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RES 1375 12/09/2008 RESOLUTION # 1375 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF THE CIBOLO, TEXAS, AMENDING, REVIEWING, AND APPROVING THE INVESTMENT POLICY; PROVIDING A REPEALING CLAUSE; PROVIDING A SEVERABILITY CLAUSE; AND PROVIDING FOR AN EFFECTIVE DATE. WHEREAS, Chapter 2256 of the Texas Government Code, commonly known as the Public Funds Investment Act" requires the City to adopt an investment policy by rule, order, ordinance or resolution annually; and WHEREAS,the Public Funds Investment Act requires the chief financial officer and investment officers of the City to attend investment training; and WHEREAS, the chief financial officer, investment officers and any official participating in the investment process have attended an investment training course as provided in the Investment Policy; and WHEREAS, the City of Cibolo Investment Policy also includes the Cibolo Economic Development Corporation to allow for the prudent investment of the CEDC's funds, as authorized by the Cibolo City Council and the Cibolo Economic Development Corporation Board of Directors; and WHEREAS, the attached Investment Policy and incorporated revisions comply with the Public Funds Investment Act, as amended, and authorize the investment of funds in safe and prudent investments. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Cibolo, Texas has complied with the requirements of the Public Funds Investment Act and the Investment Policy, as amended, attached hereto, is hereby adopted as the Investment Policy of the City, effective December 9th, 2008. SECTION 1. That this Resolution and Investment Policy adopted hereby supercede all prior resolutions and Investment Policies in conflict with the provisions hereof, said conflicting resolutions and policies being hereby repealed to the extent of such conflict, and all other resolutions and policies not in conflict with the provisions of this Resolution shall remain in full force and effect. SECTION 2. That should any word, sentence, paragraph, subdivision, clause, phrase or section of this Resolution, or other resolutions, as amended hereby, be adjudged or held to be void or unconstitutional, the same shall not affect the validity of the remaining portions of said resolution or other resolution, as amended hereby, which shall remain in full force and effect. SECTION 3. This Resolution shall become effective immediately upon its passage. Page 1 of 2 APPROVED AND ADOPTED ON THIS 91h DAY OF DECEMBER, 2008. Cl)A,/VL,4.11 Ty�l CAll J nifer H Vman, Mayor ATTEST: Peggy Cimics, City Secretary Page 2 of 2 CITY OF CIBOLO And CIBOLO ECONOMIC DEVELOPMENT CORPORATION INVESTMENT POLICY INTRODUCTION The purpose of this document is to set forth specific investment policy and strategy guidelines for the City of Cibolo (the "City") and the Cibolo Economic Development Corporation (the "EDC") in order to achieve the goals of safety, liquidity, yield, and public trust for all investment activity. The City Council and Board of Directors of the EDC ("the Board") shall review its investment strategies and policy not less than annually. This Policy serves to satisfy the statutory requirement (specifically the Public Funds Investment Act, Government Code Chapter 2256 (the "PFIA") to define, adopt and review a formal investment strategy and policy. Throughout this Investment Policy, the City and EDC shall be collectively referred to as (the "ENTITY"). INVESTMENT POLICY 1. SCOPE This Investment Policy applies to all financial assets of the ENTITY. The funds are accounted for in the ENTITY'S Annual Financial Report (AFR) and include (but is not limited to): ■ General Fund ■ Special Revenue Funds ■ Debt Service Funds ■ Capital Projects Funds ■ Enterprise Funds ■ Economic Development Funds II. OBJECTIVES The ENTITY shall manage and invest its cash with the objectives (listed in order of priority): Safety, Liquidity, Public Trust, and Yield. The safety of the principal invested always remains the primary objective. All investments 2 shall be designed and managed in a manner responsive to the public trust and consistent with State and Local law. Safety The primary objective of the ENTITY'S investment activity is the preservation of capital in the overall portfolio. Each investment transaction shall be conducted in a manner to avoid capital losses, whether they are from securities defaults or erosion of market value. Liquidity The investment portfolio shall be structured such that the ENTITY is able to meet all obligations in a timely manner. This shall be achieved by matching investment maturities with forecasted cash flow requirements, maintaining adequate levels of highly liquid investments and by investing in securities with active secondary markets. Public Trust In addition to achieving the stated objectives, all participants in the ENTITY'S investment process shall seek to act responsibly as custodians of the public trust. Investment Officers shall avoid any transaction that might impair public confidence in the ENTITY'S ability to govern effectively. Yield The investment portfolio shall be designed with the objective of regularly exceeding the average "rate of return" on three-month U.S. Treasury Bills. The investment program shall seek to augment returns above this threshold consistent with risk limitations identified herein and prudent investment policies. To determine portfolio performance, this Policy established "weighted average yield to maturity" as the standard calculation. Investment Strategies 3 The ENTITY maintains portfolios that utilize six specific investment strategy considerations designed to address the unique characteristics of the fund groups represented in the portfolios: A. It is the policy of the ENTITY to maintain a fund balance equal to a minimum of three months expenditures in the General Fund. Investment strategies for operating fund and commingled pools containing operating funds have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. The secondary objective is to create a portfolio structure that will experience minimal volatility during economic cycles. This may be accomplished by purchasing high quality, short to medium-term securities that will complement each other in a laddered or barbell maturity structure. The dollar weighted average maturity of 270 days or less will be calculated using the stated final maturity date of each security. Investments with operating funds shall have maturities that do not exceed 2 years. Funds shall be managed and invested with the objectives (listed in order of priority): Safety, Liquidity, and Yield. B. Investment strategies for debt service funds shall have as the primary objective the assurance of investment liquidity adequate to cover the debt service obligation on the required payment date. Securities purchased shall not have a stated final maturity date which exceeds the next unfunded debt service payment date. Funds shall be managed and invested with the objectives (listed in order of priority): Safety, Liquidity, and Yield. C. Investment strategies for debt service reserve funds shall have as the primary objective the ability to generate a dependable revenue stream to the appropriate debt service fund from securities with a low degree of volatility. Securities should be of high quality and, except as may be required by the bond ordinance specific to an individual issue, of short to intermediate-term maturities that do not exceed the final debt service payment date or five years, whichever is shorter. Funds shall be managed and invested with the objectives (listed in order of priority): Safety, Liquidity, and Yield. 4 D. Investment strategies for special projects or special purpose fund portfolios will have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. These portfolios should include at least 10% in financial institution deposits, constant dollar investment pools, or money market mutual funds investments to allow for flexibility and unanticipated project outlays. The stated final maturity dates of securities held shall not exceed the estimated project completion date. Funds shall be managed and invested with the objectives (listed in order of priority): Safety, Liquidity, and Yield. E. Investment strategies for enterprise funds shall have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. The secondary objective is to create a portfolio structure that will experience minimal volatility during economic cycles. This may be accomplished by purchasing high quality, short to medium-term securities that will complement each other in a laddered or barbell maturity structure. The dollar weighted average maturity of 270 days or less will be calculated using the stated final maturity date of each security. Investments with enterprise funds shall have maturities that do not exceed 2 years. Funds shall be managed and invested with the objectives (listed in order of priority): Safety, Liquidity, and Yield. F. Economic Development Funds shall maintain a fund balance in an amount to be determined by the Board. Investment strategies for Economic Development Funds will consider that these fund balances are designated for economic development projects and will be scheduled by the Cibolo Economic Development Corporation. In addition to considerations addressed in the balance of this Investment Policy, the maximum weighted average maturity of Economic Development Funds shall not exceed two years. The maximum maturity of an individual investment shall not exceed three years. To ensure adequate liquidity for unanticipated cash needs, a portion of the fund balances shall be invested in financial institution deposits, constant dollar investment pools, or money market mutual funds. Any term-specific investments shall be matched with anticipated cash 5 requirements. Funds shall be managed and invested with the objectives (listed in order of priority): Safety, Liquidity, and Yield. III. RESPONSIBILITY AND CONTROL Delegation of Authority and Training Authority to manage the ENTITY'S investment program is derived from adoption of this Investment Policy. The City Manager and the Finance Director are designated as Investment Officers of the ENTITY. The Investment Officers are authorized to give written and oral instructions to place orders for the purchase of investments. No other person may deposit, withdraw, invest, transfer or otherwise manage ENTITY funds eligible for investment without the express written authority of the City Manager. The Finance Director is responsible for day-to-day investment decisions and activities. The Finance Director shall establish procedures for the operation of the investment program, consistent with this Investment Policy. In order to ensure qualified and capable investment management, each Investment Officer shall attend at least one training session, from an independent training source and