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    40 views64 pages

    Investment Procedures and Internal Control Guidelines

    Uploaded by

    danish khan
    intense

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    | INVESTMENT PROCEDURES AND INTERNAL CONTROLS GUIDELINES compiled and written by COMMITTEE ON CASH MANAGEMENT of the | GOVERNMENT FINANCE OFFICERS ASSOCIATION ® MAY 2004 INTRODUCTION ‘The purpose of this document i to prosde 2 sample manual on investment procedures and inter- 1nal contol guidelines. The information and sample documents contained within can serve 352 use ful starting point in assembling investment procedutes and intemal control guidelines at any gov ernment organization. This document wil be updated as needed, ‘Adltional esources are avaliable ftom the Government Finance Officers Assaciatin (GFOA), which has Several publications that provide useful guidance on issues related to government investment procedures. addltion to helpful general information, the publications listed below contain stan ‘ard templates for pertinent documents {8 An invoduction to Colsterafzing Public Deposits for State ana Local Governments + Sample Custodial Trust Agreement (page 37) + Sample Custodians Certicate of Egbiliy (page 44) + Sample Security Agreement (short form) (age 32) 1 An introduction to BrokerDealer Relations fo State and Local Governments + Sample Agreement for Securities Services (page 25) + Sample Statement of Work {8 40 Introduction to investment Advisors for State and Local Governments + Sample Investment Advisory Agreement (page 26) Visit GEOAS e-store to order online at wwe gfoa.org WRITTEN INVESTMENT PROCEDURES: A HELPFUL TOOL Deveoping, regulary reviewing, and revising an investment policy i only one step in the investment process. The nest step i to develop and implement intemal controls to safeguard the entity’ cash and securities. Written secures procedures are a key part of internal cons and are one way to ensure internal canto’ are foloned.* Developing Written Investment Procedures writen proceeures utine the process for making investment decisions, detail the activites ofthe inyestment staff, and specity how investment decisions are to be to be caried out. Well written investment procedures wil answer the fllowing questions tm who is authorized to initiate investment transactions? 1m who is authorized to approve investment transactions? 1m who is authorized to inivate wite wansactions? ‘m Wvho will make investment bookkeeping and accounting entries? ‘a Wino are the approved brocerceslers and financial institutions for transacting business on 2 day-to-day bass? 1m Who isthe safekeeping agent and what are the delivery instructions? When developing writen investment procedures, it is helpful to thnk through the entire process from beginning to end, and then document the activites that take place. Investment procedures should begin with 2 review ofthe daly cash postion and indude a review of maturing investments and incoming coupon payments. Nex, the procedures should detall how investment decsions wil bbe made, How will cashflow neeis be determined? What are current and expected interest rates? What other investments are inthe entity’ potilio? ‘writen procedures should autine ar detail how investment transactions will be handled. For exam ple, the investment procedures should designate who may inte an investment decision. The ro ‘cedures also should list the eutharized brokergealers and financial institutions. Other its that ‘would be aderessed include ‘m Wo is the contact person at the bank's wire Wansler desk? At the safekeeping bank? At the brokerage firm? 1m What forms are used to dacument competitive bids? To initiate wite transfers? Where are the forms kept? Where do they go after the investment transaction and reporting process is complete? after a secuty is purchased, who reconcls the investment confirmation against the wite twansfer confirmation against the safekeeping receipt? ‘To help ensure compliance with te investment palcy and adherence to internal conto, the items listed below should be included inthe procedure manual ‘Governing statutes, regulations ordinances, resolutions, and policies 1m Duties of personnel 1 Limitations of employee authority 18 Flowchart of transaction ination and execution 1 Lists of authorized broker/dealers and financial institutions that the investment officals may call on for competitive quotes on securities 1 List of relevant bank account numbers, safekeeping and deliver instructions 1 Descriptions of elevant cycles and functions, including review and approval processes Timelines for report preparation and report distribution lists lm Methodologies and formulas for allocations, stbutions and other calculations 1 Samoles of al forms and reports 1 Descriptions of back-up and disaster recovery procedures | Foxms indicating implementation date and dates of revisions ‘Some procedure manuals o beyond the daly outine and outine what actives should take place on '@ monthly, quarter, periods, and annual bass, For example, the procedure manual might incide information on how brokedealers and financial insttuions ae selected, how often those nsttuions are reviewed for