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How Does Your Investment Policy Stack Up?

When it comes to investing for your local government, having an investment policy or “rule book” in place is a crucial first step. Like traffic laws keeping us safe, investment policies help provide established guidelines for safety. However, just as traffic laws aren’t a road map to get to where you’re going, investment policies alone don’t accomplish the objective. Each entity’s policy needs to be unique to its size, risk tolerance, time horizon, and many other specifications. In this article, we detail some common investment policy characteristics and provide several tips to help keep your policy up to date.

Statement of Scope 

The statement of scope is the introduction to the policy. Typically, this statement identifies the types of funds that are contemplated in the policy; examples of funds that are often included in a governmental entity’s investment policy are reserve, general, operating, capital projects, and bond proceeds. Alternatively, monies held in retirement or pension funds are likely to have different restrictions/allowable investments and therefore will typically have a separate set of policies. Additional provisions may be considered within the statement of scope, as well. For example, some entities include requirements with respect to specific bond projects. Finally, incorporating state statutes will help lay the groundwork for the remainder of the policy.

Investment Objectives

The investment objectives should be clearly stated in the policy. Key objectives for public funds investing are:

  1. Safety of principal: State statutes provide guidelines for permissible investments; due diligence is crucial before making an investment decision.
  2. Liquidity in the portfolio: prioritizing liquidity can help the local entity meet upcoming obligations and better protect the entity from being forced to sell a position before maturity.
  3. Yield: providing a rate of return for the entity’s funds while still prioritizing objectives of safety and liquidity.
  4. Transparency: allowing the public to easily access the entity’s financial reporting.
  5. Compliance: the ability to show that the entity’s investments align with the investment policy (asset allocation, maturity limits, credit restrictions, etc.).
Standards of Care

Allocations of Authority

No matter the size of your local government, having a list of persons with investment authority and responsibilities will help streamline the investment process. Implementing these internal controls can also help reduce fraud, employee error, and misrepresentation.

Ethics/Conflicts of Interest

Have a set of guidelines in place to prohibit officers/employees from engaging in personal business or advances when investing for the entity. If there is a potential conflict of interest, appropriate documentation of each conflict can be key.


Establishing the method by which the entity will settle transactions should be outlined in the policy. Address Delivery vs. Payment (DVP) and reference how and where securities will be held. Standard policies state that the transfer of securities will be made upon receipt of payment (DVP) and note where the securities will be held. When selecting a custodian, there are a few questions to consider. Is the custodian an independent third party? Do they provide statements frequently (quarterly at a minimum)? Are they registered with the SEC? If the entity utilizes a third party to trade and settle for their account, it can help to mitigate risk. If there are any additional internal controls, they should be discussed here as well. These controls should be designed to add extra protection to the entity’s account and the public’s dollars.

Suitable/Authorized Investments

A list of authorized investments should be stated in the policy. These investments usually mirror allowable public funds investments under state statutes and maybe even more conservative based on the investment goals of the entity.

Investment Requirements

The addition of specific investment requirements can further define the investing process when selecting investment vehicles. Diversification specifications can be made here (i.e., not more than X of the entity’s funds can be invested in X at any given time).


Investment policies should outline the required items for the entity to report. The entity will determine the matters to report upon, but the list should include current holdings, security type or description, all transaction details, and the market value for each holding. If the entity chooses to follow a benchmark for certain funds, the portfolio performance vs. benchmark performance may also be included in reporting.


Whether facing a financial crisis, a global pandemic, or a change of board members, it is critical to review investment policies on a relatively frequent basis. Industry standards recommend a review every one to three years. Having a review process in place allows for updates when state statutes have changed or as the entity grows and goals begin to shift. Peer-to-peer sharing of policies can be a helpful way to share ideas and re-work current policies as well as implement new ones. While having the policy and review in place doesn’t guarantee the entity against loss/fraud/error in any situation, having a “rule book” to follow can be an important tool in helping circumvent the possibility of these occurrences.

An important distinction is that an investment policy for the entity is not an investment plan. This is simply setting the rules for the entity to follow when implementing the investment plan. While seeking to earn a reasonable rate of return is a duty of the fiduciary, the first and foremost priority is to keep the entity’s money safe while maintaining liquidity to meet demands and obligations.

For help establishing, reviewing, or updating an investment policy, please reach out to the California CLASS relationship team.

All comments and discussions presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose.