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Contract 43405 (2)
C1_u. V SECRETARY 0/94 0 c 'iJ RA` T NOS .. r i r Ii. al. a INVESTMENT ADVISORY AND PORTFOLIO MANAGEMENT AGREEMENT BETWEEN PATTERSON CAPITAL MANAGEMENT and CITY OF FORT WORTH, TEXAS This Investment Advisory and Portfolio Management Agreement dated as of the day of u A : 2012 (the "Agreement") is made and entered into by and between Patterson Capital Management, L.P. ("Patterson"), a Texas limited partnership and a registered investment advisor and funds manager, and the City of Fort Worth (the "Client"), a Texas home -rule municipal corporation. PREAMBLE WHEREAS, the Client has determined to select and appoint Patterson to act as its investment advisor and portfolio manager for funds and securities to manage and invest monies and securities, to maintain records, and to perform the advisory and consulting 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 Clients Investment Policy, which is made a part of this Agreement and attached hereto as Exhibit A. "Authorized Representative(s) of the Client" shall mean those duly authorized officers and employees empowered to execute instructions and take other necessary actions under this Agreement on behalf of the Client as designated in writing and attached hereto as Exhibit D. "Authorized Representative(s) of Patterson" shall mean any employee of Patterson who is designated in writing by Patterson as an authorized representative for purposes of this Agreement, attached hereto as Exhibit D. ARTICLE II. Creation of Portfolio and Account(s) Section 2.O1.Creation of a Seaarate and Distinct Portfolio(s4. Patterson, on behalf of the Client, hereby creates and establishes for management and reporting purposes one or more separate and distinct portfolios (the "Portfolio") with all assets held in the Client's name at Client's safekeeping institution. Patterson shall invest and manage all monies deposited by the Client into the Portfolio. Client will determine the number of Portfolios to be established and maintained in accordance with Client needs. All Portfolios shall be segregated and held distinct from all other funds held or invested by Patterson. 06-26-1 2 A07:57 IN OFFICIAL RECORD C1TY SECRETARY FT, WORTH TX 1 ARTICLE III. Operation of Portfolio(s) Section 3.01.Depository Services. The Portfolio and securities owned by the Portfolio will be maintained in the Client's name and in the safekeeping institution of the Client and the Client may authorize Patterson to conduct security transactions in that account for Client. All fees and expenses for safekeeping account maintenance and transactions will be paid directly by Client to the safekeeping institution. Section 3.02.Delivery versus Payment. All securities managed by Patterson will be settled on a delivery versus payment (DVP) basis into the Client designated depository account at the safekeeping institution. DVP will assure that no Client funds are released until the security is received and verified by the safekeeping institution of the Client. Section 3.03.Separatton of Portfolios. The Portfolio(s) shall be segregated and distinctly invested from all other funds managed by Patterson. ARTICLE IV. Investment Duties and Services Section 4.01.Standard of Care. Patterson hereby agrees to manage Client Portfolios in accordance with the "Prudent Person Standard,' which is defined as that level of judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence would exercise in the management of their own financial 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 Standard shall be applied to the investment of all Portfolios and Accounts with the same degree of care and assuming the same duty as the Client. Section 4 02.Investment Services. Patterson shall provide full advisory and management services for Clients Portfolios to include market advice, portfolio structure advice, trade execution and settlement on an ongoing basis. All investments shall be in accord with applicable state laws and with Client's Investment Policy, which is attached hereto as Exhibit A and made a part hereof. Patterson certifies that all funds shall be invested only in Client -authorized investments. Client Designation of Funds. Client has full discretion to designate the amount of funds to be placed in Portfolios or in separate investments in accordance with Clients cash flow needs. In addition, Client has full discretion to designate the amount of funds to be placed in Portfolios or in a local government investment pool or money fund for liquidity and as authorized by the Client's governing body. Client Directives. Monies held in the Portfolios shall be invested and reinvested in Authorized Investments selected by Patterson and approved by Client before settlement in accordance with the Client Investment Policy. Client reserves the right to notify the safekeeping institution of pending trades and approve settlement of those trades. Client reserves the right to approve any and all trades. Patterson will utilize only Client -approved broker/dealers. Trade Aggregation. For the purpose of purchase transactional efficiency or market price advantage involving funds of the Portfolios, Patterson may aggregate these funds with other clients' funds for investment. However, Client funds and securities shall never be commingled with other clients' funds, and Client transactions will be specifically segregated on all brokerage transactions and