Investment Policy

An investment policy describes the parameters for investing government funds and identifies the investment objectives, preferences or tolerance for risk, constraints on the investment portfolio, and how the investment program will be managed and monitored. The document itself serves as a communication tool for the staff, elected officials, the public, rating agencies, bondholders, and any other stakeholders on investment guidelines and priorities. An investment policy enhances the quality of decision making and demonstrates a commitment to the fiduciary care of public funds, making it the most important element in a public funds investment program. 

The investment policy should be reviewed and updated annually and should include statements on the following:

• Scope and investment objectives: Tailor the scope and investment objectives to the type of investment to which the policy applies (e.g., excess operating funds, bond proceeds, pension fund assets).
• Roles, responsibilities, and standards of care: Identify the roles of all persons involved in the investment program by title and responsibility. Standards of care should include language on prudence (i.e., the prudent person rule), due diligence, ethics and conflicts of interest, delegation and authority, and knowledge and qualifications.
• Suitable and authorized investments: Include guidelines on selecting investment types, investment advisors, interest rate risk, maturities, and credit quality, along with any collateralization requirements.  
• Investment diversification: State the government’s approach to investment diversification, identifying the method that will be used to create a mix of assets that will achieve and maintain the government’s investment objectives.
• Safekeeping, custody, and internal controls: Develop guidelines to enhance the separation of duties and reduce the risk of fraud.
• Authorized financial institutions, depositories, and broker/dealers: Establish a process for creating a list of financial institutions, depositories, and broker/dealers that will provide the primary services necessary for executing the investment program. 
• Risk and performance standards: Establish one or more appropriate benchmarks against which the portfolio should be measured and compared.
• Reporting and disclosure standards: Define the frequency of reporting to the governing body and the government’s management team.