B.1.6 Investments

B.1.6.1 Investments

Responsible Department: Finance

Date Approved/Amended: December 2, 2010

The Board shall adopt an Investment Policy as required by law.

B.1.6.2 Investments Reports

HCC Investment Policy 2013

HCC Investment Policy 2014

HCC Investment Policy 2015

B.1.6 Investments Policy

1. Purpose

The purpose of this Investment Policy (the“Policy”) is to comply with the Act, which requires that the HCCS annually adopt a written investment policy for the investment of its funds and funds under its control.  This document will set forth specific investment policy and strategy guidelines for HCCS in order to achieve the goals of ensuring safety of principal, maintaining adequate liquidity, maintaining public trust for all investment activities, and achieving the best allowable yield commensurate with the risk criteria of this Policy.

2. Policy

It is the policy of the HCCS that after allowing for the anticipated cash flowrequirementsand giving due consideration to the safety andrisks of investments, allavailable funds shall be invested in conformance with these legal and administrativeguidelines totargetarisk-commensuraterate of return.Effective cash management is recognized as essential to good fiscal management. Anactive cash management and investment policy will be pursued to take advantage ofinvestment interest as a viable and material source of revenue. HCCS’ portfolio shall bedesigned and managed in a mannerintendedto maximize this revenue resource, to beresponsive to the public trust, andtobe in compliance with legal requirements andlimitations. HCCS will investitsfunds in a mannerthatwill provideoptimalsecurity and areasonablerate of return while meeting the daily cash flow demands.Investmentsshall be made with the primary objectives of:

  • Safetyand preservation of principal,
  • Maintenance of sufficientliquidityto meet operating needs,
  • Public trustfrom prudent investment activities, and
  • Risk-commensurateyieldon the portfolio

3. Investment Strategy

HCCS maintains a portfolio that utilizes specific investment strategy considerations designed to address the unique characteristics of the fund groups represented in the portfolio. HCCS maintains a comprehensive and proactive cash management program, which is designed to monitor and control all HCCS funds to ensure maximum utilization and yield a market rate of return. The investment strategy emphasizes low credit risk, diversification, and the management of maturities. In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not exceed the anticipated cash flow requirements of the funds. The composite portfolio will have a dollar weighted average maturity of two (2) years or less. The management of maturities refers to structuring the maturity dates of the direct investments so that, while funds are initially invested for a longer period of time, some investments mature as cash needs require. The allowable investment instruments as defined in Section 7 of this Policy reflect the avoidance of credit risk. Diversification refers to dividing investments among a variety of securities offering independent returns. This strategy uses local government investment pools to achieve diversification.

3.1 The primary investment strategy and objectives of HCCS as specified in this Policy (See Section 2.) are listed below, in their order of importance:

    • Safety and preservation of principal
    • Maintenance of sufficient liquidity to meet operating needs
    • Achieve a market rate of return on the investment portfolio; and
    • Seek at all times to maintain public trust by adhering to the above stated objectives.

3.2 The list of investments authorized by this Policy intentionally excludes some investments allowed by state law. The restrictions limit possible credit risk and provide the maximum measure of safety. Within the investment objectives, the investment strategy is to utilize authorized investments for maximum advantage to HCCS. To increase the interest earnings for funds identified as being available for investment over longer periods of time based upon a cash requirements projection, HCCS will consider the following strategies:

3.2.1 Strategy No. 1. Diversifying HCCS’ investment opportunities through the use of local government investment pools and money market mutual funds as authorized by the Board of Trustees. An investment pool is an entity created to invest public funds jointly on behalf of its participants and whose investment objectives in order of priority match those objectives of HCCS. Funds are usually available from investment pools on a same-day basis, meaning the pools have a high degree of liquidity. Because of the size and expertise of their staff, investment pools are able to prudently invest in a variety of the investment types allowed by state law. In this manner, investment pools achieve diversification. The strategy of HCCS calls for the use of investment pools as a primary source of diversification and supplemental source of liquidity. Funds that may be needed on a short-term basis but that are in excess of the amount maintained at the depository bank are available for deposit in investment pools.

3.2.2 Strategy No. 2. Building a laddered structure of Investment Policy authorized securities with staggered maturities for all or part of the longer term investable funds. The benefits of this ladder approach include the following:

    • It is straight-forward and easily understood
    • It represents a prudent diversification method
    • All investments remain within the approved maturity horizon
    • It will normally allow HCCS to capture a reasonable portion of the yield curve; and
    • It provides predictable cash flow with scheduled maturities and reinvestment opportunities

3.2.3 Strategy No. 3. Pursuant to the Public Funds Investment Act (Texas Government Code 2256.003), HCCS may, at its discretion, contract with an investment management firm registered under the Investment Advisors Act of 1940 (15 U.S.C. Section 80b-1 et seq.) and with the State Securities Board to provide for investment and non-discretionary management of its public funds or other funds under its control.

An appointed Investment Advisor shall act solely in an advisory and administrative capacity, within the guidelines of this Investment Policy. At no time shall the Advisor take possession of securities or funds or otherwise be granted authority to transact business on behalf of HCCS. Any contract awarded by HCCS for investment advisory services may not exceed two years, with an option to extend by mutual consent of both parties.

Duties of the Investment Advisor contracted by HCCS shall abide by the Prudent Expert Rule, whereby investment advice shall, at all times, be given with the judgment and care, under circumstances then prevailing, which persons paid for their special prudence, discretion and intelligence in such matters exercised in the management of their client’s affairs, not for speculation by the client or production of fee income by the advisor or broker, but for investment by the client with emphasis on the probable safety of the capital while considering the probable income to be derived.

Chapter 2263 of the Texas Government Code mandates certain actions by governing boards of state entities involved in the management and investment of state funds and adds disclosure requirements for outside financial advisors and service providers. Ethic and disclosure requirements for outside financial advisors and service providers are in Chapter 2263.01 through 2263.06 of the Texas Government Code.

3.2.4 Strategy No. 4. HCCS will maintain portfolio(s), which utilize four specific investment strategy considerations designed to address the unique characteristics of the fund group(s) represented in the portfolio(s): Investment strategies for operating funds and pooled funds 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 through diversification by security type, maturity date, and issuer. All security types, as authorized by this policy, are considered suitable investments for the operating and pooled funds. 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(s). These funds have predictable payment schedules. Securities purchased shall not have a stated final maturity date which exceeds the debt service payment date, or funds shall be maintained in an investment pool or money market mutual fund to be available for debt service payments. Investment strategies for bond funds and debt service reserve funds shall have as the primary objective the ability to generate a dependable revenue stream to the appropriate debt service fund with low degree of volatility. Managing the Debt Service Reserve Fund’s portfolio maturities to not exceed the call provisions of the bond issue will reduce the investment’s market risk if HCCS’ bonds are called and the reserve fund liquidated. Except as may be required by the bond ordinance specific to an individual issue, securities should be of high quality, with short to medium term maturities. No investment maturity shall exceed the final maturity of the bond issue. Debt Service Funds, including reserves and sinking funds, to the extent not required by law or existing contract to be kept segregated and managed separately. Investment strategies for special projects or capital projects funds will have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. Market conditions and arbitrage regulations will influence the investment of capital project funds. When market conditions allow, achieving a positive spread to applicable arbitrage yield is the desired objective; although at no time shall the anticipated expenditure schedule be exceeded in an attempt to increase yield.

3.2.5 Strategy No. 5 - Hold until Maturity. The strategy of HCCS is to maintain sufficient liquidity in its portfolio so that it does not need to sell a security prior to maturity. Should it become necessary to sell a security prior to maturity, where the sale proceeds are less than the current book value, the Investment Officer may authorize the sale of those securities.

4. Scope

The Investment Policy shall govern the investment of all financial assets considered to be part of HCCS entity and includes the following funds or fund types: Operating, Auxiliary, Unexpended, and Plant Replacement Funds, Endowment and Loan Funds, Debt Service Funds, and any other funds which have been contractually delegated to HCCS for management purposes. HCCS may add or delete funds as may be required by law, or for proper accounting procedures. This policy does not include funds governed by approved trust agreements, or assets administered for the benefit of HCCS by outside agencies under retirement or deferred compensation programs. Additionally, bond funds (including debt service and reserve funds) are governed by bond ordinances and are subject to the provisions of the Internal Revenue Code and applicable federal regulations governing the investment of bond proceeds.

