Investments
WHEREAS Article IV, Section 7 of the Corporate Bylaws empowers the Board of Directors (“Board” or “Directors”) of the Recreation Centers of Sun City, Inc. (“RCSC” or “Corporation”) to adopt policies not in conflict with the Restated Articles of Incorporation (“Articles”) or the Corporate Bylaws (“Bylaws”).
WHEREAS to minimize inconsistencies, misunderstandings and misinterpretations inherent in verbal instructions, rules and regulations, the Board of Directors has established Board Policies (“BP” or “Policies”) in written form. Such Policies shall be titled, numbered and indexed for easy reference and use.
WHEREAS the Restated Articles of Incorporation (“Articles”) and the Corporate Bylaws (“Bylaws”) shall take precedence over Board Policies and that the following Board Policy regarding Investments shall provide instruction, direction and guidelines regarding such and shall remain in effect until such time it is amended or removed.
WHEREAS the Corporation will consolidate cash separately in restricted funds and unrestricted funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping and administration.
NOW, THEREFORE BE IT RESOLVED the Corporation has an unrestricted cash reserve fund, a restricted preservation and improvement fund, and a restricted capital reserve fund which shall be invested as follows:
BE IT FURTHER RESOLVED that the Corporation may have additional unrestricted operating funds that shall be invested as follows:
General Objectives
The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield:
1. Safety
Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall investment portfolio. The objective will be to mitigate credit risk and interest rate risk.
a. Credit Risk
RCSC will minimize credit risk, which is the risk of loss due to the failure of the security issuer or backer, by:
i. Limiting investments to the types of securities listed in this Investment Policy; and
ii. Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized.
b. Interest Rate Risk
RCSC will minimize interest rate risk, which is the risk that the market value of securities in the investment portfolio will fall due to changes in market interest rates, by:
i. Structuring the investment portfolio so that securities mature or are available to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to the target duration strategy; and
ii. Investing operating funds primarily in shorter-term securities, money market mutual funds, or similar investment pools and limiting the average maturity of the investment portfolio in accordance with this policy.
2. Liquidity
The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the investment portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the investment portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Alternatively, a portion of the investment portfolio may be placed in money market mutual funds or local government investment pools which offer same day liquidity for short-term funds.
3. Yield
The 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 objectives 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. Securities shall generally be held until maturity with the following exceptions:
a. A security with declining credit may be sold early to minimize loss of principal.
b. Liquidity needs of the investment portfolio require that the security be sold.
Standards of Care
1. Delegation of Authority
Authority to manage the investment portfolio is granted to RCSC’s Investment Commission made up of the Board of Directors of the Corporation. The President of the Corporation shall serve as Chair of the Investment Commission each year. The President, in January of each year, shall recommend to the Board three (3) fellow Directors to serve with him/her on said Commission for that calendar year. The Board of Directors shall approve the Directors who will serve with the President on the Investment Commission by majority vote.
Responsibility for the operation of the investment portfolio is hereby delegated to the Controller, who shall act in accordance with established written procedures and internal controls for the operation of the investment program consistent with this Investment Policy. The Controller shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials.
2. Prudence
The standard of prudence to be used by the Investment Commission shall be the “prudent person” standard and the standard of care set forth in Arizona Revised Statutes for directors and officers which shall be applied in the context of managing the overall investment portfolio. The Investment Commission, acting in accordance with Arizona Revised Statutes, written procedures, this Investment Policy and exercising due diligence, shall be relieved of personal responsibility for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and the liquidity and the sale of securities are carried out in accordance with the terms of this Investment Policy.
The “prudent person” standard states that, “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.”
Arizona Revised Statues states that, “A director’s duties, including duties as a member of a committee, shall be discharged: (1) in good faith, (2) with the care an ordinary prudent person in a like position would exercise under similar circumstances, and (3) in a manner the director reasonably believes to be in the best interest of the corporation.”
3. Ethics and Conflicts of Interest
Officers and employees involved in the investment portfolio shall refrain from personal business activity that could conflict with the proper execution and management of the investment portfolio, or that could impair their ability to make impartial decisions. Officers and employees 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. Officers and employees shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of RCSC.
Authorized Financial Institutions, Depositories, and Broker/Dealers
1. Authorized Financial Institutions, Depositories, and Broker/Dealers
A list will be maintained of financial institutions and depositories authorized to provide investment services. In addition, a list will be maintained of approved security broker/dealers selected by creditworthiness (e.g., a minimum capital requirement of $10,000,000 and at least five years of operation). These may include “primary” dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule).
a. All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate:
b. Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines;
c. Proof of National Association of Securities Dealers (NASD) certification (not applicable to Certificate of Deposit counterparties);
d. Proof of state registration; and
e. Certification of having read and understood and agreeing to comply with RCSC’s investment policy.