containing at least 10 hours of instruction relating to the Officer's responsibility under the PFIA within 12 months after assuming duties. Thereafter, each Investment Officer shall additionally attend at least one training session, from an independent training source, and containing at least 10 hours of instruction relating to the Officer's responsibility under the PFIA not less than once in a two-year period. The approved independent sources of training are: Government Finance Officers Association of Texas, Government Treasurers Organization of Texas, Alamo Area Council of Governments, University of North Texas, and the Texas Municipal League. Internal Controls The Finance Director is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the ENTITY are protected from loss, theft or misuse. The internal control structure shall 6 be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. Accordingly, the Finance Director shall establish a process for annual independent review by an external auditor in conjunction with the annual audit to assure compliance with policies and procedures. The internal controls shall address the following points: A. Control of collusion. B. Separation of transaction authority from accounting and record keeping. 01 C. Custodial safekeeping. D. Avoidance of physical delivery securities. E. Clear delegation of authority to subordinate staff members. F. Written confirmation for telephone (voice) transactions for investments and wire transfers. Prudence The standard of prudence to be applied to the Investment Officer shall be the "prudent person" rule, which states: "Investments shall be made with judgment and care under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation but for investment, considering the probable safety of their capital as well as the probable income to be derived." In determining whether an Investment Officer has exercised prudence with respect to an investment decision, the determination shall be made taking into consideration: governing body. At the end of the fiscal year, the Investment Officers shall include information incorporating the full year's investment portfolio activity and performance. The quarterly investment report shall include a succinct management summary that provides a clear picture of the status of the current investment portfolio and transactions made over the last quarter. This management summary will be prepared in a manner that will allow the ENTITY to ascertain whether investment activities during the reporting period have conformed to the Investment Policy. The report will include the following: A. A listing of individual securities held at the end of the reporting period. B. Unrealized gains or losses resulting from appreciation or depreciation by listing the beginning and ending book and market value of securities for the period. A0101 C. Additions and changes to the market value during the period. D. Average weighted yield to maturity of portfolio on entity investments as compared to applicable benchmarks. E. Listings of investments by maturity date. F. The percentage of the total portfolio that each type of investment represents. G. Statement of compliance of the ENTITY'S investment portfolio with State Law and the Investment Policy and strategies. Effect of Loss of Authorization or Rating The ENTITY is not required to liquidate investments that were authorized investments at the time of purchase but no longer meet one or more requirements of this Policy. An investment that requires a minimum rating does not qualify as an authorized investment if, during the period, the investment does not have the minimum required rating. The ENTITY shall 9 A. 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. B. Whether the investment decision was consistent with the written Investment Policy. The Investment Officer, acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for a specific security's credit risk or market price changes, provided that these deviations are reported immediately to the City Manager and/or the Board and that appropriate action is taken to control adverse developments. Ethics and Conflicts of Interest Investment Officers shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair the ability to make impartial investment decisions and shall disclose to the City Manager any material financial interests in financial institutions that conduct business with the ENTITY. They shall further disclose positions that could be related to the performance of the ENTITY'S portfolio. Investment Officers shall subordinate their personal financial transactions to those of the ENTITY, particularly with regard to timing of purchases and sales. An Investment Officer who has a personal business relationship with an organization seeking to sell an investment to 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 to an individual seeking to sell an investment to the 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 bodies of the ENTITY. Quarterly Reporting The Finance Director shall submit a signed quarterly investment report, crafted in compliance with the PFIA, to the City Manager and each respective 8 take all prudent measures that are consistent with this Investment Policy to liquidate an investment that does not have the minimum rating. Investments Assets of the ENTITY may be invested in the following instruments. 1. Authorized A. Obligations of the United States of America, its agencies and instrumentalities. B. Certificates of deposit and other evidences of deposit at a financial institution that, a) has its main office or a branch office in Texas and is guaranteed or insured by the Federal Deposit Insurance Corporation or its successor, b) is secured by obligations described in Section V. SAFEKEEPING AND CUSTODY and in a manner and amount provided by law for deposits of the ENTITY, or c) is executed through a depository institution that has its main office or a branch office in Texas that participates in the Certificate of Deposit Account Registry Service (CDARS) and meets the requirements of the PF IA. C. Fully collateralized direct repurchase agreements with a defined termination date secured by obligations of the United States or its agencies and instrumentalities pledged with a third party, selected by the Finance Director, other than an agency for the pledger. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in Texas. D. Eligible Investment Pools as defined by and in compliance with the Public Funds Investment Act, that have been authorized by the City Council and Board of Directors, maintain a rating of a least AAA or AAAm, or the equivalent, and whose investment philosophy and strategy qualify as "government security" investment portfolios and seek to maintain a stable net asset value of $1.00 or provide fixed maturity/fixed rate investment. 10 E. SEC registered, no load, government money market mutual funds that comply with the requirements of State law. 2. Not Authorized The ENTITY'S authorized investment options are more restrictive than those allowed by State law. State law specially prohibits investment in the following investment securities: A. Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal. B. Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest. C. Collateralized mortgage obligations that have a stated final maturity date of greater than 10 years. D. Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. 3. Holding Period The ENTITY intends to match the holding periods of investment funds with liquidity needs of the ENTITY. The maximum final stated maturity of any investment shall not exceed five years. 4. Risk and Diversification The ENTITY recognizes that investment risks can result from issuer defaults, market price changes or various technical complications leading to temporary illiquidity. Risk is controlled through portfolio diversification that shall be achieved by the following general guidelines: 11 A. Risk of issuer default is controlled by limiting investments to those instruments allowed by the PFIA, which are described herein. B. Risk of market price changes shall be controlled by avoiding over- concentration of assets in a specific maturity sector, limitation of average maturity of operating funds investments, and avoidance of over-concentration of assets in specific instruments. C. All investment funds shall be placed directly with qualified investment providers. The ENTITY will not deposit or invest funds through third parties or money brokers. IV. SELECTION OF QUALIFYING INSTITUTIONS Depository In compliance with state legislation, a Depository shall be selected through the ENTITY'S banking services procurement process, which shall include a formal request for proposal (RFP). In selecting a depository, the credit worthiness of institutions shall be considered, and the Finance Director shall conduct a review of prospective depository's credit characteristics and financial history. It is the policy of the ENTITY to permit selection of a depository outside municipal boundaries. Securities Broker/Dealers For brokers/dealers of investment securities, the ENTITY may select any dealers reporting to the Market Reports Division of the Federal Reserve Board of New York, also known as the "Primary Government Security Dealers." Other non-primary firms may be utilized if analysis reveals that such firms are adequately financed to conduct public business. All broker/dealers who desire to become qualified for investment transactions must provide an investment provider certificate in compliance with the PFIA. Any broker/dealer must have been authorized by the City Council to execute transactions with the ENTITY prior to any such transaction. 12 V. SAFEKEEPING AND CUSTODY Insurance and Collateral All depository deposits shall be insured or collateralized in compliance with applicable State law. The ENTITY reserves the right, in its sole discretion, to accept or reject any form of insurance or collateralization pledged towards depository deposits. Financial institutions serving as the ENTITY depositories must provide an investment provider certificate in compliance with the PFIA and will be required to sign a depository agreement with the ENTITY. The collateralized deposit portion of the agreement shall define the ENTITY'S rights to the collateral in case of default, bankruptcy, or closing and shall establish a perfected security interest in compliance with federal and State regulations, including: • The agreement must be in writing; • The agreement has to be executed by the depository and the ENTITY contemporaneously with the acquisition of the asset; • The agreement must be approved by the Board of Directors or authorized Committee of the depository and a copy of the meeting minutes must be delivered to the ENTITY; and • The Agreement must be part of the depository's "official record" continuously since its execution. Insurance, Pledged Collateral or Purchased Securities - With the exception of deposits secured with irrevocable letters of credit at 100% of amount, all deposits of the ENTITY'S funds with eligible depositories shall be secured by pledged collateral with a market value equal to or greater than 102% of the deposits, less any amount insured by the FDIC. Repurchase agreements shall be documented by a specific agreement noting the "purchased securities" in each agreement. Collateral pledged and purchased securities shall be held at an independent third party financial institution approved by the ENTITY and reports of said securities reviewed at least monthly to assure the market value equals or exceeds the related ENTITY investment. 