5. Investment Objectives

 HCCS shall manage and invest its cash with four primary objectives, listed in order of priority: safety, liquidity, yield, and public trust. The safety of the principal invested always remains the primary objective. All investments shall be designed and managed in a manner responsive to public trust and consistent with all applicable Texas statutes, this Policy and any other approved, written administrative procedures.

HCCS shall maintain a comprehensive cash management program with includes collection of accounts receivable, vendor payments in accordance with invoice terms, and prudent investment of available cash. Cash management is defined as the process of managing monies in order to insure maximum cash availability and maximum yield on short-term investment of pooled idle cash.

The four objectives of HCCS’ investment activities shall be as follows (in the order of priority):

5.1 Safety of Principal. Safety of principal invested is the foremost objective in the investment decisions of HCCS. Each investment transaction shall seek to ensure the preservation of capital in the overall portfolio. The risk of loss shall be controlled by investing only in authorized securities as defined in this Policy, by qualifying the financial institutions with whom HCCS will transact, and by portfolio diversification. Safety is defined as the undiminished return of the principal on HCCS’ investments.

5.2 Liquidity. HCCS’ investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands. Because all possible cash demands cannot be anticipated, the portfolio will also be placed in money market mutual funds or local government investment pools which offer same day liquidity for short-term funds.

5.3 Market Rate-of-Return (Yield). HCCS’ investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objective described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed.

5.4 Public Trust. All participants in HCCS’ investment program shall seek to act responsibly as custodians of the public trust. Investment officials shall avoid any transaction which might involve a conflict of interest or otherwise impair public confidence in HCCS’ ability to govern effectively. All officials of HCCS having either a direct or indirect role in the process of investing idle funds shall act responsibly as custodians of the public trust.

6. Investment Responsibility and Control

The authority for investing funds rests with the Board of Trustees. As provided in this policy, the daily operation and management of HCCS’ investments are the responsibility of the following persons. These individuals must be qualified and capable in making investment decisions.

6.1 Delegation of HCCS. The Board of Trustees delegates the authority to invest HCCS funds to the Chancellor or designee. Therefore, the Chancellor or designee is the Investment Officer for Houston Community College System and is authorized to deposit, withdraw, invest, transfer or manage in any other manner the funds of HCCS. In the management of the investment program, the Chancellor or designee shall establish written procedures for the operation of the investment program consistent with this Policy. Such procedures shall include explicit delegation of HCCS to persons responsible for investment transactions. All persons involved in investment activities will be referred to in this Policy as “Investment Officials.” No persons may engage in an investment transaction except as provided under the terms of this Policy and the procedures established by the Chancellor or designee. The Chancellor or designee shall be responsible for all transactions undertaken, and shall establish a system of controls to regulate the activities of subordinate Investment Officials. The system of controls shall be designed to provide reasonable assurance that ensures the assets of HCCS are protected from loss, theft or misuse. The concept of reasonable assurance recognizes that:

  • the cost of a control should not exceed the benefits likely to be derived; and
  • the valuation of costs and benefits requires estimates and judgments by management

The Chancellor or designee shall be designated as the primary investment officer for HCCS and shall be responsible for investment decisions and activities under the direction of the Board of Trustees. The Chancellor or designee may delegate any phase of the investment program to the Executive Director, Business Affairs. Both the Chancellor or designee and the Executive Director, Business Affairs are responsible for daily investment decisions and activities, however, ultimate responsibility for investment decisions will rest with the Chancellor or designee. Commitment of financial and staffing resources in order to maximize total return through active portfolio management shall be the responsibility of the Board of Trustees.

6.2 Prudence. The standard of prudence to be applied by the Investment Officer shall be the "prudent investor" 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 the Investment Officer has exercised prudence with respect to an investment decision, the determination shall be made taking into consideration the following:

6.2.1 The investment of all funds over which the Investment Officer had responsibility rather than a consideration as to the prudence of a single investment; and

6.2.2 whether the investment decision was consistent with the written investment Policy and procedures of HCCS

6.3 Due Diligence. The Investment Officer acting in accordance with written policies and procedures and exercising due diligence, shall not be held personally responsible for a specific security’s credit risk or market price changes. All Investment Officials involved in investment transactions will be bonded.

