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HomeMy WebLinkAboutResolution - 2000-R0292 - Agreement - Patterson Capital Mgmt LP- Nondiscretionary Fund & Securities Mgmt - 08/24/2000Resolution No. 2000-RO292 August 24, 2000 Item No. 48 RESOLUTION BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK THAT the Mayor of the City of Lubbock BE and is hereby authorized and directed to execute for and on behalf of the City of Lubbock, an Agreement between the City of Lubbock and Patterson Capital Management, L.P., dba Patterson & Associates ("P&A"), to act as its funds nondiscretionary manager for funds and securities, and related documents. Said Agreement is attached hereto and incorporated in this resolution as if fully set forth herein and shall be included in the minutes of the City Council. Passed by the City Council this 24th day of August , 2000. ATTEST: Kay"Darnell City Secretary APPROVED AS TO CONTENT: A Andy BVcham, Cash & Debt Manager APPROVED AS TO FORM: William de Haas Competition and Contracts Manager/Attorney Dh/Ccdocs/Patterson & Associates.res August 9, 2000 ti• Resolution No. 2000—R 0292 August 24, 2000 Item No. 48 INVESTMENT ADVISORY AGREEMENT BETWEEN PATTERSON & ASSOCIATES and CITY OF LUBBOCK, TEXAS This Investment Advisory Agreement dated as of the 24`s day of August, 2000 (the "Agreement") is made and entered into by and between Patterson Capital Management, L.P., dba Patterson & Associates ("P&A"), a registered investment advisor and funds management Texas limited partnership and the City of Lubbock (the "Client"). PREAMBLE WHEREAS, the Client has determined to select and appoint P&A to act as its funds non - discretionary manager for funds and securities to advise and assist in the investments of monies and securities and to perform the services described herein, NOW THEREFORE, for and in consideration of the mutual promises, covenants, and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree with each other as follows: ARTICLE I. Definitions "Authorized Investments" shall mean those investments authorized and defined in the Client's Investment Policy attached hereto as Exhibit A. "Authorized Representative(s) of the Client" shall mean the duly authorized officers, members of the Board of Directors or their delegated representatives, empowered to execute instructions and take other necessary actions under this Agreement on behalf of the Client as evidenced by Resolution, attached hereto as Exhibit D. "Authorized Representative(s) of P&A" shall mean any employee of P&A who is designated in writing by P&A as an authorized representative for purposes of this Agreement, attached hereto as Exhibit D. "Letter of Instructions" shall mean a written authorization and direction to an Authorized Representative of P&A signed by an Authorized Representative of the Client. ARTICLE H. Creation of Portfolio and Account(s) Section 2.01. Creation of a Separate and Distinct Portfolio. P&A, on behalf of the Client hereby creates and establishes a separate and distinct portfolio(s) (the "Portfolio") for reporting purposes. ARTICLE M. Operation of the Portfolio and Accounts Section 3.01. Depository Services. The Client's Portfolio and securities owned by the Portfolio will be maintained in the Client's name and in the Client's designated depository. P&A shall conduct security transactions in that account after gaining prior trade approval from the Client. All charges for the depository account maintenance and transactions will be paid by the Client. P&A will provide dual clearing instructions to the Client and Custodian, and guide the trade through the clearing process. ARTICLE IV. Investments and Duties Section 4.01. Duties. All investments shall be in accord with state law and the client's own investment policy attached hereto and made a part hereof as Exhibit A. P&A hereby agrees to provide full-time non -discretionary investment advisory services and portfolio management services to the Client to include: - on-going review of investment management procedures and documentation for recommendations assistance in developing and implementing investment strategies to enhance performance, review and recommend changes to the Client's Investment Policy, assist in establishing guidelines for financial institutions, propose internal controls for entire investment function, monitor the creditworthiness of the Client's financial institutions, work with staff on investment transactions and availability of funds, monitor collateral arrangements, review and verify repurchase agreement documentation, perform broker/dealer due diligence, provide cash and investment training on cash, treasury and investments, provide technical and fundamental market research, provide monthly and quarterly reporting in accordance with GAAP, GASB, and the Client's requirements, provide executive reporting on market conditions and the economy as it applies to the Client's portfolio, review and verify internal and external reporting, assist Client in developing cash flow models, attend required meetings with staff and the Investment Review Committee, and provide other mutually agreed upon procedures and services. P&A hereby agrees to provide information and advise on the Portfolio 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 probable income to be derived. This Prudent Person Law shall be applied to the investment of all Portfolios with the same degree of care and assuming the same duty as the Client. Section 4.02. Earnings and Losses from Investments. The Client and P&A agree that all funds in the Portfolio shall be invested only in Authorized Investments. All earnings and profits from the investment of funds in any Account shall be credited to and deposited in such Account. All losses resulting from the investment of funds in any Account shall be charged to such Account. Section 4.03. Liability. P&A, or any P&A employees shall not be held liable for any act or omission to act on behalf of herself, her agents, employees or other persons except for negligence or malfeasance, or violation of applicable law. Common law and the federal securities laws impose liabilities under certain circumstances on persons who act in good faith, and therefore nothing herein shall in any way constitute a waiver or limitation of any rights which the Client may have under common law or any federal securities laws Section 4.04. Portfolio Designation Client has the full discretion to designate the amount of funds to be considered under this Agreement. ARTICLE V. Expenses and Reports Section 5.01. Fee and Expenses. The Client agrees to pay to P&A on a quarterly basis an amount sufficient to reimburse P&A for costs of performing the duties contemplated under this Agreement in accordance with the Fee Schedule, attached hereto and made a part hereof as Exhibit B. P&A shall advise the Client from time to time, in writing of the amount of such costs. This itemized invoice shall set forth the services. Payment on the charges shall be made within ten (10) business days after receipt of invoice. Section 5.02. Reports. The Client shall define all reporting needs for information needed. P&A shall submit all reports to the Client of its transactions promptly after the end of each month. Section 5.03. Records. P&A shall keep a book of records in which complete and correct entries shall be made of all transactions in accordance with generally accepted accounting principles.' Such records shall be available for inspection at all reasonable hours of the business day and under reasonable conditions by the Client. ARTICLE VI. Miscellaneous Section 6.01. Notices. Any notices, Letters of Instruction, requests or demands required or permitted to be given hereunder shall be given in writing and shall be deemed duly given when mailed by registered or certified mail, postage pre -paid, addressed, e-mailed or telefaxed as follows: To the Client: Andy Burcham Cash and Debt Manager City of Lubbock 1625 13'h Street Lubbock, Texas 79457 Telephone: 806-775-2149 Telefax: 806-775-2033 E-mail: aburcham@mail.ci.lubbock.tx.us To P&A: Linda Patterson Patterson & Associates 301 Congress Avenue Suite 570 Austin, Texas 78701 Telephone: (512) 320-5042 Telefax: (512) 320-5041 E-mail: linda@patterson.net Section 6.02. Severability. If any provision of this Agreement shall be held or deemed to be or in fact shall be illegal, inoperative, or unenforceable, the same shall not affect any other provision or provisions herein contained or render the same invalid, inoperative, or unenforceable to any extent whatsoever. Section 6.03. Limitation of Rights. With the exception of the rights herein expressly conferred, nothing in or to be implied from this Agreement is intended or shall be construed to give any person other than the parties hereto any legal or equitable right, remedy or claim under or in respect to this Agreement or any of the covenants, conditions and provisions herein contained; this Agreement and all of the covenants, conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and herein provided. The Client further agrees that P&A's responsibilities hereunder are limited to the management of the Portfolio and Accounts as herein described and the providing of reports and information herein required; P&A shall not be liable for any losses from investments made and transfers made in accordance with the procedures set forth in this Agreement. Section 6.04. Execution of Counterparts. This Agreement may be simultaneously executed in several separate counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 6.05. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and is performable in Lubbock County, Texas. Section 6.06. Captions. The captions or headings in this Agreement are for convenience only and in no way define, limit, or describe the scope or intent of any provisions, articles, or sections of this Agreement. Section 6.07. Amendment. The Client and P&A may supplement or amend this Agreement only if evidenced in a writing signed by both parties. Section 6.08. Termination. This Agreement may be terminated by either party hereto, with or without cause, by tendering ninety (90) days prior written notice in the manner set forth in Section 6.01 hereof. In addition, the Client may terminate this Agreement within five (5) business days of the date hereof, with or without cause and without penalty, by notifying P&A in the manner set forth in Section 6.01 hereof of its decision to terminate the Agreement. Section 6.09. Term. Unless terminated in accordance with Section 6.08 hereof, this Agreement shall be automatically renewed on each anniversary date hereof. However, after the second renewal, the fee schedule provided by Exhibit B may be revised. Section 6.10. Assignment. This Agreement shall not be assignable by either party hereto, by operation of law or otherwise, without the prior written consent of the other party hereto. Any assignment in violation of this Section 6.10 shall result in the automatic termination of this Agreement. Section 6.11. Ownership Change. P&A shall notify the Client in writing of any change in its partnership ownership within a reasonable time after such change. Section 6.12. Information Acknowledgement. In accordance with Texas State Securities Board requirements, Client will acknowledge receipt of the disclosure statement (Part H of Form ADV) by signature on the attached Exhibit C within five business days of entering into this contract. IN WITNESS VvMREOF the parties hereto have cause this Agreement to be executed in multiple counterparts as of the date first set forth above. CITY OF LUBBOCK, TEXAS ILI Still : ATTEST: Kaythieba-me 1, City Secretary APPROVED AS TO CONTENT: Andy Bur ham, Cash & Debt Manager APPROVED AS TO FORM: "s-, /Po�' William de Haas, Competition and 40-A-,#%CTI '04 ..^ "S e - r- Patterson Capital Management, L.P. dba PATTERSON & ASSOCIATES By:Patterson & Associates, Inc. General Partner ww"'Onomwoleam—i'm .. T. -Patterson, President Date: i` // EXHIBIT A CLIENT'S INVESTMENT POLICY The Client's investment policy is made part of this Investment Advisory Agreement in order to assure that all investment decisions conform to the policy and parameters established by the Client. Resolution No. 2000—RO292 APPENDIX A CITY OF LUBBOCK, TEXAS INVESTMENT POLICY AND INVESTMENT STRATEGY POLICY The Managing Director of Finance, or Designee, of the City of Lubbock, Texas, is charged with the responsibility to prudently and properly manage any and all funds of the City. These funds must be fully collateralized and appropriately authorized. The following investment policy addresses the methods, procedures, and practices which must be exercised to ensure sound fiscal management. SCOPE This policy shall apply to the investment of all financial assets and all funds of the City of Lubbock (hereinafter referred to as the "City") over which it exercises financial control. In order to effectively make use of the City's cash resources, all moneys, with the exception of certain bond proceeds which must be segregated and accounted for separately ("Bond Funds"), shall be pooled into one investment account ("Consolidated Funds"). The investment income derived from this account shall be distributed to the various City funds in accordance with the existing City Policy. These funds are accounted for in the City of Lubbock Comprehensive Annual Financial Report (CAFR) and include: General Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Enterprise Funds Internal Service Fund Trust & Agency Funds The Bond Funds Portfolio includes bond proceeds recorded in Capital Project Funds and Enterprise Funds, while the Consolidated Portfolio includes all other resources in Capital Project Funds and Enterprise Funds as well as all other funds listed. OBJECTIVES The City's principal investment objectives are listed in order of priority: A. SAFETY: Preservation of capital and the protection of investment principal. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. B. LIQUIDITY: Maintenance of sufficient liquidity to meet anticipated disbursements and cash flows. C. YIELD: Attainment of a market rate of return equal to or higher than the performance measure established by the Managing Director of Finance, or Designee. City of Lubbock, Texas, Investment Policy Page 2 D. COMPLIANCE with all Federal, State, and other legal requirements (includes but is not limited to Chapter 2256 "Public Funds Investment Act, as amended and Chapter 2257 "Public Funds Collateral Act, as amended, of Vernon's Texas Civil Statutes) RESPONSIBILITY AND CONTROL Delegation of Authority The ultimate responsibility and authority for investment transactions involving the City resides with the Managing Director of Finance, or Designee. The Managing Director of Finance, or Designee, has delegated the investment function to the Cash & Debt Manager. The Cash & Debt Manager is charged with executing the day-to-day investment functions for the City following the guidance and recommendations of the City's Investment Review Committee. Investment Review Committee The City will establish an Investment Review Committee to assist in monitoring the performance and structure of the City's investments. The Investment Review Committee shall be composed of Managing Director of Finance, or Designee, the Cash & Debt Manager, and three other persons specifically designated by the City Manager. The Investment Review Committee shall be responsible for the investment strategy decisions, activities, and the establishment of written procedures for the investment operations consistent with this policy. Monitoring of the portfolio shall be performed by the Investment Review Committee no less than quarterly and verified by the City's independent auditor at least annually. The Investment Review Committee shall discuss investment reports, investment strategies, and investment and banking procedures. Investment Advisers The Managing Director of Finance, or Designee, may in his/her discretion appoint one or more investment advisers, registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.), to assist in the management of a portion of the City's assets. To be eligible for consideration, an investment adviser shall demonstrate to the Managing Director of Finance, or Designee, and to the Cash & Debt Manager knowledge of cash management as well as familiarity and experience in managing public funds. Selection of any investment adviser shall be based upon their expertise in public cash management. An appointed investment adviser may be granted limited investment discretion within the guidelines of this Investment Policy with regard to the City's assets placed under its management. A contract made under authority of Sec. 2256.003 of the PFIA may not be for a term longer than two years. A renewal or extension of the contract must be made by the City Council by order, ordinance or resolution. Prudence The standard of prudence to be used for managing the City's assets is the "prudent person" 