for in the investment policy of the local government.
(b) An investing entity created under authority of Section 52(b), Article III, or Section 59, Article XVI,
Texas Constitution, that has contracted with an investment management firm under Section
2256.003(b) and has fewer than five full-time employees or an investing entity that has contracted with
another investing entity to invest the entity's funds may satisfy the training requirement provided by
Subsection (a)(2) by having an officer of the governing body attend four hours of appropriate
instruction in a two-year period. The treasurer or chief financial officer of an investing entity created
under authority of Section 52(b), Article 111, or Section 59, Article XVI, Texas Constitution, and that
has fewer than five full-time employees is not required to attend training required by this section unless
the person is also the investment officer of the entity.
(c) Training under this section must include education in investment controls, security risks, strategy risks,
market risks,diversification of investment portfolio,,and compliance with this chapter.
(d) Not later than December 31 each year, each individual, association, business, organization,
governmental entity, or other person that provides training under this section shall report to the
comptroller a list of the governmental entities for which the person provided required training under
this section during that calendar year. An individual's reporting requirements under this subsection are
satisfied by a report of the individual's employer or the sponsoring or organizing entity of a training
program or seminar.
(e) This section does not apply to a district governed by Chapter 36 or 49, Water Code.
Sec. 2256.009 Authorized Investments: Obligations of,or Guaranteed by Governmental Entities.
(a) Except as provided by Subsection (b),the following are authorized investment under this
subchapter:
(1) Obligations, including letters of credit, of the United States or its agencies and
instrumentalities;
(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, this state or the United States or their
respective agencies and instrumentalities;and
5
(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 and
(6) bonds issued,assumed, or guaranteed by the State of Israel.
(b) The following are not authorized investments under this section:
(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 10
years;and
(4) collateralized mortgage obligations the interest rate of which is determined by an index that
adjusts opposite to the changes in a market index.
Sec.2256.010 Authorized Investments: Certificates of Deposit.
A certificate of deposit is an authorized investment under this subchapter if the certificate of deposit is issued by a
state or national bank domiciled in this state or a savings bank domiciled in this state,or state or federal credit union
domiciled in this state and is:
(1) guaranteed or insured by the Federal Deposit Insurance Corporation, or its successor or the National
Credit Union Share Insurance Fund or its successor,
(2) secured by obligations that are described by Section 2256.009(a), 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 of the nature described by
Section 2256.009(b); or
(3) secured in any other manner and amount provided by law for deposits of the investing entity.
Sec.2256.011 Authorized Investments: Repurchase Agreements.
(a) A fully collateralized repurchase agreement is an authorized investment under this subchapter if the
repurchase agreement:.
(1) has a defined termination date;
(2) is secured by obligations described by Section 2256.009(x)(1);and
(3) requires the securities being purchased by the entity to be pledged to the entity, held in the
entity's name, and deposited at the time the investment is made with the entity or with a third party
selected and approved by the entity;and
(4) is placed through a primary government securities dealer, as defined by the Federal Reserve,
or a financial institution doing business in this state.
(b) In this section, "repurchase agreement" means a simultaneous agreement to buy, hold for a specified
time, and sell back at a future date, obligations described by Section 2256.009(a)(1) at a market value at
the time the funds are disbursed of not less than the principal amount of the funds disbursed. The term
includes a direct security repurchase agreement and a reverse security repurchase agreement.
(c) Notwithstanding any other law, the term of any reverse security repurchase agreement may not exceed
90 days after the date the reverse security repurchase agreement is delivered.
(d) Money received by an entity under the terms of a reverse security repurchase agreement shall be used
to acquire additional authorized investments,but the term of the authorized investments acquired must
mature not later than the expiration date stated in the reverse security repurchase agreement.
Sec.2256.0115 Authorized Investments. Securities Lending
(a) A securities lending program is an authorized investment under this subchapter if it meets the
conditions provided by this section.