settled separately into Client depository at the safekeeping institution Section 4.03.Confirmations. Patterson will establish all necessary procedures for Client to receive independent trade confirmations from all broker/dealers for each transaction involving the Portfolios. Independent confirmations will be sent directly to both the Client and Patterson for audit -trail purposes. Section 4.04.Reportina. Patterson shall provide monthly and quarterly reports that, at a minimum, detail and summarize all investments and Portfolio transactions during the reporting period. In addition, Client shall define information that is needed on a daily monthly or quarterly basis, and Patterson shall provide and report information in accordance with those definitions. Patterson shall 2 submit to the Client all reports of its transactions promptly after the end of each month; for purposes of this provision, reports shall generally be considered to be "promptly" submitted if provided to Client by the tenth business day (i) after the end of the month or (ii) after Client has supplied all needed information. Such reports shall indicate, at a minimum, the following information for each Portfolio and each Account: balance remaining, interest earned, all deposits and withdrawals, and a detailed inventory of all securities and positions for the period. All reports shall comply with applicable statutory requirements In addition, on an annual basis Patterson will prepare and submit reports for GASB 31 and 40 reporting. Section 4.05.Presentations. An Authorized Representative of Patterson will be available, at no additional cost to Client, to present reports or attend presentations to the Client or the Client's governing body on a semi annual basis, or as required by the Client. Section 4.06.Earninas and Losses from Investments. All earnings and profits from the investment of funds in any Portfolio shall be credited to and deposited in that Portfolio unless otherwise designated by Client. All losses resulting from the investment of funds in any Portfolios shall be charged to such Portfolio or Account. Section 4.07.Liability. Except as otherwise provided below, Patterson and its employees shall only be held liable for acts or omissions to act on behalf of the company, its agents, employees or other persons that involve negligence, 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 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 4.08.Mediation. Prior to instigating any litigation with respect to any controversy or claim arising out of or relating to this Agreement, or the breach thereof, the parties agree to first attempt to settle the matter through consultation and negotiation in good faith and a spirit of mutual cooperation If those attempts fail, the parties agree that the matter must be submitted to mediation. In order to institute a mediation proceeding, the party who has a claim shall notify the other party in writing, describing the nature of the claim and the material facts surrounding it. Thereafter the parties will attempt to agree on a mediator. However, if the parties are unable to agree on a mediator, the parties shall request that the senior -most judge (as determined by length of tenure) of state civil district courts of Tarrant County, Texas, acting in his individual and not his judicial capacity, designate a mediator (the "Designated Mediator"). The parties shall submit to mediation by the Designated Mediator within thirty (30) days of the Designated Mediator's designation at such time and place as the parties may agree. At such mediation, the Alternative Dispute Resolution provisions of the Texas Civil Practice and Remedies Code shall apply. Section 4.09.Coordination and Advisory Consulting Services. Patterson agrees to provide advisory consulting services for the Client in all areas of investment and cash management to include, at a minimum, examination and evaluation of the following treasury areas and coordination of activities as indicated: IMP Investment policy review. To analyze the existing investment policy in comparison to the Client's needs and, if necessary to formulate recommendations for revisions. Investment strategy review To continuously evaluate investment strategies (written and operational) for feasibility and appropriateness. Cash Flow Analysis. To provide cash flow analysis advice to develop a cash flow system for the Client to include ongoing forecasts and projections for investment purposes. Internal procedures and processes. To evaluate internal treasury procedures in an effort to maximize benefit and efficiency to the Client and its Portfolios, including, but not limited to, evaluation of procedures related to broker/dealer transactions, wire transfers, competitive bidding process, repurchase agreements documentation and transaction audit trails. To review for adequate management oversight and prepare written procedures. Delivery and Settlement Oversight. To coordinate investment settlements and the delivery and availability of funds with City staff to ensure safe transfer of funds and securities. 3 Credit Rating Monitoring. To continuously monitor credit ratings related to investments held by the City, as required by policy and statute. Financial counter -party evaluation. To provide ongoing credit review of Client's banking institutions and financial counter -parties. To obtain and maintain all statutorily required broker certifications. GASB 31 and 40 Compliance. To provide assistance in crafting and revising custodial procedures to achieve GASB 40 compliance and to ensure accurate and timely reporting and disclosures in accordance with GASB 31 and GASB 40. Market Research. To provide technical and fundamental market research on an ongoing basis. Banking arrangement and structure. To evaluate the Clients current banking structure to determine its efficiency and effectiveness and to formulate recommendations for improvements as needed. To prepare documents for the solicitation of proposals for banking services for the Client and to evaluate bids received. Coordination with external client agencies. To make recommendations on ways to improve communications and efficiencies between the Client and any external service agencies (including broker/dealers) to ensure policy compliance, maximum utility of funds, and identification of investment alternatives. To maintain all broker/dealers files for certification and ensuring compliance with Client and Patterson requirements. Exposure review. To determine if the Client has any audit, operational or policy exposures in the Treasury area. Investment Reporting. To review all investment reporting for adequacy of information and efficiency of presentation format in providing maximum benefit and understanding. To provide monthly and quarterly Portfolio reporting. Statutory Compliance. To monitor, evaluate, and inform Client of changes in applicable law which might impact the management of Client's Portfolios, its reporting obligations, or both. ARTICLE V. Expenses and Reports Section 5.O1.Fee and Expenses. The Client agrees to pay to Patterson on a quarterly basis, in arrears, in accordance with the Fee Schedule, attached hereto and made a part hereof as Exhibit B. Patterson shall submit a written invoice to Client requesting payment for the previous quarter. Payment on the charges shall be made within thirty (30) business days after receipt of invoice. Section 5 O3.Records Patterson shall keep a book of records in which complete and correct entries shall be made of all transactions relating to the holdings, balances and values in Client's Portfolios in accordance with generally accepted accounting principles. Such records shall be available for inspection by the Client at all reasonable hours of the business day and under reasonable conditions. Section 5 04 Client Confidentiality. All records and information regarding the Client will be held as confidential by Patterson. ARTICLE VI. Miscellaneous Section 6.O1-Notices. Any notices required or permitted to be given hereunder shall be made in writing and sent to the other party via (i) hand delivery or (ii) registered or certified US mail, postage pre -paid, return receipt requested, addressed as follows: To Client: James Mauldin City of Fort Worth 1000 Throckmorton Fort Worth, Texas 76103 ToPatterson: Linda T. Patterson Patterson Capital Management, L.P. 301 Congress Avenue Suite 570 4 Austin, Texas 78701 Telephone: (817) 392-2438 (512) 320-5042 or 800-817-2442 Telefax: (817) 392-8181 (512) 320-5041 E-mail. iames.mauldinefortworthtexas.aov Iinda@ patterson.net If notice is sent via hand delivery, it shall be deemed received at the time of delivery. If notice is sent via US mail, it shall be deemed received three days after the date on which it is deposited in the mail so long as the notice is properly addressed and has sufficient postage. Section 6.02.Severability. In case any one or more of the provisions contained in this Agreement are held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be considered as if such invalid, illegal, or unenforceable provisions were never contained herein. 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 Patterson's responsibilities hereunder are limited to the management of the Portfolios as herein described and the providing of advice, reports, and information herein required' Patterson 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 Tarrant County, Texas. Section 6.06.Cantions. 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 Patterson 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 Patterson in the manner set forth in Section 6.01 hereof of its decision to terminate the Agreement If Patterson is subject to an Ownership Change under Section 6.11, Client may terminate this Agreement with thirty (30) days' written notice. Patterson acknowledges and agrees that Client is a governmental entity, and because of statutory, constitutional, and City Charter provisions, the Client cannot commit to the funding of its obligations described herein beyond each fiscal year. Therefore, the funding obligations of the Client described herein are subject to and conditioned upon the City Council of the City of Fort Worth appropriating for each fiscal year sufficient funds to satisfy such obligations. If for any reason at any time during any term of this Agreement, the City Council fails to appropriate funds sufficient for the Client to fulfill all or part of its obligations under this Agreement the Client may terminate this Agreement to be effective on the later of: (i) thirty (30) days following delivery by the Client to Patterson of written notice of the Client's intention to terminate or (ii) the last date for which funding has been appropriated by the City Council for the purposes set forth in this Agreement Section 6 09.Term. This Agreement shall be for an initial term of three years, beginning July 1, 2012, and ending June 30 2015, unless terminated in accordance with Section 6.08 hereof. This Agreement may be renewed for two additional one-year periods under the same terms and conditions if agreed in writing and signed by both parties. 