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." Investment officers acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for a specific security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. The City will perform a compliance audit of management controls on investments and adherence to investment policies annually. City of Lubbock, Texas, Investment Policy Page 3 In accordance with Section 2256 Public Funds Investment Act, as amended, the Managing Director of Finance, and the Cash & Debt Manager shall attend an investment training session no less often than once every two fiscal years commencing September 1, 1997 and shall receive not less than 10 hours of instruction relating to investment responsibilities. The investment training session shall be provided by an independent source approved by the Investment Review Committee. Training must include education in investment controls, security risks, strategy risks, market risks, diversification of investment portfolio, and compliance with the PFIA. INVESTMENT PORTFOLIO Eligible Investments The following are eligible investments for City of Lubbock and all are authorized by V.T.C.A., Government Code, Section 2256 (the Public Funds Investment Act) as amended: • Obligations of the United States or its agencies and instrumentalities, which have a liquid market with a readily determinable market value. • Direct obligations of this state or its agencies and instrumentalities • Other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities • Obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent • Certificates of deposit issued by a state or national bank domiciled in this state and guaranteed, or insured by the Federal Deposit Insurance Corporation or its successor, secured by obligations authorized by this subchapter, or secured in any other manner and amount provided by law for deposits of the investing entity • Repurchase agreements with a defined termination date; and secured by obligations authorized by V.T.C.A., Government Code, Section 2256.009(a)(1); and pledged to the City, held in the City's name, and deposited at the time the investment is made with the City or with a third party selected and approved by the City. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in this state. The term of any reverse repurchase agreements may not exceed 90 days after the date the reverse security repurchase agreement is delivered. Money received by the City under the terms of a reverse security repurchase agreement shall be used to acquire additional authorized investments, but the term of the authorized investments acquired must mature not later than the expiration date stated in the reverse security repurchase agreement. • Bankers' acceptances with a stated maturity of 270 days or fewer from the date of its issuance; and liquidated in full at maturity; and eligible for collateral for borrowing from a Federal Reserve Bank; and 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, or of a bank holding company of which the bank is the largest subsidiary, are rated not less than A-1 or P-1 or an equivalent rating by at least one nationally recognized credit rating agency • Commercial paper with a stated maturity of 270 days or fewer from the date of its issuance, and rated not less than A-1 or P-1 or an equivalent rating by at least two nationally recognized credit rating agencies or one nationally recognized credit rating agency and 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 • No-load money market mutual funds regulated by the Securities and Exchange Commission, and with a dollar - weighted average stated maturity of 90 days or fewer, and whose investment objectives include the maintenance of a stable net asset value of $1 for each share • Investment pools authorized by the City's governing body and as defined by Public Funds Investment Act 2256, which invests in eligible securities as authorized by this subchapter City of Lubbock, Texas, Investment Policy Page 4 The following investments are prohibited by V.T.C.A., Government Code, Section 2256: • Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal, i.e. interest -only collateralized mortgage obligations (IO's). • Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest, i.e. principal -only collateralized mortgage obligations (PO's). • Collateralized mortgage obligations that have a stated final maturity date of greater than 10 years. • Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index, i.e. CMO inverse floaters. • Investment in the aggregate of more than 80 percent of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in money market mutual funds or mutual funds; investment in the aggregate of more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in mutual funds; investment of any portion of bond proceeds, reserves, and funds held for debt service, in mutual funds; and investment of its funds or funds under its control, including bond proceeds and reserves and other funds held for debt service, in any one mutual fund in an amount that exceeds 10 percent of the total assets of the mutual fund Investment Diversification It is the intent of the City to diversify the investment instruments within the portfolio to avoid incurring unreasonable risks inherent in over -investing in specific instruments, individual financial institutions or maturities. The asset allocation in the portfolio should, however, be flexible depending upon the outlook for the economy and the securities markets. When conditions warrant, the guidelines below may be exceeded by approval of the Investment Review Committee. The City may invest to the following limits as a percentage of its total portfolio: 100% in United States Treasury Obligations 50% in Certificates of Deposit 65% in Federal Instrumentalities or Agencies 30% in Repurchase Agreements collateralized by Federal Instrumentalities, or 100% in Repurchase Agreements collateralized by United States Treasury Obligations 20% in Commercial Paper (no more than 10% in any one issuer) 20% in Banker's Acceptances Investment pools must be continuously rated no lower than AAA, with a weighted average maturity of <90 days. The pool must have an advisory board. A thorough investigation of the pool is required prior to investing, and on a continual basis, as due diligence, and shall include but is not limited to, the following topics: • A description of eligible investment securities, and a written statement of investment policy and objectives. • A description of interest calculations, method of distribution, and treatment of gains and losses. • A description of the method used to safeguard securities (including the settlement processes), and the frequency and method by which securities are priced. • The frequency of audit of the program. • A description of eligible participants along with allowable frequency and size of deposits and withdrawals. • A schedule for receiving statements and portfolio listings. • The policy under which reserves, retained earnings, etc. may be utilized by the pool. • A fee schedule, and when and how it is assessed. • Information related to the fund's eligibility for accepting bond proceeds. Investments in a qualifying Investment Pool (in accordance with Resolution dated May 28, 1992) should be limited to no more than 5% of the total assets in the pool. City of Lubbock, Texas, Investment Policy Page 5 Investment Strategy The City of Lubbock maintains portfolios which utilize four specific investment strategy considerations, designed to address the unique characteristics of the fund groups represented in the investment portfolios. The policies detailed below are subject to an annual review to occur prior to the annual City Council action regarding the Investment Policy. (1) Operating Funds and Commingled Pools Containing Operating Funds: Investment strategies for operating funds, or Consolidated Fund, have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. Investment maturities shall be matched against liabilities including debt service requirements. The secondary objective of the consolidated fund is to create a portfolio structure which will experience minimal volatility during economic cycles. This will be accomplished by purchasing high quality, short- to medium-term securities which will complement each other in a laddered maturity structure. The City shall maintain a dollar -weighted average maturity of 2 years or less based on the stated final maturity dates of each security in its consolidated fund. The City shall at all times maintain at least 10% of its consolidated investment portfolio in instruments maturing in 120 days or less. (2) Debt Service 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. Securities purchased shall not have a stated final maturity date which exceeds the debt service payment date. (3) Debt Service Reserve Funds Investment strategies for debt service reserve funds shall have as the primary objective the ability to generate a dependable revenue stream to the appropriate debt service fund from securities with a low degree of volatility. Except as may be required by the bond ordinance specific to an individual issue, securities should be of high quality with short- to intermediate-term maturities. Volatility shall be further controlled through the purchase of securities carrying the highest coupon available within the desired maturity and quality range using a laddered maturity structure. Such securities will tend to hold their value during economic cycles. (4) Bond Funds Investment strategies for bond funds will have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. These portfolios should include at least 10% in highly liquid securities to allow for flexibility and unanticipated project outlays. The stated final maturity dates of securities held shall not exceed the estimated project completion date. A cash flow analysis shall be reviewed and updated no less than semi-annually, in connection with revised budget and proposed budget reviews. This cash flow analysis is the basis for matching liabilities or obligations with security maturities as outlined in the strategies previously listed. The maximum maturity of any individual security the City may invest in shall be 5 years. City of Lubbock, Texas, Investment Policy Page 6 Derivatives A derivative is any security whose cash flow characteristics (coupon, redemption amount, or stated and estimated maturity) depend upon one or more indices or that have embedded futures or options. They can be linked to different market sectors or interest rate scenarios including: 1) increasing or decreasing interest rates, 2) U.S. Treasury yield curve, 3) foreign yield curves, 4) relationship between two different yield curves, 5) foreign exchange rates 6) equity price movements, and 7) commodity price movements. The City shall define a derivative for purposes of investment as any mortgaged backed security to eliminate possible extension, volatility and reinvestment risk. The City will not invest in any mortgage-backed securities (MBS) whether a straight pass-through mortgage backed or further derived mortgage backed security (CMO). The City shall not define United States Agency and Instrumentality debentures as derivatives. Debentures have a defined maturity date which can not extend regardless of their structure. These