cedtwortiness, and who resporsible for this revew. Samples of forms, such a requests for financial information, should be included inthe manual forte use’ reference Procedures shouldbe clearly documented and communicated to all employees. al investment er sonnel should have a copy of the investment policy and procedure manual. Questions not incl ed inthe manual should be directed to one department o* person to ensure consistency and con: {tol When propery constructed, a procedure manual can be an invaluable tol for traning invest ‘ment staff and answering routine questions. For this reason, written procedures should be reviewed and updated annual, "Te inemation in hi section iginly appeared in: Caine Las, Tvesene Peed vy” Par Toveor 19, 98 Magu 32001) pp 13 [GOVERNMENT] INVESTMENT PROCEDURES AND INTERNAL CONTROLS MANUAL | LAST UPDATED [DATE] INVESTMENT PROCEDURES AND INTERNAL CONTROLS GUIDELINES TABLE OF CONTENTS A, Introduction 3 8. Objective 3 CC Prudence and Ethical Standards 3 . Investment Decisions 3 E. Delegation of Authority 3 F Outies and Responses a 6. Ethics and Contes of interest 4 H. Segregation of Duties and Compensating Controls 4 | Reporting Requirements 5 1. Operations 1 Iavestment Procedures 5 2. Authorizes Wires 5 3 Securities Confirmations 5 4. Safekeeping Procedures 6 K. Accounting for Investment Transactions 6 Lvestment information 1 Internal investment Reports 6 2. Market Values 6 M. Selection of Dealers and Bankers 6 N. Security Selection Process 7 ©. Exhibits 7 |. Policy Documents Exhibit > Investment Policy 9 Exhibit 2 Governing Statute linge Statute for Investing Pubic Funds) 18 Exhibit 3: Loca Ethics Rules and Regulations 2 ll Agreements Exhibit 4: Master Repurchase Agreements 30 Eshibit 5: Safekeeping Agreements 3 Exhibit M6: Security Agreement (Long Form) 35 Exhibit "7: BrokerDealer Questionnaire 40 Exhibit IF8: Bond Indentures 45 IN. Operating Documents Exhibit LS: investment Flowchart 50 Exhibit I-10: Order/Confizmation Document 31 Exhibit 1 Uist of Authorized Financial Insitutions and Brokers 55 Exhibit 142: List of Authorized Personnel 37 Exhibit 13; Disaster Recovery/Business Continuity lan 58 Exhibit I-14: Sample Investment Summary Report 33 INVESTMENT PROCEDURES AND INTERNAL CONTROLS GUIDELINES |A. Introduction ‘The government ha established an investment offceldvson/veasurer within the weasury or finance eparvment withthe responsibilty of conducting cash and investment transactons for all funds held by o forthe benefit of the government. The espe for Une neat of Ue ie ‘ments here and after inthis document wil be refered to asthe iwestment officer. The investment program has been delegated tothe investment officer who shal implement the investment poicy by following the investment procedures and internal contol herein delineated, 1B. Objective ‘The investment Procedures and intemal Controls Manual provides an outline foe investment ‘management. Ths manual sal be reviewed annually ©. Prudence and Ethical Standards ‘The standard of prudence tobe used by the investment staf shall be the “prudent person" and shall be apaliedin te ontert of managing the averal patio, The government’ nvestment of ceo pesons performing te investment functions, acting in accordance with writen plies nd procedures and exerciing due dligence, shall nat be responsbie for an individual securtys cet tsk or market price changes, provided that deviations from expectations are reported in 2 timely fashion and appvopriae action is taken to control adverse developments. The standard of prudence ‘and ethical standards should mirar what in te investment policy forthe ent ‘Te “prudent person" standard is herewith understood to mean the folowing: “lwestments shall be made wth ucgment and care, under cicumstances then prevaing, which persons of pr sence, dscretion, and inteligence excise in the management of ther own affairs, not for spec. lation, ut for investment, considering the probable safety of thet captal as wl asthe probable income tobe derived” D. Investment Decisions The investment officer shall adhere to the guidelines of the governments investment poicy ‘regarding al investment purchases or any other cash and investment transactions. E. Delegation of Authority As established by the investment policy, certain specified individuals (i.e. the Weasure, finance icectar have authority to transact investments. The elected oficas shal establish the overall investment polices, the management and implementation of which is delegated tothe invest- ‘ment officer, who shall establish procedures for the operation ofthe investment program. Such procedures shal incude explicit written delegation of authority to other investment personne! ‘espansble for investment transactions. F._ Duties and Responsibilities The investment ofiers) has speciic duties and responses as stated in their respective poston descriptions. Tey shold at @ minimum include a description outing the duties of al the person nel involved in investi, in case ofan absence ofan ofcer, procedures and specific alternate per sonnel should be delieate. G. Ethics and Conflicts of interest For the protection ofthe investment officer and statis imperative that ull writen disosure be ‘made by investment