13 Evidence of the pledged collateral shall be maintained by the Finance Director or a third party financial institution. Custodial Agreement Collateral pledged to secure deposits of the ENTITY shall be held by a third party financial institution in accordance with a custodial agreement which clearly defines the procedural steps for gaining access to the collateral should the ENTITY determine that the ENTITY'S funds are in jeopardy. The custodial institution, or Custodian, shall be the Federal Reserve Bank, Federal Home Loan Bank, or an institution not affiliated with the firm pledging the collateral and that meets the requirements of State Law. The custodial agreement shall include the signatures of authorized representatives of the ENTITY, the firm pledging the collateral, and the Custodian. A custodial receipt shall be issued to the ENTITY listing the specific investment, rate, maturity, and other pertinent information. Collateral Defined The ENTITY shall accept only the following as collateral: A. FDIC insurance coverage. B. A bond, certificate of indebtedness, debenture or letter of credit of the United States or its agencies and instrumentalities, or other evidence of indebtedness of the United States that is guaranteed as to principal and interest by the United States or its agencies and instrumentalities. C. Obligations, the principal and interest on which, are conditionally guaranteed or insured by the State of Texas. D. A bond of a county, city or other political subdivision of the State of Texas having been rated no less than "A" or its equivalent by a nationally recognized rating agency, with a remaining maturity of ten (10) years or less. E. Surety bonds, one or more bonds issued and executed by one or more solvent surety companies authorized to do business in this state, 14 payable to the municipality and filed with the secretary and the designated officer of the municipality. F. A letter of credit issued to the ENTITY by the Federal Home Loan Bank. Subject to Audit All collateral shall be subject to inspection and audit by the Finance Director or the ENTITY'S independent auditors. Delivery vs. Pam Investment securities shall be purchased using the delivery vs. payment method. That is, funds shall not be wired or paid until verification has been made that the correct security was received by the safekeeping agent. The security shall be held in the name of the ENTITY or held on behalf of the ENTITY. The safekeeping agent's records shall assure the notation of the ENTITY'S ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the ENTITY. VI. INVESTMENT POLICY ADOPTION The ENTITY Investment Policy shall be annually reviewed and adopted by action of the City Council and the Board. 15 GOVERNMENT CODE CHAPTER 2256. PUBLIC FUNDS INVESTMENT SUBCHAPTER A. AUTHORIZED INVESTMENTS FOR GOVERNMENTAL ENTITIES Sec. 2256.001. SHORT TITLE. This chapter may be cited as the Public Funds Investment Act. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. 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 with the State Securities Board, a person who is an officer or principal of the investment management firm. (11) "School district" means a public 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. 1 Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1421, Sec. 1, eff. Sept. 1, 1997; Acts 1999, 76th Leg. , ch. 1454, Sec. 1, eff. Sept . 1, 1999. Sec. 2256.003. AUTHORITY TO INVEST FUNDS; ENTITIES SUBJECT TO THIS CHAPTER. (a) Each governing body of the following AVW 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-1 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 . Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1999, 76th Leg. , ch. 1454, Sec. 2, eff. Sept. 1, 1999. 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 505, Sec. 24, eff. Sept. 1, 1997; Acts 1997, 75th Leg. , ch. 1421, Sec. 2, eff. Sept. 1, 1997; Acts 1999, 76th Leg. , ch. 62, Sec. 8.21, eff. Sept. 1, 1999; Acts 1999, 76th Leg. , ch. 1454, Sec. 3, eff. Sept. 1, 1999. 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 2 maturity date for the portfolio; (D) methods to monitor the market price of investments acquired with public funds; and (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 the 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. Text of subsec. (h) as amended by Acts 1997, 75th Leg. , ch. 685, Sec. 1 (h) 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. Text of subsec. (h) as amended by Acts 1997, 75th Leg. , ch. 1421, Sec. 3 (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. (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 3 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) 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. Subject to a risk assessment and to the legislative audit committee's approval of including a review by the state auditor in the audit plan under Section 321.013, the state auditor may review information provided under this section. If review by the state auditor is approved by the legislative audit committee, the state auditor may, based on its review, require a state agency to also 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. 