6.4 Ethical Standards and Conflicts of Interest. All HCCS Investment Officials having a direct or indirect role in the investment of HCCS funds shall act as custodians of the public trust avoiding any transaction which might involve a conflict of interest, the appearance of a conflict of interest, or any activity which might otherwise discourage public confidence. Officers and employees involved in the investment process 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.

An Investment Officer who has a personal business relationship with the depository bank or with any entity seeking to sell an investment to HCCS shall file a statement disclosing that personal business interest. Investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Investment Officials shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of HCCS.

An Investment Officer who is related within the second degree of affinity or consanguinity to an individual seeking to sell an investment to HCCS shall file a statement disclosing that relationship. A statement required under this subsection must be filed with the Texas Ethics Commission and the Board of Trustees.

6.5 Training. Each member of the Board of Trustees shall attend at least one training session related to the person’s responsibilities within six months after taking office or assuming duties. The training will include education in investment controls, security risks, strategy risks, market risk, diversification of investment portfolio, and compliance with the Public Funds Investment Act.

The investment officers shall attend at least one training session containing at least 10 hours of instruction relating to the officer's responsibility under the Public Funds Investment Act within twelve (12) months after assuming duties, and attend an investment training session not less than once every two years, receiving an additional ten (10) hours of training. The investment training session shall be provided by an independent source approved by the Board of Trustees or a designated investment committee advising the investment officer. Such training from an independent source shall include the Texas Higher Education Coordinating Board, the Government Finance Officers Association of Texas, the Government Treasurers Organization of Texas, the Texas Municipal League, the University of North Texas Center Public Management, or any other professional organization, institute of higher learning, or any other sponsor other than a business organization with whom the Board of Trustees may engage in an investment transaction.

6.6 Internal Control. The Investment Officer shall establish a system of written internal controls, which shall be reviewed annually by independent auditors. The controls shall be designed to prevent loss of public funds due to fraud, error, misrepresentation, unanticipated market changes, or imprudent actions. The internal controls are to be reviewed annually in conjunction with an external independent audit. This review will provide assurance of compliance with policies and procedures as specified by this Policy. HCCS, in conjunction with its annual financial audit, shall perform a compliance audit of management controls and adherence to HCCS’ established investment policy. The internal controls shall address the following points.

  • Control of collusion
  • Separation of transactions authority from accounting and record keeping
  • Custodial safekeeping
  • Avoidance of physical delivery securities
  • Clear delegation of authority to subordinate staff members
  • Written confirmation for telephone (voice) transactions for investment and wire transfers
  • Development of wire transfer agreement with the depository bank or third party custodian

7. Authorized Investments

7. AUTHORIZED INVESTMENTS. As stated previously, safety of principal is the primary objective in investing HCCS funds and can be accomplished by limiting two types of risk-credit risk and interest rate risk. Credit risk is the risk associated with the failure of a security issuer or backer. Interest rate risk is the risk that the value of a portfolio will decline due to an increase in the general level of interest rates. In order to provide for safety of principal as HCCS’ primary objective, only certain investments are authorized as acceptable investments for HCCS. HCCS is not required to liquidate investments that were authorized investments at the time of purchase. The following list of authorized investments for HCCS intentionally excludes some investments authorized by law. These restrictions are placed in order to limit possible risk and provide the maximum measure of safety to HCCS funds.

7.1 Authorized and Acceptable Investments. The authorized list of investment instruments are as follows:

7.1.1 Obligations of the United States or its agencies and instrumentalities.

7.1.2 Direct obligations of the State of Texas, or its agencies and instrumentalities.

7.1.3 Other obligations, the principal of and interest on which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities.