(b) To qualify as an authorized investment under this subchapter:
(1) the value of securities loaned under the program must be not less than 100 percent collateralized,
including accrued income;
(2) a loan made under the program must allow for termination at any time;
(3) a loan made under the program must be secured by:
(A) pledged securities described by Section 2256.009;
(B) pledged irrevocable letters of credit issued by a bank that is:
(i) organized and existing under the laws of the United States or any other state; and
6
(ii) continuously rated by at least one nationally recognized investment rating firm at not
less than A or its equivalent; or
(C) cash invested in accordance with Section:
(i) 2256.009;
(ii) 2256.013;
(iii) 2256.014; or
(iv) 2256.016
(4) the terms of a loan made under the program must require that the securities being'held as collateral
be:
(A) pledged to the investing entity;
(B) held in the investing entity's name, and;
(C) deposited at the time the investment is made with the entity or with a third party selected by or
approved by the investing entity;
(5) a Ioan made under the program must be placed through:
(A) 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
(B) a financial institution doing business in this state;and
(6) an agreement to lend securities that is executed under this section must have a term of one year or
less.
Sec.2256.012 Authorized Investments: Banker's Acceptances
A bankers'acceptance is an authorized investment under this subchapter if the bankers'acceptance:
(1) has a stated maturity of 270 days or fewer from the date of its 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 F-1 or an equivalent rating by at least one nationally recognized credit rating
agency.
Sec.2256.013 Authorized Investments: Commercial Paper.
Commercial paper is an authorized investment under this subchapter if the commercial paper:
(1) has a stated maturity of 270 days or fewer from the date of its issuance;and
(2) is rated not less than A-1 or P-1,or an equivalent rating by at least:
(A) two nationally recognized credit rating agencies; or
(B) 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
or any state.
Sec.2256.014 Authorized Investment: Mutual Funds.
(a) A no-load money market mutual fund is an authorized investment under this subchapter if the mutual
fund:
(1) is registered with and regulated by the Securities and Exchange Commission;
(2) provides the investing entity with a prospectus and other information required by the
Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.) or the Investment Company
Act of 1940(15 U.S.C. Section 8 Oa-I et seq.)
(3) has a dollar-weighted average stated maturity of 90 days or fewer; and
(4) includes in its investment objectives the maintenance of a stable net asset value of $1 for each
share.
(b) In addition to a no-load money market mutual fund permitted as an authorized investment in Subsection
(a),a no-load mutual fund is an authorized investment under this subchapter if the mutual fund:
(1) is registered with the Securities and Exchange Commission;
(2) has an average weighted maturity of less than two years;
(3) is invested exclusively in obligations approved by this subchapter;
(4)is continuously rated as to investment quality by at least one nationally recognized
investment rating firm of not less than AAA or its equivalent; and
(5)conforms to the requirements set forth in Sections 2256.016(b)and(c)relating to the eligibility
of investment pools to receive and invest funds of investing entities.
7
(c) An entity is not authorized by this section to:
(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
Subsection(b);or
(2) invest any portion of bond proceeds,reserves and funds held for debt service, in mutual funds
described in Subsection(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 Subsection(a)or(b)in an amount
that exceeds 10 percent of the total assets of the mutual fund.
Sec.2256.015 Authorized Investments: Guaranteed Investment Contracts.
(a) A guaranteed investment contract is an authorized investment for bond proceeds under this subchapter
if the guaranteed investment contract:
(1) has a defined termination date;
(2) is secured by obligations described by Section 2256.009(a)(1), excluding those obligations
described by Section 2256.009(b), in an amount at least equal to the amount of bond proceeds
invested under the contract;and
(3) is pledged to the entity and deposited with the entity or with a third party selected and
approved by the entity.
(b) Bond proceeds, other than bond proceeds representing reserves and funds maintained for debt service
purposes, may not be invested under this subchapter in a guaranteed investment contract with a term of
longer than five years from the date of issuance of the bonds.
