State law allows the City Council to annually adopt the Statement of Investment Policy. Thus, per the City's fiscal policies, "The City Council will review and adopt annually an investment policy as recommended by the Investment Advisory Committee." The Investment Policy serves as a guideline for the investment of City and Successor Agency funds. The Brea Investment Advisory Committee annually reviews the Statement of Investment Policy for the City of Brea and the Successor Agency to the Brea Redevelopment Agency.
The below changes and additions have been recommended by either City staff or Chandler Asset Management and were approved by the Investment Advisory Committee.
To avoid duplicate statements and confusion, staff recommends combining the Reporting and Monthly Reporting sections of the Investment Policy. All references to reporting requirements are now detailed under "Reporting." Also, it is noted that City’s practice is that the Administrative Services Director submit the Monthly Report of Investments to the City Council. Therefore, the Investment Policy is being updated to reflect that practice.
Chandler Asset Management, the City's Portfolio Manager, recommends the City update its language on Asset Backed Securities as outlined in AB 1770. This update to the California Government Code clears up ambiguities specific to Asset Backed Securities and expands the eligible securities in the sector. Under the City's current policy, the Provisions of Government Code Section 53601, Asset Backed Securities, the bullet point stating:
"Underlying issuer rating must meet the requirements of code (i.e. A3 or A- minimum)."
is recommended to be removed.
AB 1770 eliminated the requirement that the securities issuer be rated “A” or its equivalent or better for the issuer’s debts as provided by a Nationally Recognized Statistical Rating Organization (NRSRO). The Asset Backed Securities held in the City portfolio must still be rated at least "AA" to be eligible. The Chandler team will continue to evaluate and review all the securities held in the City’s portfolio for underlying credit quality, relative value, and suitability. They anticipate the underlying credit quality of the Asset Backed securities will remain similar to the current credit quality, with a broader universe of securities eligible for purchase.
In addition, Chandler recommends adding language under Qualified Brokers/Dealers. The added language is as follows:
"Selection of broker/dealers used by an external investment adviser retained by the City will be at the sole discretion of the adviser. Where possible, transactions with broker/dealers shall be selected on a competitive basis and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, best efforts will be made to document quotations for comparable or alternative securities. When purchasing original issue instrumentality securities, no competitive offerings will be required as all dealers in the selling group offer those securities at the same original issue price."
The added language describes the ability of the City's external investment adviser’s discretion to transact with brokers/dealers.
Lastly, the Chandler Asset Manager recommends that the Glossary be updated to reflect their Model Policy. The revised glossary includes added terminology such as: Asset Backed Securities, Average Life, Callable, Certificate of Deposit Account Registry System (CDARS), Collateralized Bank Deposit, Collateralized Mortgage Obligations (CMO), Collateralized Time Deposit, Federally Insured Time Deposit, Local Agency Investment Fund (LAIF), Make Whole Call, Margin, Market Risk, Medium Term Notes, Modified Duration, Money Market Mutual Fund, Mortgage Pass-Through Securities, Municipal Securities, Mutual Fund, Nationally Recognized Statistical Rating Organization (NRSRO), Negotiable Certificate of Deposit (CD), Supranational, Total Rate of Return, U.S. Treasury Obligations, and Treasury Bills.
In addition, the definition of a number of terms have been revised and enhanced. Such terms include: Agencies, Banker's Acceptance Benchmark, Broker, Collateral, Commercial Paper, Coupon, Dealer, Delivery vs. Payment (DVP), Derivative, Discount, Diversification, Duration, Federal Deposit Insurance Corporation (FDIC), Liquidity, Local Government Investment Pool, Primary Dealer, Prudent Person (Prudent Investor), Repurchase Agreement, Safekeeping, Securities and Securities and Exchange Commission (SEC), Securities and Exchange Commission SEC Rule 15c3-1, Structured Note, Treasury Notes, Treasury Bonds, and Yield to Maturity. All terms listed in the City's current policy, which are not recommended to be revised, remain in the glossary.
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