7.1.4 Collateralized Certificates of Deposit. A certificate of deposit issued by a depository institution that has its main office or a branch office in this state, and is:

  • guaranteed or insured by the Federal Deposit Insurance Corporation or its successor or the National Credit Union Share Insurance Fund or its successor
  • secured by obligations that are described by Section 2256.009(a) of the Public Funds Investment Act, including mortgage backed securities directly issued by a federal agency or instrumentality, but excluding those mortgage backed securities of the nature described in Section 2256.009(b) of the Act; or
  • secured in any other manner and amount provided by law for deposits of HCCS

7.1.5 Eligible Local Government Investment Pools. Public funds investment pools which invest in instruments and follow practices allowed by the current law as defined in Section 2256.016 of the Texas Government Code, provided that:

  • the investment pool has been authorized by the Board of Trustees
  • the investment pool has an advisory board as specified in the Public Funds Investment Act
  • the pool shall have furnished the Investment Officer an offering circular containing the information required by Section 2256.016(b) of the Texas Government Code
  • the pool shall furnish the Investment Officer investment transaction confirmations with respect to all investments made with it
  • the pool shall furnish to the Investment Officer monthly reports containing the information required under Section 2256.016(c) of the Texas Government Code
  • the pool is continuously rated no lower than “AAA” or “AAA-m” or an equivalent rating by at least one nationally recognized rating service
  • the pool marks its portfolio to market daily
  • the pool’s investment objectives shall be to maintain a stable net asset value of one dollar ($1.00); and
  • the pool’s investment philosophy and strategy are consistent with this Policy

7.1.6 Repurchase Agreements, Reverse Repurchase Agreements, Bankers’ Acceptances. Fully collateralized Repurchase Agreements. The agreement must have a defined termination date and must be secured by obligations of the United States or its agencies and instrumentalities. The agreement must be pledged to HCCS, held in the name of HCCS, and deposited at the time the investment is made with HCCS’ custodial (safekeeping) agent, and is placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the state of Texas. No repurchase agreement shall be entered into unless a Master Repurchase Agreement has been executed between HCCS and its trading partner. All repurchase agreement transactions will be on a deliver vs. payment basis. Securities received for repurchase agreements must have a market value greater than or equal to 102 percent at time funds are disbursed.

7.1.7 Bankers’ Acceptances. These investments are authorized, under the following condition:

  • has a stated maturity of 270 days or fewer from the date of its issuance
  • will be, in accordance with its terms, liquidated in full at maturity
  • is eligible for collateral from borrowing from a Federal Reserve Bank; and
  • 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, of a bank holding company of which the bank is the largest subsidiary, are rated not less the A-1 or P-1 or a equivalent rating by at least one nationally recognized credit rating agency

7.1.8 Regulated No-Load Money Market Mutual Funds. These investments are authorized, under the following conditions:

  • the money market mutual fund is registered with and regulated by the Securities and Exchange Commission
  • the fund provides HCCS with a prospectus and other information required by the Securities Exchange Act of 1934 or the Investment Company Act of 1940
  • the fund has a dollar-weighted average portfolio maturity of ninety (90) days or less
  • the investment objectives include the maintenance of a stable net asset value of one dollar ($1.00) per share; and
  • the fund is continuously rated no lower than "AAA" or an equivalent rating by at least one nationally recognized rating service
  • HCCS may not invest funds under its control in an amount that exceeds 10% of the total assets of any individual money market mutual fund

7.1.9 Regulated No-load Mutual Fund is an authorized investment if the mutual fund:

  • is registered with the Securities and Exchange Commission
  • has an average weighted maturity of less than two years
  • is invested exclusively in obligations approved by this Policy
  • is continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent
  • complies with the information and reporting requirements for investment pools as prescribed in the Public Funds Investment Act
  • HCCS may not invest funds under its control in an amount that exceeds 15% of the total monthly average fund balance, excluding bond proceeds, reserves and debt service funds

7.1.10 Commercial Paper with a stated maturity of 270 days or less from the date of issuance that either: is rated not less than A-1, P-1, or the equivalent by at least two nationally recognized credit rating agencies; or is rated at least A-1, P-1, or the equivalent by at least 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 thereof.

7.1.11 Obligations of States, Agencies, Counties, Cities, and other political subdivisions of any State having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than “A” or its equivalent.

7.1.12 Securities Lending Program in accordance with Chapter 2256.0115 of the Public Funds Investment Act.

7.2 Investment Instruments NOT Authorized. State law specifically prohibits investment in the following securities:

7.2.1 Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pay no principal.