personnel tothe oversight entity of any material interests which they may hold ina financial institution (brokersdealers, banks, et) which conducts business with the govern ‘ment. This should miror and reference what inthe investment policy. Any local, county, or state ethic laws shal ao be enforced, H. Segregation of Duties and Compensating Controls ‘The government shal establish written internal controls, which should include: 1. Control of Collusion: Colluson isa situation where two or more employees are working in Conjunction to defraud ther employe 2, Segregation of duties: By separating the person who authorizes or pecoums the transaction from the people who record or otherwise account forthe trarsactio, a good separation of duties achieved, 3. Custotial safekeeping: Secures purchase from any bank or dele, cluding approrite col lateral, shouldbe placed into an independent thie-party institution for usta safekeeping 4, Avoidance of physical deliver securities: Book entry secures are nuch ease to transfer and sccount for since actual delivery is never taken. Physical delivery secuties must be proper: ly safeguarded as are any valuable documents. The potential of freud and loss increases with Dhysical delivery securties. Beaer-focm secures are much easier to convert 10 personal use ‘than securities that are registered in the name of the government. 5. Clear delegation of authority to subordinate staff members: Subarinate staff members must have 2 clear understanding of thei authonty and responsible to avoid any improper actions. Clear delegation of authority abo preserves the internal contol structure that s Bult {around the various staff positions and ther respective esponsibites, 6. Wilten confirmation of all transactions (transfer, fax, Internet) for investments and wire transfers: Due to the potential for rors and improprieies acing fram telephaneeecroic lwansictions, they should be documented in wating and approve by the anpropiate person 7, Development of a electronic funds transfer agreement with tanks: Tis agreement Should outline the various contiols and security provisions for making and receiving elec: tronic funds transfers, + Dual authorization representing the government shal bein compliance with the policy for al wanstes. + Financial institutions wil have writen instructions regarding government authorizations for vir trensfes, restictions on accounts where funds can be wied, and other procedures that wall mitigate Unauthorized movement of funds (eg, callback to ineeperdent person, wit: ten confematons, etc). Suggested minimum planned vacations for investment personnel. 9. Insurance shall be secured at appropriate levels to bond employees charged with Investment and cash handling responsibilities. L_ Reporting Requirements: 1 The investrent officer shal prepare a quarterly report. The report shall contain but not be l= ited tothe following infocmation ‘month average rate of return on the porto, + Sverage days to maturity. + monthly portfolio compasition, and ‘mark o market valuation 2. Ataminimum, a report shall be presented annually o the governing body to update admin- istration or securties held, matures, investment returns, unrealized gains (losses), compar isons to estabished benchmarks, market conditions, prevaiing iwestment strategy, and adherence tothe investment policy, Securities wil be reported an 2 marked to market bass 2s defined by the Governmental Accounting Standards Board (GASE) J. Operations Procedures ard duties recommended include 1. Investment Procedures: The following isa bas outline of routine dally procedures neces say to maintain proper documentation on cash and investment transactions. EXAMPLE: Each morning, the dally bank balance eport shall be obtained from te depository bank) Overnight (seep) repurchase agreements andlor money matket account interest shall be vei and recorded. All incoming and maturing investments shall be verifies with the cus- tocial bank All earned interest, maturing investments, and incoming funds should be verified and record. ‘The accounting division shall be responsible for provcing the westment dvsion with daly information regarding the cash requirements and required matuity dates, Al security purchas- sor sels must be recorded on a confimation form, (Ona del basis, itis necesary to conduct cash and investment activity within specfc bark counts, an all ransactons within each account shall be recorded ona daly ivestment werk Sheet. All worksheets shall be maintained by the investment officer, ard the worksheets sal be avalabe fo: eview upon request. Proper documentation and authorization shall be required before any cash or invest ment transaction is executed, 2. Authorized Wires: Only the authorized representatives shall wie funds according to the approved wire transfer agreement for investment, Wie instructions avd personal identification numbers (PN) shall be safeguarded, Al bank vansler requests shall bein writing and requie a second confirmation by another government employee. The purpose of the bank transfer ‘must be state as pant ofthe transfer information. ACH procedures sal also be delineated 3. Securities Confirmations: The processing of sects’ confimaton, including fling andre ‘nciling, shal be conducted by an individual not permitted to purchase and sell ivestments 4, Safekeeping Procedures: + All securities purchased shall be received by “delivery vs. payment” (per the investment Policy to the custodian for safekeeping, + Certicates of deposit are permitted to Be held atthe issuing bank 4 Collateral fr eeniiatee of denost and purchased secures n connection with repurchase ‘2greements sal be delivered to the governments designated ustasian. Adsional equire- ments and procedures shouldbe outined in athie-party custodial safekeeping agreement ‘regarcing safekeeping procedures. (Please see the GFOA Recommended Practices on these ‘pics in Exhibit and 5.) Accounting for Investment Transactions. 