will be restricted to a maximum maturity of three (3) years. Floating rate debentures may only float on the U.S. Treasury rates and not exceed one (1) year in maturity. The Cash & Debt Manager will monitor the development of new financial instruments and may present to the Investment Review Committee amendments to the above definition. Other Investment Guidelines All investment transactions must be executed with broker/dealers and financial institutions that have been authorized by the City and each transaction must be competitively transacted with at least three authorized broker/dealers or financial institutions. In addition, before any repurchase agreements shall be executed with an authorized broker/dealer or financial institution, a Master Repurchase Agreement must be signed between the City and that broker/dealer or financial institution. The Cash & Debt Manager shall maintain a file of all executed Master Repurchase Agreements. The City seeks an active, rather than passive, management of its portfolio assets. Assets may be sold at a loss only if the Managing Director of Finance, or Designee, or the Investment Adviser feels that the sale of the security is in the best long-term interest of the City. Supporting documentations shall be maintained by the Cash & Debt Manager for all sales of securities in which there is a book loss or where a security is sold in order to simultaneously purchase another security. AUTHORIZED FINANCIAL BROKER/DEALERS AND INSTITUTIONS As defined by PFIA Chapter 2256, as amended, the City shall maintain a list of authorized broker/dealers and financial institutions which are approved by the Investment Review Committee for investment purposes, and it shall be the policy of the City to purchase securities only from those authorized institutions and fu -ms and to review the list at least annually. To be eligible for authorization, each broker/dealer or financial institution must complete and submit to the City a Broker/Dealer Questionnaire which includes the firm's most recent financial statements. In addition, each broker/dealer must provide a written instrument certifying that they have received and thoroughly reviewed the City's investment policy and have implemented reasonable procedures and controls and understand the parameters set by the City of Lubbock. Financial Institutions must be members of the FDIC in order to be eligible for authorization. Approved security broker/dealers may include "primary" dealers or regional dealers that qualify under Securities & Exchange Commission Rule 150-1 (uniform net capital rule). All broker/dealers must submit: (a) audited financial reports (b) proof of National Association of Security Dealers certification, and (c) proof of state registration. The Cash & Debt Manager shall maintain a file of all Broker/Dealer Questionnaires. Broker/dealers and other financial institutions will be selected on the basis of their expertise in cash management and their ability to provide service to the City's account. City of Lubbock, Texas, Investment Policy Page 7 Depositories shall be selected through the city's banking services procurement process, which shall include a formal request for proposals. In selecting depositories, the credit -worthiness of institutions shall be considered, and the Managing Director of Finance, or Designee, shall conduct a comprehensive review of prospective depositories' credit characteristics and financial history. The supervising officer shall agree to exercise due diligence in monitoring the activities of other officers and subordinate staff members engaged in transactions with the City. Employees of any firm or financial institution offering securities or investments to the City of Lubbock shall be trained in the precautions appropriate to public - sector investments and shall be required to familiarize themselves with the City's investment objectives, policies and constraints. In the advent of a material adverse change in the financial condition of the firm or financial institution, the City will be informed immediately by telephone and in writing. Selection of Financial Institutions The City shall select financial institutions from which the City may purchase C.D.'s in accordance with Public Funds Investment Act 2256 as amended. The City of Lubbock will have a written agreement with any financial institution with whom the City of Lubbock has time or demand deposits. The Cash & Debt Manager shall monitor the financial condition of financial institutions where Certificates of Deposit are held and report quarterly to the Investment Review Committee. Collateralization/Safekeeoin Collateralization requirements are governed by Chapter 2257 COLLATERAL FOR PUBLIC FUNDS. Collateralization will be required on three types of investments: depository bank balances, certificates of deposit and repurchase agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest. The City of Lubbock chooses to limit collateral to the following: Underlying collateral shall be composed of only those investments approved in this policy for investment by the City of Lubbock. The maturity of the collateral security shall be no longer than 5 years. Market value of the collateral shall be priced at least daily for repurchase agreements and monthly for securities. Collateral will always be held by an independent third party with whom the City of Lubbock has a current custodial agreement. A safekeeping receipt must be supplied to the City of Lubbock for any transaction involving sales/purchases/maturities of securities and/or underlying collateral, which the City of Lubbock will retain. The right of collateral substitution is granted