(c) To be eligible as an authorized investment:
(1) the governing body of the entity must specifically authorize guaranteed investment contracts as
an eligible investment in the order, ordinance,or resolution authorizing the issuance of bonds;
(2) the entity must receive bids from at least three separate providers with no material financial
interest in the bonds from which proceeds were received;
(3) the entity 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 trust certify the administrative costs reasonably expected to be paid to third
parties in connection with the guaranteed investment contract.
Sec.2256.016 Authorized Investment: Investment Pools.
(a) An entity may invest its funds and fiinds under its control through an eligible investment pool if the
governing body of the entity by rule, order, ordinance, or resolution, as appropriate, authorizes investment
in the particular pool. An investment pool shall invest the funds it receives from entities in authorized
investments permitted by this subchapter.
(b) To be eligible to receive funds from and invest funds on behalf of an entity under this chapter, an
investment pool must furnish to the investment officer or other authorized representative of the entity an
offering circular or other similar disclosure instrument that contains, at a minimum, the following
information:
(1) the types of investments in which money is allowed to be invested;
(2) the maximum average dollar-weighted maturity allowed, based on the stated maturity date, of
the pool;
(3) the maximum stated maturity date any investment security within the portfolio has;
(4) the objectives of the pool;
(5) the size of the pool;
(6) the names of the members of the advisory board of the pool and the dates their terms,expire;
(7) the custodian bank that will safekeep the pool's assets;
(8) whether the intent of the pool is to maintain a net asset value of one dollar and the risk of
market price fluctuation;
(9) whether the only source of payment is the assets of the pool at market value or whether there is
a secondary source of payment, such as insurance or guarantees,and a description of the secondary
source of payment;
(10) the name and address of the independent auditor of the pool;
(11) the requirements to be satisfied for an entity to deposit funds in and withdraw funds from the
pool and any deadlines or other operating policies required for the entity to invest funds in and
withdraw funds from the pool;and
8
(12) the performance history of the pool, including yield, average dollar-weighted maturities,
and expense ratios.
(c) To maintain eligibility to receive funds from and invest funds on behalf of an entity under this chapter,
an investment pool must furnish to the investment officer or other authorized representative of the entity:
(1) investment transaction confirmations;and
(2) a monthly report that contains,at a minimum,the following information:
(A) the types and percentage breakdown of securities in which the pool is invested;
(B) the current average dollar-weighted maturity,based on the stated maturity date, of the
pool;
(C) the current percentage of the pool's portfolio in investments that have stated
maturities of more than one year;
(D) the book value versus the market value of the pool's portfolio, using amortized cost
valuation;
(E) the size of the pool;
(F) the number of participants in the pool;
(G) the custodian bank that is safekeeping the assets of the pool;
(H) a listing of daily transaction activity of the entity participating in the pool;
(I) the yield and expense ratio of the pool;
(J) the portfolio managers of the pool; and
(K) any changes or addenda to the offering circular.
(e) An entity by contract may delegate to an investment pool the authority to hold legal title as custodian
of investments purchased with its local funds.
(f) In this section, "yield" shall be calculated in accordance with regulations governing the registration of
open-end management investment companies under the Investment Company Act of 1940, as promulgated
from time to time by the Federal Securities and Exchange Commission.
(g) To be eligible to receive funds from and invest funds on behalf of an entity under this chapter, a public
funds investment pool created to function as a money market mutual fund must mark its portfolio to market
daily, and,to the extent reasonably possible, stabilize at a$1 net asset value. If the ratio of the market value
of the portfolio divided by the book value of the portfolio is less than 0.995 or greater than 1.005, portfolio
holdings shall be sold as necessary to maintain the ratio between 0.995 and 1.005.