Safekeeping and Custody
1. Internal Controls
The Controller shall establish a system of internal controls, which shall be documented in writing. The internal controls shall be reviewed by the Investment Commission and with an independent auditor. The controls shall be designed to prevent the loss of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by Officers and employees of RCSC.
Suitable and Authorized Investments
1. Investment Types
a. U.S. Treasury obligations which carry the full faith and credit guarantee of the United States government and are considered to be the most secure instruments available.
b. U.S. government agency and instrumentality obligations that have a liquid market with a readily determinable market value.
c. Certificates of deposit and other evidences of deposit at financial institutions.
d. Bonds, debentures and notes that are issued by corporations organized and doing business in the United States and that are rated “A” or better by Moody’s Investor Service, Standard and Poor’s and/or Fitch rating service or their successors. All bonds must have at least two of these ratings.
e. Commercial paper of prime quality that is rated “A1” and/or better by Standard and Poor’s, and/or F1 by Fitch rating service or their successors. All commercial paper must have at least two of these ratings. All commercial paper must be issued by corporations organized and doing business in the United States.
f. Investment-grade obligations of state, provincial and local governments and public authorities.
g. Money market mutual funds regulated by the Securities and Exchange Commission and whose portfolios consist only of dollar-denominated securities.
Investment Parameters
1. Diversification
It is the policy of RCSC to diversify its investment portfolio. To eliminate risk of loss resulting from the over-concentration of assets in a specific maturity, issuer, or class of securities, all cash and cash equivalent assets in all RCSC funds shall be diversified by maturity, issuer, and class of security. Diversification strategies shall be determined and revised periodically by the Investment Commission for all funds.
In establishing specific diversification strategies, the following general policies and constraints shall apply:
a. Portfolio maturities shall be staggered to avoid undue concentration of assets in a specific maturity sector.
b. Maturities selected shall provide for stability of income and reasonable liquidity. For cash management funds: a. Positions in securities having potential default risk (e.g., commercial paper) shall be limited in size so that in case of default, the portfolio’s annual investment income will exceed a loss on a single issuer’s securities.
b. Risks of market price volatility shall be controlled through maturity diversification such that aggregate price losses on instruments with maturities exceeding one year shall not be greater than coupon interest and investment income received from the balance of the portfolio.
The following diversification limitations shall be imposed on the portfolio:
a. Maturity: No more than 50% percent of the portfolio may be invested beyond 12 months, and the weighted average maturity of the portfolio shall never exceed 2.5 years.
b. Default risk: No more than 5 percent of the overall portfolio may be invested in the securities of a single issuer, except for securities of the U.S. Treasury.
c. Liquidity risk: At least 25 percent of the portfolio shall be invested in overnight instruments or in marketable securities which can be sold to raise cash in one day’s notice.
2. Maximum Maturities
To the extent possible, RCSC shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, RCSC will not directly invest in securities maturing more than five (5) years from the date of purchase. RCSC shall adopt weighted average maturity limitations (which often range from 90 days to 3 years), consistent with the investment objectives.
Reserve funds and other funds with longer-term investment horizons may be invested in securities exceeding five (5) years if the maturities of such investments are made to coincide as nearly as practicable with the expected use of funds. The intent to invest in securities with longer maturities shall be disclosed in writing to the entire Board of Directors.
Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds such as money market funds and appropriate liquidity is maintained to meet ongoing obligations.
Reporting
1. Investment Commission
The Controller and/or Investment Manager shall prepare an investment report at least quarterly that provides an analysis of the status of the current investment portfolio and the individual transactions executed over the last quarter. This report will be prepared in a manner which will allow RCSC’s Investment Commission to ascertain whether investment activities during the reporting period have conformed to the investment policy.
The report will include the following:
a. Listing of individual securities held at the end of the reporting period.
b. Average weighted yield to maturity of portfolio on investments as compared to applicable benchmarks.
c. Listing of investment by maturity date.
d. Percentage of the total portfolio which each type of investment represents.
2. RCSC Membership
A summary report shall be updated quarterly and shall be reported as a part of the Treasurer’s report in a monthly Board meeting excluding the month of July or August.
BE IT FURTHER RESOLVED that a copy of this resolution shall be posted on the RCSC website for members and shall be made available to members upon request at no cost.
Adopted and signed this 27th day of October, 2016 at a duly called Board meeting by a majority (5) of the Recreation Centers of Sun City, Inc. Board of Directors.