7.2.2 Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest.

7.2.3 Collateralized mortgage obligations that have a stated final maturity date of greater than ten years.

7.2.4 Collateralized mortgage obligations, the interest rate of which is determined by an index that adjusts opposite to the changes in a market index.

8. Effect of Loss of Required Rating

The Investment Officer will take all prudent measures that are consistent with this Investment Policy to liquidate an investment that is downgraded to less than the required minimum rating.

9. Diversification

Diversification of investment instruments shall be utilized to avoid incurring unreasonable risks resulting from over-concentration of investments in a specific maturity, a specific issue, or a specific class of securities. With the exception of U.S. Government securities, as authorized in this Policy, and authorized local government investment pools, no more than fifty percent (50%) of the total investment portfolio will be invested in any one security type or with a single financial institution. Diversification of the portfolio considers diversification by maturity dates and diversification by investment instrument.

9.1 Diversification by Maturities. The longer the maturity of investments, the greater their price volatility. Therefore, it is HCCS’ policy to concentrate its investment portfolio in shorter-term securities in order to limit principal risks caused by change in interest rates. HCCS will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, HCCS will not directly invest in securities maturing more than ten (10) years from the date of purchase. However, the above described obligations, certificates, or agreements may be collateralized using longer date instruments. HCCS shall diversify the use of investment instruments to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions or maturities. Maturity scheduling shall be managed by the Investment Officer so that maturities of investments shall be timed to coincide with projected cash flow needs.

The entire HCCS portfolio, including funds at HCCS’ depository bank, shall comprise one pooled fund group, and the maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio is two (2) years or less. Investment maturities for debt service interest and sinking funds and/or other types of reserve funds, whose use is longer-term, may not exceed ten (10) years.

9.2 Diversification by Investment Instrument. Diversification by investment instrument shall not exceed the following guidelines for each type of instrument:

Portfolio Percentage of Portfolio (Maximum)
U.S. Treasury Obligations 100%
U.S. Government Agency Securities and Instrumentalities of Government-Sponsored Corporations 80%
Authorized Local Government Investment Pools 100%
Fully Collateralized Certificates of Deposit 100%
Fully Collateralized Repurchase Agreements 10%
SEC-Regulated No-Load Money Market Mutual Funds 50%
SEC-Regulated No-Load Mutual Funds 50%
Commercial Paper 20%
Obligations of States, Agencies, Counties, Cities 20%

10. Authorized Financial Dealers and Institutions

Financial institutions (federally insured banks) with and through whom HCCS invests shall be state or national banks, which have main offices or a branch office in this state. No public deposit shall be made except in a qualified public depository as established by state laws. Broker/dealers authorized to provide investment services to HCCS may include only those authorized by the Board of Trustees. All banking services will be governed by a depository contract awarded by the Board of Trustees. In addition, the Chancellor or designee shall maintain a list of authorized security brokers/dealers, and investment pools that are authorized by the Board of Trustees.

10.1 Financial Institutions. All financial institutions and brokers/dealers with whom HCCS does business must supply the following as appropriate: (1) audited financial statements; (2) proof of National Association of Securities Dealers (NASD) certification; (3) proof of state registration; (4) completed broker/dealer questionnaire; (5) certification of having read HCCS’ investment policy signed by a qualified representative of the organization, acknowledging that the organization has implemented reasonable procedures and controls in an effort to preclude imprudent investment activities arising out of investment transactions conducted between HCCS and the organization.

10.2 Annual Review of Bidders Financial Conditions. An annual review of the financial condition and registration of qualified bidders will be conducted by the Chancellor or designee. The review may include, but is not limited to, review of rating agency reports, review of call reports, and analyses of management, profitability, capitalization, and asset quality. Financial institutions and brokers/dealers desiring to conduct business with HCCS shall be required to provide any financial data requested by the Investment Officer. Upon completion of the annual review by the Chancellor or designee, the financial institutions and brokers/dealers desiring to conduct business with HCCS shall be approved by the Board of Trustees.