(h) To be eligible to receive funds from and invest funds on behalf of an entity under this chapter, a public
funds investment pool must have an advisory board composed
(1) equally of participants in the pool and other persons who do not have a business.
relationship with the pool and are qualified to advise the pool,for a public funds investment pool
created under Chapter 791 and managed by a state agency;or
(2) of participants in the pool and other persons who do not have a business relationship with
the pool and are qualified to advise the pool,for other investment pools.
(i) To maintain eligibility to receive funds from and invest funds on behalf of an entity under this chapter,
an investment pool must be continuously rated no lower than AAA or AAA-m or at an equivalent rating by
at least one nationally recognized rating service.
Sec.2256.017 Existing Investments.
An entity is not required to liquidate investments that were authorized investment at the time of purchase.
Sec.2256.019 Ratings of Certain Investment Pools.
A public funds investment pool must be continuously rated no lower than AAA or AAA-m or at an
equivalent rating by at least one nationally recognized rating service or no lower than investment grade by
at least one nationally recognized rating service with a weighted average maturity no greater than 90 days.
Sec.2256.020 Authorized Investments. Institutions of Higher Education.
In addition to the authorized investments permitted by this subchapter, an institution of higher education
may purchase, sell,and invest its funds and funds under its control in the following:
(1) cash management and fixed income funds sponsored by organizations exempt from federal
income taxation under Section 501(f), Internal Revenue Code of 1986(26 U.S.C. Section 501(f));
(2) negotiable certificates of deposit issued by a bank that has a certificate of deposit rating of at
least 1 or the equivalent by a nationally recognized credit rating agency or that is associated with a
holding company having a commercial paper rating of at least A-1, P-1, or the equivalent by a
nationally recognized credit rating agency;and
(3) corporate bonds, debentures, or similar debt obligations rated by a nationally recognized
investment rating firm in one of the two highest long-term rating categories, without regard to
gradations within those categories.
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Sec. 2256.0201 Authorized Investment; Municipal Utility
(a) A municipality that owns a municipal electric utility that is engaged in the distribution and sale of
electric energy or natural gas to the public may enter into a hedging contract and related security and
insurance agreements in relation to fuel oil, natural gas, and electric energy to protect against loss due
to price fluctuations. A hedging transaction must comply with the regulations of the Commodity
Futures Trading Commission and the Securities and Exchange Commission. If there is a conflict
between the municipal charter of the municipality and this chapter,this chapter prevails.
(b) A payment by the municipally owned electric or gas utility under a hedging contract or related
agreement in relation to fuel supplies or fuel reserves is a fuel expense, and the utility may credit any
amounts it receives under the contract or agreement against fuel expenses.
(c) The governing body of a municipally owned electric or gas utility or the body vested with power to
manage and operate the municipally owned electric or gas utility may set policy regarding hedging
transactions.
(d) In this section, "hedging" means the buying and selling of fuel oil, natural gas, and electric energy
futures or options or similar contracts on those commodity futures as a protection against loss due to
price fluctuations.
Sec.2256.021 Effect of Loss of Required Rating.
An investment that requires a minimum rating under this subchapter does not qualify as an authorized
investment during the period the investment does not have the minimum rating. An entity shall take all
prudent measures that are consistent with its investment policy to liquidate an investment that does not have
the minimum rating.
Sec.2256.022 Expansion of Investment Authority.
Expansion of investment authority granted by this chapter shall require a risk assessment by the state auditor
or performed at the direction of the state auditor, subject to the legislative audit commit approval of
including the review in the audit plan under Section 321.013_
Sec.2256.023 Internal Management Reports.
(a) Not less than quarterly, the investment officer shall prepare and submit to the governing body of the
entity a written report of investment transactions for all funds covered by this chapter for the preceding
reporting period.
(b) The report must:
(1) describe in detail the investment position of the entity on the date of the report;
(2) be prepared jointly by all investment officers of the entity;
(3) be signed by each investment officer of the entity;
(4) contain a summary statement prepared in compliance with generally accepted accounting
principles of each pooled fund group that states the:
(A) beginning market value for the reporting period;
(B) additions and changes to the market value during the period;
(E) ending market value for the period;and
(F) fully accrued interest for the reporting period.