provided the substitution is followed by the delivery of a safekeeping receipt to the City of Lubbock. All security transactions, including collateral for repurchase agreements, entered into by the City of Lubbock shall be conducted on a delivery -versus -payment (DVP) basis, and held in third party safekeeping by a Federal Reserve member financial institution designated as the City's depository. The trust department of the institution designated as depository will be considered to be a third party for the purposes of safekeeping securities. Securities purchased by the City that are wirable via the Federal Reserve System shall be held by the City's depository bank in their Customer Account (02). Collateral pledged to the City securing Certificates of Deposit shall be held in joint custody at the Federal Reserve Bank (07). It is the intent of the City that all securities be perfected in the name of the City. City of Lubbock, Texas, Investment Policy Page 8 Rel2ortin Investment reports shall be prepared on a quarterly and annual basis and be submitted to the Managing Director of Finance, or Designee, in a timely manner. A written record shall be maintained of all bids and offerings for securities transactions in order to insure that the City receives competitive pricing. The Investment Review Committee will meet no less than quarterly to review the investment activity. The quarterly reports should include listings of all the investments held by the City, the current market valuation of the investments, transactions summaries, and performance results. Within a reasonable time after the end of each quarter, the Cash & Debt Manager shall prepare and submit to the Managing Director of Finance, or Designee, City Manager, and City Council a written report of the quarter's investment activity. This report must be signed by each official member of the Investment Review Committee. This report shall describe in detail the investment position of the City, disclose the market value and book value of each fund group as well as each separate investment, and state the maturity date of each security and accrued interest for the reporting period. It must also express the compliance of the portfolio to the investment strategy contained in the City's investment policy and the Public Funds Investment Act as amended, and Generally Accepted Accounting Principles. Market pricing information is obtained through the use of appropriate software available either externally such as through investment advisers, or internally. An independent auditor will review quarterly investment reports on an annual basis, as required by Public Funds Investments Act 2256, as amended. CHANGES IN STATUTES, ORDINANCES OR PROCEDURE This policy is designed to operate within the restrictions set forth in applicable State of Texas and Federal laws and statutes, but it does not permit all activity allowed by those laws. Changes to state or federal laws which restrict a permitted activity under this policy shall be incorporated into this policy immediately upon becoming law. Changes to state or federal laws which do not further restrict this policy shall be reviewed by the Investment Review Committee and recommended to the City Council when appropriate. PERFORMANCE REVIEW The Investment Review Committee shall meet no less than quarterly to review the portfolio's adherence to appropriate risk levels and to compare the portfolio's total return to the established investment objectives and goals. The Managing Director of Finance, or Designee, or his/her appointee, shall periodically establish a benchmark yield for the City's investments which shall be equal to the average yield on the United States Treasury security which most closely corresponds to the portfolio's actual weighted average maturity. When comparing the performance of the City's portfolio, all fees and expenses involved with managing the portfolio should be included in the computation of the portfolio's rate of return. ETHICS AND CONFLICTS OF INTEREST 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 their ability to make impartial investment decisions. Employees and investment officials shall disclose to the Managing Director of Finance, or Designee, any material financial interests in financial institutions that conduct business within this City, and they City of Lubbock, Texas, Investment Policy Page 9 shall further disclose any large personal fmancial/investment positions that could be related to the performance of this City's portfolio. Employees and officers shall subordinate their personal investment transactions to those of the City particularly with regard to the timing of purchases and sales. INTERNAL CONTROLS The Managing Director of Finance, or Designee, shall establish a system of internal controls, which shall be documented in writing. The internal controls shall be reviewed by the investment committee and with the independent auditor on an annual basis. The controls shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated market changes, or imprudent actions by employees and officers of the City. POLICY REVISIONS The governing body shall adopt a written instrument by rule, order, ordinance, or resolution stating that it has reviewed the investment policy and investment strategies and that the written instrument so adopted shall record any changes made to either the investment policy or investment strategies. The Investment Policy and Investment Strategies will be reviewed annually by the Investment Review Committee. The Investment Review Committee shall forward modifications to the Policy or a resolution stating there are no changes to the City Council annually for City Council action. AUTHORITY/DATE ISSUED: City Council Resolution # 5728/December 18, 1997 City Council Resolution # 5867/May 28, 1998 City Council Resolution #6600/November 4, 1999 City of Lubbock, Texas, Glossary to Investment Policy Page 1 of 3 GLOSSARY AGENCIES: Federal agency securities and/or Government-sponsored enterprises. ASKED: The price at which securities are offered. BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer. BROKER: A broker brings buyers and sellers together for a commission. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large -denomination CD's are typically negotiable. COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the City of Lubbock, Texas. It includes combined financial statements for all fund types and account groups as well as combining financial statements, as applicable, and footnotes prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance - related legal and contractual provisions, extensive introductory material, and a detailed Statistical and Supplemental Information Section. COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities). DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued a discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open market operations. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. • City of Lubbock, Texas, Glossary to Investment Policy Page 2 of 3 MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parries to repurchase—reverse repurchase agreements that establishes each party's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer -lender to liquidate the underlying securities in the even of default by the seller -borrower. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. PORTFOLIO: Collection of securities held by an investor. PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) -registered securities, broker- dealers, banks, and a few unregulated firms. PRUDENT PERSON RULE: An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody state— the so-called legal list. In other states the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond the current income return. REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security "buyer" in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank reserves. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See Uniform Net Capital Rule. TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BONDS: Long-term coupon -bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than 10 years. TREASURY NOTES: Medium-term coupon -bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to 10 years. UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a fu -in, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. City of Lubbock, Texas, Glossary to Investment Policy Page 3 of 3 YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in the purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. EXHIBIT B FEE SCHEDULE The investment advisory services described under the terms of this Agreement are being provided in accordance with the following fee schedule. Services are provided for a fee of: $22,000 flat fee for the life of the contract Fees are calculated by P&A on services rendered in the preceding month and the invoice provided to the Client by the fifth (5) business day of the succeeding month. Fees are due and payable within ten (10) business days after receipt of invoice. EXMBIT C Securities and Exchange Commission ADV FORM, PART II This form is being provided the Client in accordance with SEC Regulations 204-3 for Registered Investment Advisors. This disclosure document must be provided the Client not less than 48 hours prior to entering any investment advisory contract. August 24, 2000 Patterson & Associates 301 Congress Avenue Suite 570 Austin, Texas 78701 In accordance with the Texas State Securities Board regulations we hereby acknowledge the acceptance of Part H of Form ADV as part of this Investment Advisory contract. The regulations require that: "Client acknowledges receipt of Part H of Form ADV, a disclosure statement containing the equivalent information, or a disclosure statement containing at least the information required by Schedule H of Form ADV if the client is entering into a wrap fee program sponsored by the investment adviser. If the appropriate disclosure statement was not delivered to the Client at least 48 hours prior to the Client entering into any written or oral advisory contract with the investment adviser, then the Client has the right to terminate the contract without penalty within five business days after entering into the contract. For the purposes of this provision, a contract is considered entered into when all parties to the contract have signed the contract, or in the case of an oral contract otherwise signified their acceptance, any other provisions of this contract notwithstanding." Acknowledgement by Client EXHIBIT D AUTHORIZED REPRESENTATIVES Authorized Representatives of the Client Name/Title Phone Andy Burcham 806-775-2149 Cash & Debt Manager Perry Stout, CPA 806-775-2160 Chief Accountant Debra Forte' 806-775-2015 Deputy City Manager Anna Mosqueda 806-775-2002 Managing Director Management Services Authorized Representatives of P&A Name/Title Phone Deborah A. Cervantes 512-320-5042 Vice President Leticia Davilla 512-320-5042 Portfolio Analyst Linda T. Patterson 512-320-5042 President Fax e-mail 806-775-2033 aburcham®mail.ci.lubbock.tx.us 806-775-2033 Rstout®mail.ci.lubbock.tx.us 806-775-2051 dforte@mail.ci.lubbock.tx.us 806-775-2033 amosqueda®mail.ci.lubbock.tx.us Fax e-mail 512-320-5041 debbie®patterson.net 512-320-5041 leticia®patterson.net 512-320-5041 linda@patterson.net