Selection Criteria for federally insured financial institutions shall include the following: (1) the financial institution must be insured by the FDIC; (2) the financial institution must be incorporated under the laws of the State of Texas or of the United States of America; and (3) the financial institution must be located within the corporate boundaries of HCCS. Depositories located outside HCCS limits, but within Harris County may be eligible to bid on investments, provided the financial institution maintains a place of business within the State of Texas and offers within the State the services required by the depository services contract; and the Board of Trustees, has adopted a written policy expressly permitting the consideration of applications received by HCCS from a financial institution that is not doing business within HCCS, after taking into consideration what is in the best interest of HCCS in establishing a depository.

Monitoring Investments. The Investment Officer of HCCS is responsible for monitoring the investments made by a financial institution and/or broker/dealer to determine that they are in compliance with the provisions of the Investment Policy.

11. Delivery versus Payment

 It is the policy of HCCS that all security transactions entered into with HCCS shall be conducted on a “DELIVERY VERSUS PAYMENT” (DVP) basis through the Federal Reserve System, with the exception of investment pools and mutual funds. By doing this, HCCS funds are not released until HCCS has received, through the Federal Reserve wire, the securities purchased. HCCS shall authorize the release of funds only after receiving notification from the safekeeping bank that a purchased security has been received in the safekeeping account of HCCS. The notification may be oral, but shall be confirmed in writing.

12. Safekeeping and Collateralization

12.1 Safekeeping. All securities owned by HCCS shall be held by its safekeeping agent, except the collateral for bank deposits. The collateral for bank deposits will be held in a Federal Reserve Bank account in HCCS’ name or a third-party bank, at HCCS’ discretion. Original safekeeping receipts shall be obtained and held by HCCS. HCCS shall contract with a bank or banks for the safekeeping of securities either owned by HCCS as part of its investment portfolio or held as collateral to secure time deposits.

12.2 Collateralization. Consistent with the requirements of the Public Funds Collateral Act, it is the policy of HCCS to require full collateralization of all HCCS funds on deposit with a depository bank. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 107% of market value of principal and accrued interest on the deposits or investments reduced to the extent that the deposits are insured by the Federal Deposit Insurance Corporation (FDIC) unless otherwise noted in this section. Securities pledged as collateral shall be held in HCCS’ name in a segregated account at the Federal Reserve Bank or by an independent third party with whom HCCS has a current custodial agreement. Securities pledged as collateral will consist of only U.S. Treasuries and/or Government National Mortgage Association (GNMA). The agreement is to specify the acceptable investment securities as collateral, including provisions relating to possession of the collateral, the substitution or release of investment securities, ownership of securities, and the method of valuation of securities. The safekeeping agreement must clearly state that the safekeeping bank is instructed to release purchased and collateral securities to HCCS in the event HCCS has determined that the depository bank has failed to pay on any matured investments in certificates of deposit, or has determined that the funds of HCCS are in jeopardy for whatever reason, including involuntary closure or change of ownership. A clearly marked evidence of ownership, e.g., safekeeping receipt, must be supplied to HCCS and retained by HCCS. Any collateral with maturity over five (5) years must be approved by the Investment Officer before the transaction is initiated. Release of collateral or substitution of securities must be approved in writing by the Investment Officer. The total market value of the eligible security must be reported at least once each month to the Board.

12.2.1 HCCS may accept the following securities as collateral for bank deposits (V.T.C.A., Government Code, Section 2256.001, et. seq., formerly Article 842a-2, Section 2, V.T.C.S., as amended)

    • FDIC coverage
    • U.S. Government securities; including bonds, certificates of indebtedness, or Treasury Notes of the United States, or other evidence of indebtedness of the United States that is guaranteed as to principal and interest by the United States
    • State of Texas bonds; including obligations, the principal and interest on which, are unconditionally guaranteed or insured by the State of Texas
    • Bonds issued by other Texas governmental entities (City, County, school district, or special districts) with a remaining maturity of twenty (20) years or less. Bonds must be (and must remain) investment quality: that is, with a rating of at least "A" or its equivalent; or
    • A surety bond that meets the requirements of the Public Funds Investment Act.
    • Other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of the State of Texas or the United States or their respective agencies and instrumentalities

12.2.2 For certificates of deposit and other evidences of deposit, collateral shall be at 102% of market or par, whichever is lower. The market value of collateral will always equal or exceed the principal plus accrued interest of deposits at financial institutions.