(5) state the book value and market value of each separately invested asset at the beginning and
end of the reporting period by the type of asset and fund type invested;
(6) state the maturity date of each separately invested asset that has a maturity date;
(7) state the account or fund or pooled fund group in the state agency or local government for
which each individual investment was acquired;and
(8) state the compliance of the investment portfolio of the state agency or local government as it
relates to:
(A) the investment strategy expressed in the agency's or local government's investment
policy; and
(B) relevant provisions of this chapter.
(c) The report shall be presented not less than quarterly to the governing body and the chief executive
officer of the entity within a reasonable time after the end of the period.
(d)If an entity invests in other than money market mutual funds, investment pools or accounts offered by its
depository bank in the form of certificates of deposit, or money market accounts or similar accounts, the
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reports prepared by the investment officers under this section shall be formally reviewed at least annually by
an independent auditor,and the result of the review shall be reported to the governing body by that auditor.
Sec.2256.024 Subchapter Cumulative
(a) The authority granted by this subchapter is in addition to that granted by other law. Except as provided
by Subsection(b),this subchapter does not:
(1) prohibit an investment specifically authorized by other law;or
(2) authorize an investment specifically prohibited by other law.
(b) Except with respect to those investing entities described in Subsection (c), a security described in
Section 2256.009(b) is not an authorized investment for a state agency, a local government, or another
investing entity,notwithstanding any other provision of this chapter or other law to the contrary.
(c) Mortgage pass through certificates and individual mortgage loans that may constitute an investment
described in Section 2256.009(b) are authorized investments with respect to the housing bond programs
operated by:
(1) the Texas Department of Housing and Community Affairs or a nonprofit corporation created
to act on its behalf;
(2) an entity created under Chapter 392,Local Government Code; or
(3) an entity created under Chapter 394,Local Government Code.
Sec.2256.025 Selection of Authorized Brokers
The governing body of an entity subject to this subchapter or the designated investment committee of the entity shall,
at least annually, review, revise, and adopt a list of qualified brokers that are authorized to engage in investment
transactions with the entity,
See.2256.026 Statutory Compliance
All investments made by entities must comply with this subchapter and all federal, state, and local statutes, rules or
regulations.
[SECTION 2256.027-2256.050 Reserved for expansion]
SUBCHAPTER B. MISCELLANEOUS PROVISIONS.
Sec.2256.051 Electronic Funds Transfer.
Any local government may use electronic funds means to transfer or invest all funds collected or controlled
by the local government.
Sec. 2256.052 Private Auditor.
Notwithstanding any other law, a state agency shall employ a private auditor if authorized by the legislative
audit committee either on the committee's initiative or on request of the governing body of the agency.
Sec.2256.053 Payment of Securities Purchased by State.
The comptroller or the disbursing officer of an agency that has the power to invest assets directly may pay
for authorized securities purchased from or through a member in good standing of the National Association
of Securities Dealers or from or through a national or state bank on receiving an invoice from the seller of
the securities showing that the securities have been purchased by the board or agency and that the amount to
be paid for the securities is just, due and unpaid. A purchase of securities may not be made at a price that
exceeds the existing market value of the securities.
Sec.2256.054 Delivery of Securities Purchased by State.
A security purchased under this chapter may be delivered to the comptroller, a bank,or the board or agency
investing its funds. The delivery shall be made under normal and recognized practices in the securities and
banking industries,including the book entry procedure of the Federal Reserve Bank.
Sec.2256.055 Deposit of Securities Purchased By State.
At the direction of the comptroller or the agency, a security purchased under this Chapter may be deposited
in trust with a bank or federal reserve bank or branch designated by the comptroller, whether in or outside
the state. The deposit shall be held in the entity's name as evidenced by a trust receipt of the bank with
which the securities are deposited.
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