1. The investment division must ensure proper accounting entries. 2. Iovestments shall be recorded in the financial records at orginal cost 3. Interest income will be recognized at maturity or amortized as ofthe last day ofthe fiscal year according tothe effective interest method af amortization, Investment Information 1. Internal investment Reports: Investment reports should be generated on a month bass and Shall be checked against the orginal documentation to ensure the accuracy ofthe report, 2, Market Values ‘+All iavestment income shouldbe recorded monthly and allocated tothe appropiate fund that earned the investment income. ‘+ Investment portfolios wil be reported at the fait market value according tothe GFOA rec- ‘ommended practice (and as defined by GASB 31) on 2 monthhfauarteryyearend bass + Yesvend financial statements wil contain all required dclosures and comply with GASB 31 1. Selection of Dealers and Bankers Al secunies shall be purchased according tothe investment pale. The selection of dealers and bankers should be governed by the GFOAS recommended practice an the selection of dealersovo- kes, For mote infomation on selecting dealers and brokers, please refer tothe GFOA Publication ‘An introduction to Broker/Dealer Relations for Stateocal Governments. A stated in the inves ‘ment policy, te investment officer shall oly purchase secures from financial nstutions that ate {qualified as public depositories by state, or from primary secures deals as designated by the Federal Reserve Bank of New York. Furthermore, only institutional brokers from institutional departments shal be selected. The investment dvsion shal provide each authorized dealer a copy ofthe investment pol cy which they shal sign, acknowledging that they wil comply with its requirements NN. Security Selection Process \wen purchasing or seling securtis, the investment dvs shall select the security that satisfies the current objectives anc needs ofthe government portfoa and that provides both the highest rate of return within estabished parameters of the investment policy. These slections shall be made based on a competine bss. All secur Wanssctions should be documented fr items such a + bids and offers + securty and contrmaton ©. Exhibits ‘There ae a series of documents that ae used by investment staff to provide forthe proper doc- Lumentation for cash anc investment tansactions, a5 described in this manval. The flowing exhibits are samples or ‘lated recommended practices that the GFOA Committee co Cash Management believes wil be useful to fnance offices. These are meant to supplement the (GFOA publication sted earlier. Samples or elated recommended practices have been cluded for many of these docurents 1. Policy Documents 1. GFOA Sample Imestment Policy 2 Governing Statues 3. Local Ethics Rules and Regulations Agreements 4. Master Repurchase Agreements (GFOA Recommended Practice) 5. Safekeeping Agreements (GFOA Recommended Practice) 5. Security Agreement (Long Form) 7. Broker/Dealer Questionnaire 8 Bond Indentures ‘Operating Documents Investment Flowenart 10. Order(Confrmation Document 11 Uist of Authorizes Financial institutions and Brokers 12. List of Authorize Personnel 13. Disaster RecoveryBusiness Continuity Pan 14, Sample investment Summary Report POLICY DOCUMENTS GFOA SAMPLE INVESTMENT POLICY “The purpose ofthis sample inestment policy sta aid the general membership ofthe Government Finance Ofcers Association (GFOA) in the reparation of an investment policy. This sample policy is ot intended to supplant an existing policy athe, its presented asa model to help investing ent “tes customize a policy to fittheir partcular needs, constraints and capabilities. In order to accom ‘madite the varying needs of government entities and in order to stimulate conversation atthe local level, certain sections ofthe ttached policy include examples of alternative language. These ater- native examples may be usedin place of or inaction tothe fst paragraph presented for that sec “tion, depending on the goals and objectives of the particular investing entity. For additional information, please read Chapter 3 of Investing Public Funds, second edition, a ‘tent authored by Girard Milly, with M. Cocinne Lason and W. Paul Zorn, and published by the GFOA, You are also invited to contact current staff of the GFOA Standing Committee on Cash Management for assistance in medifying andlor writing your governments investment pclcy ‘Governments should obtain counsel to ensure compliance