4 (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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 685, Sec. 1, eff. Sept. 1, 1997; Acts 1997, 75th Leg. , ch. 1421, Sec. 3, eff. Sept. 1, 1997; Acts 1999, 76th Leg. , ch. 1454, Sec. 4, eff. Sept . 1, 1999; Acts 2003, 78th Leg. , ch. 785, Sec. 41, eff. Sept. 1, 2003. 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. 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. (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, 10W 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 180th day after the last day of each regular session of the legislature. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 73, Sec. 1, eff. May 9, 1997; Acts 1997, 75th Leg. , ch. 1421, Sec. 4, eff. Sept. 1, 1997; Acts 1999, 76th Leg. , ch. 1454, Sec. 5, eff. Sept. 1, 1999. 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 Subsections (b) and (e) , 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 00"" local government. (b) An investing entity created under authority of Section 52(b) , Article III, or Section 59, Article XVI, Texas Constitution, 5 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 III, 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1421, Sec. 5, eff. Sept. 1, 1997; Acts 1999, 76th Leg. , ch. 1454, Sec. 6, eff. Sept. 1, 1999; Acts 2001, 77th Leg. , ch. 69, Sec. 4, eff. May 14, 2001. Sec. 2256.009. AUTHORIZED INVESTMENTS: OBLIGATIONS OF, OR GUARANTEED BY GOVERNMENTAL ENTITIES. (a) Except as provided by Subsection (b) , the following are authorized investments 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; (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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1999, 76th Leg. , ch. 1454, Sec. 7, eff. Sept. 1, 1999; Acts 2001, 77th Leg. , ch. 558, Sec. 1, eff. Sept. 1, 2001. Sec. 2256.010. AUTHORIZED INVESTMENTS: CERTIFICATES OF DEPOSIT AND SHARE CERTIFICATES. (a) A certificate of deposit or share certificate is an authorized investment under this subchapter if the certificate is issued by a depository institution that has its main office or a branch office in this state and is : (1) guaranteed or insured by the Federal Deposit 6 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. (b) In addition to the authority to invest funds in certificates of deposit under Subsection (a) , an investment in certificates of deposit made in accordance with the following conditions is an authorized investment under this subchapter : (1) the funds are invested by an investing entity through a depository institution that has its main office or a branch office in this state and that is selected by the investing entity; (2) the depository institution selected by the investing entity under Subdivision (1) arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the investing entity; (3) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States; (4) the depository institution selected by the investing entity under Subdivision (1) acts as custodian for the investing entity with respect to the certificates of deposit issued for the account of the investing entity; and (5) at the same time that the funds are deposited and the certificates of deposit are issued for the account of the investing entity, the depository institution selected by the investing entity under Subdivision (1) receives an amount of deposits from customers of other federally insured depository institutions, wherever located, that is equal to or greater than the amount of the funds invested by the investing entity through the depository institution selected under Subdivision (1) . Amended by Acts 1995, 74th Leg. , ch. 32, Sec. 1, eff. April 28, 1995; Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1421, Sec. 6, eff. Sept. 1, 1997. Amended by: Acts 2005, 79th Leg. , Ch. 128, Sec. 1, eff. September 1, 2005. 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(a) (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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. Sec. 2256.0115. AUTHORIZED INVESTMENTS: SECURITIES 7 LENDING PROGRAM. (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 (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 loan 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. Added by Acts 2003, 78th Leg. , ch. 1227, Sec. 1, eff. Sept. 1, 2003. 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 P-1 or an equivalent rating by at least one nationally recognized credit rating agency. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. Sec. 2256.014. AUTHORIZED INVESTMENTS: MUTUAL FUNDS. 8 (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 80a-1 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. (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) ; (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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1421, Sec. 7, eff. Sept. 1, 1997; Acts 1999, 76th Leg. , ch. 1454, Sec. 8, eff. Sept. 1, 1999. 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 must certify the administrative costs 9 reasonably expected to be paid to third parties in connection with the guaranteed investment contract. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1421, Sec. 8, eff. Sept. 1, 1997; Acts 1999, 76th Leg. , ch. 1454, Sec. 9, 10, eff. Sept. 1, 1999. Sec. 2256.016. AUTHORIZED INVESTMENTS: INVESTMENT POOLS. (a) An entity may invest its funds and funds 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 (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. (d) 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. (e) In this section, "yield" shall be calculated in accordance with regulations governing the registration of open-end 10 management investment companies under the Investment Company Act of 1940, as promulgated from time to time by the federal Securities and Exchange Commission. (f) 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. (g) 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. (h) 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1421, Sec. 9, eff. Sept. 1, 1997. Sec. 2256.017. EXISTING INVESTMENTS. An entity is not required to liquidate investments that were authorized investments at the time of purchase. Added by Acts 1995, 74th Leg. , ch. 76, Sec. 5.46(a) , eff. Sept. 1, 1995; Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. Amended by Acts 1997, 75th Leg. , ch. 1421, Sec. 10, eff. Sept. 1, 1997. Sec. 2256.019. RATING 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 414"* grade by at least one nationally recognized rating service with a weighted average maturity no greater than 90 days. Added by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. Amended by Acts 1997, 75th Leg. , ch. 1421, Sec. 11, eff. Sept. 1, 1997. 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. Added by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. Sec. 2256.0201. AUTHORIZED INVESTMENTS; 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, coal, nuclear fuel, 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 a municipally owned electric or gas utility 11 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, coal, nuclear fuel, and electric energy futures or options or similar contracts on those commodities and related transportation costs as a protection against loss due to price fluctuation. Added by Acts 1999, 76th Leg. , ch. 405, Sec. 48, eff. Sept. 1, 1999. Amended by: Acts 2007, 80th Leg. , R.S. , Ch. 7, Sec. 1, eff. April 13, 2007. Sec. 2256.0205. AUTHORIZED INVESTMENTS; DECOMMISSIONING TRUST. (a) In this section: (1) "Decommissioning trust" means a trust created to provide the Nuclear Regulatory Commission assurance that funds will be available for decommissioning purposes as required under 10 C.F.R. Part 50 or other similar regulation. (2) "Funds" includes any money held in a decommissioning trust regardless of whether the money is considered to be public funds under this subchapter. (b) In addition to other investments authorized under this subchapter , 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 invest funds held in a decommissioning trust in any investment authorized by Subtitle B, Title 9, Property Code. Added by Acts 2005, 79th Leg. , Ch. 121, Sec. 1, eff. September 1, 2005. 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. Added by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. 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 committee's approval of including the review in the audit plan under Section 321.013. Added by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. Amended by Acts 2003, 78th Leg. , ch. 785, Sec. 42, eff. Sept. 1, 2003. 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; (C) ending market value for the period; and (D) 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; 12 (6) state the maturity date of each separately invested asset that has a maturity date; (7) state the account or fund or pooled group fund 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 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. Added by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. Amended by Acts 1997, 75th Leg. , ch. 1421, Sec. 12, eff. Sept. 1, 1997. 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(2)nPanf1entitcorporation created undero act on Chapter ,its 392Local Government Code; or (3) an entity created under Chapter 394, Local Government Code. Added by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. 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. Added by Acts 1997, 75th Leg. , ch. 1421, Sec. 13, eff. Sept. 1, 1997. Sec. 2256.026. STATUTORY COMPLIANCE. All investments made by entities must comply with this subchapter and all federal, state, and local statutes, rules, or regulations. Added by Acts 1997, 75th Leg. , ch. 1421, Sec. 13, eff. Sept. 1, 1997. SUBCHAPTER B. MISCELLANEOUS PROVISIONS Sec. 2256.051. ELECTRONIC FUNDS TRANSFER. Any local government may use electronic means to transfer or invest all funds collected or controlled by the local government. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995. Sec. 2256.053. PAYMENT FOR 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 13 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1423, Sec. 8.67, eff. Sept. 1, 1997. 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1423, Sec. 8.68, eff. Sept. 1, 1997. 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. Amended by Acts 1995, 74th Leg. , ch. 402, Sec. 1, eff. Sept. 1, 1995; Acts 1997, 75th Leg. , ch. 1423, Sec. 8.69, eff. Sept. 1, 1997. 14