12.2.3 Financial institutions with whom HCCS invests or maintains other deposits, shall provide monthly, and as requested by the Investment Officer, a listing of the collateral pledged to HCCS, marked to current market prices. The listing shall include total pledged securities itemized by name, type, description, par value, current market value, maturity date, and Moody's or Standard & Poor's rating, if applicable. HCCS and the financial institution shall jointly assume the responsibility for ensuring that the collateral is sufficient.

12.2.4 Collateralized Deposits. Consistent with the requirements of State law, HCCS requires all bank deposits to be federally insured or collateralized with eligible securities. Financial institutions serving as HCCS depositories will be required to sign a "Depository Agreement" with HCCS and HCCS’ safekeeping agent. The collateralized deposit portion of the Agreement shall define HCCS’ rights to the collateral in the event 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 HCCS contemporaneously with the acquisition of the asset
  • the Agreement must be approved by the Board of Directors of the Loan Committee of the Depository and a copy of the meeting minutes must be delivered to HCCS; and
  • the Agreement must be part of the Depository's "official record" continuously since its execution

12.2.5 Competitive Pricing. In making investment purchases, the Investment Officer shall compare yields on potential investments to yields on US Treasury Bills and Notes, money market accounts at HCCS’ depository bank, and local government pools. Three competitive bids will be obtained for all purchases of U.S. Government Agency Securities and Instrumentalities of Government-Sponsored Corporations, Fully Collateralized Repurchase Agreements, Commercial Paper and Obligations of States, Agencies, Counties, Cities.

HCC recognizes that a competitive bid process is not always necessary or is not always in the best interest of HCC. On these occasions, the Investment Officers are authorized to purchase a security without seeking a competitive bid. The following are three occasions that are authorized:

    1. Market conditions are changing rapidly
    2. The security is a “new issues” that is still in the primary market
    3. A specific type of security, maturity date, or rate or return is sought that may not be immediately available

13. Performance

HCCS’ investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio shall be designed with the objective to obtain a market rate of return on investments commensurate with investment risk constraints and cash flow requirements of HCCS.

14. Reporting

The Chancellor or designee shall submit a signed quarterly investment report that summarizes the investment strategies employed in the most recent quarter, and describe the portfolio in terms of investment securities, maturities, risk characteristics, and shall explain the total investment return for the quarter.

14.1 Annual Report. The reports prepared by the Chancellor or designee shall be formally reviewed at least annually by an independent auditor and the result of the review shall be reported to the Board of Trustees by that auditor.

14.2 Methods. 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 past quarter. This management summary will be prepared in a manner, which will allow HCCS to ascertain whether investment activities during the reporting period have conformed to the investment policy. The report will be prepared in compliance with generally accepted accounting principles. The report will be provided to the Board of Trustees. The report will include the following:

14.2.1 A listing of individual securities held at the end of the reporting period. This list will include the name of the fund or pooled group fund for which each individual investment was acquired

14.2.2. Unrealized gains or losses resulting from appreciation or depreciation by listing the beginning and ending book and market value of securities for the period. Market values shall be obtained from financial institutions or portfolio reporting services independent from the broker/dealer from which the security was purchased

14.3.3 Additions and changes to the market value during the period

14.3.4 Fully accrued interest for the reporting period

14.3.5 Average weighted yield to maturity of portfolio on entity investments as compared to applicable benchmarks

14.3.6 Listing of investments by maturity date

14.3.7 The percentage of the total portfolio which each type of investment represents; and

14.3.8 Statement of compliance of HCCS’ investment portfolio with State Law and the investment strategy and policy approved by the Board of Trustees

15. Investment Policy Adoption and Amendment

HCCS’ Investment Policy shall be adopted by resolution of the Board of Trustees only. It is HCCS’ intent to comply with state laws and regulations. HCCS’ written policies and procedures for investments are subject to review not less than annually to stay current with changing laws, regulations and needs of HCCS. The Board of Trustees must adopt a written instrument that it has reviewed the Investment Policy and investment strategies and the written resolution so adopted shall record any changes made to the Investment Policy or strategies.

Office of Responsibility: Finance and Accounting