with state and local laws, regulations, and other palces concerning the investment of pubic funds |. Governing Authority 1. Legality: The investment pragram shal be operated in conformance with federal, state, and ‘other legal requirements, incuding {insert aplcable citations governing the investment of public funds) Scope This policy applies to the investment of al funds, excluding the investment of employees’ etre ‘ment funds. Proceeds frem certain bond issues, as wel as Separate foundation or endowment assets, are covered by a saparate policy [This section should be modified to speciy which assets fare excluded fram this paey) 1. Pooling of Funds: Except for cash in certain restricted and special funds, the fet] wl consol iaate cash and ceserve balances from al funds to maximize investment earings and to increase efficiencies with regard to investment pricing, safekeeping and administration. Investment income ‘wl be allocated tothe tarious funds based on ther espectve participation andin accordance with generally accepted accounting principles. [This paragranh refers tothe pooling of funds within 3 _sngle govereental erty and imps no reference t0 local gveenment investment poo’. This (GF0A Samo ivestment Poy isnot specfcaly designed for use by local government investment ‘Books, athough certain portions of tis sample poy may apply) HL, General Objectives ‘The primary objectives, in pris order of investment actiities shall be safety ligucity, and yield 1. Safety: Safety of prinopa is the foremest objective of the investment program. investments shal be undertaken in 2 manner that seeks to ensure the preservation of capital inthe overall portfolio. The objective wil be to mitigate cet sk and interest rate ek 8) Credit Rsk. The lent will minimize edt rik, which & the rick of loss due to the flare Of the security issuer o- backs, y: * Lirstng investments o the tyes of scutes std in Section Vi ofthis Investment Policy + Pre-qualfying the financial insitutons, brokerdealer, intermediaries, and acisers with which the entity] wil do business in accordance with Section V + Diversifying the imeeament portflo so that the impact of potential oses from any one ‘ype of security or fre any one incvialssver wil be minimized 1) interest Rate isk. Te entity wil minimize interest raters, wich ithe sk thatthe mar- ket value of secures in the potfoto wil fall due t changes in market interest ates by: + Structuring the investment portfolio so that secures mature to meet eash requirements for ongoing operations, thereby avaising the need to sel secures on the open market prior to maturity * Investing operating funds primary in shorter-trm secures, money market mutual funds, ‘or simiar investment pools and limiting the average maturty of the porto in accordance vith this plc ee sation Vt, 2, Liquidity: The investmen: porfolo shall remain sufficiently quid to meet all operating ‘equirements that may be reasonably anticipated. This's accomplished by structuring the port {alo so that secures mature concutent with cash needs to meet anticipated demancs stat ic lquidiy). Furthermore, snce all possible cash demands cannot be anticipated, the portiolo should consist largely of securities with active secondaty or resale markets (dynamic haut) Alternatively, a porton of the portfolio may be placed in money market mutual funds or local {yoresniment investment penis which offer Same-day Quit for sor-term funds 3. Yield: The investment porflo shall be designed withthe abecive of attaining a market rte ‘of return throughout budgetary and economic cytes, taking into account the investment tk ‘constraints and liquidity ne2ds. Return on investment is of secandary impartance compared 10 the safety and liquidity obsctives described above. The core of investments are limited to rl atively low risk securities n antiopation of earning a fai retuin relative to the rk Being assumed. Secures sal generaly be held until maturity wth the folowing exceptions: + Assecuity with declining credit may be sald early to minimize loss of pancpal + A security swap wouldimprove the quality yield, or taget duration in the portfolio, “+ Uquiity needs ofthe rortoo require thatthe security be sold Alternative sare language — The (entity) cash management pontolio shall be designed withthe objective of regulaty meeting or exceeding a performance benchmark, which could be the average return on three-month U.S. Treasury bls the tate investment pool, 3 money mar- ket mutual und (speci) othe average rate on Fed funds, whichever is higher These indices {ate considered benchmark for lower rikivestment transactions and therefore comprise 3 mi imum standard forthe por‘olo$ rate of return. The investment program shall seek to augment returns above ths threshold consistent wth sk limitations identi herein and prudent invest ‘ment principles, See Section on performance standards and selecting benchmark) 4, Local Considerations: Where possible, furds may be invested fr the betterment ofthe local «economy ofthat of focal entities within the State. The [entity] may acept a propasal fom an celgiieinsituion which peovies for a reduced rte of interest provided that such institution

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