5 Section 6.10. Assiinmerat. This Agreement shall not be assignable by either party hereto, in whole or in part, 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. Patterson shall notify the Client in writing of any change in its partnership ownership at least sixty (60) days prior to such change becoming effective. Section 6.12.SEC Document Disclosure. The Client, by execution of this document, acknowledges the receipt of Patterson's most current ADV Part II brochure disclosure document as required by the SEC. IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed in multiple counterparts as of the date first set forth above. CITY OF FORT WORTH, TX Date: _Co 1124 1 nK CA/ D AS TO PI ANIIb LYGALfl\ SEflSTANT CtTY AYTORNEY i\k-k 14(C Patterson Capital Nianaaernent, L.P. By: Patterson & Associates Inc. General Partner By: I/Ve/M ,/,77,-td,7(} Linda T. Patterson, President Date: Attested by: Mary J. KaysW c • E-)t-Irl 1f\ r : .y 6 6 EXHIBIT A CLIENT'S INVESTMENT POLICY Client Investment Policy is made part of this Investment Advisory Agreement in order to ensure that all investment decisions conform to the policy and parameters established by the Client and its governing body. As the Policy changes with Council action, the Client will provide the amended Policy to Patterson and the most recent amended and adopted Policy will control the Client's investments 7 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 an annual fee of: $ 60,000.00 Payable quarterly. Fees are due and payable within thirty (30) business days after receipt of invoice. 8 EXHIBIT 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. Failure to do so can result in a voidable contract. Patterson shall provide to Client an updated ADV Form on an annual basis in accordance with SEC Regulations 9 EXHIBIT D AUTHORIZED REPRESENTATIVES Authorized Representatives of the Client Name/Title Jenny Kerzman Assistant City Treasurer James Mauldin City Treasurer Phone 817-392-6030 817-392-2438 Lena Ellis 817-392-8517 Financial Management Services Director / CFO Authorized Representatives of Patterson Name/Title Linda T. Patterson President Justin Gard Adviser Howard Herring Adviser Rikki Ramirez Portfolio Assistant Phone 512-320-5042 512-320-5042 512-320-5042 512-320-5042 Fax a -mail 817-392-8181 iennv.kerzman@fortworthtexas.aov 817-392-8181 lames.mauldin©fortworthtexas.aov 817-392-8966 Iena.ellisWortworthtexas.aov Fax a -mail 512-320-5041 Iinda©patterson. net 512-320-5041 iustinenatterson.net 512-320-5041 howieeoatterson.net 512-320 5041 rikkieoatterson.net 10 INVESTMENTS To invest the City s cash in such a manner so as to ensure the safety of principal and interest, to meet the liquidity needs of the City, and to achieve the highest reasonable market yield. A. Cash Management Policy (AMC G-9552, March 12, 1992) Subject to approval by the City Manager and the Director of Finance, the City Treasurer is both authorized and required to promulgate a written Statement of Cash Management Rules and Regulations governing the City's cash management and investment activities (exclusive of the investment activities of the Employees' Retirement Fund), and to institute and administer such specific piocedures and criteria as may be necessary to ensure compliance with the City's cash management policy and the Public Funds Investment Act (Texas Government Code Chapter 2256). Specifically, this policy mandates the pursuit of the following overall goals and objectives: 1 All aspects of cash management operations shall be designed to ensure the safety and integrity of the City's financial assets. 2. Cash management activities shall be conducted in full compliance with prevailing local, state, and federal regulations. Furthermore, such activities shall be designed to adhere to guidelines standards, and practices promulgated by such professional organizations as the American Institute of Certified Public Accountants (AICPA), the Governmental Accounting Standards Board (GASB), and the Government Finance Officers Association (GFOA). 3. Operating within appropriately established administrative and procedural parameters, the City shall aggressively pursue optimum financial rewards while simultaneously controlling its related expenditures. Therefore cash management functions that engender interaction with outside financial intermediaries shall be conducted in the best financial and administrative interests of the City. In pursuit of these interests, the City will utilize competitive bidding practices wherever practicable affording no special financial advantage to any individual or corporate member of the financial or investment community. 4. The City shall design and enforce written standards and guidelines relating to a variety of cash management issues, such as the eligibility or selection of various financial intermediaries and counterparties, documentation and safekeeping requirements* philosophical and operational aspects of the investment function; and such other finetional and administrative aspects of the cash management program which necessitate standard setting in pursuit of appropriate prudence, enhanced protection of assets or procedural improvements. 5. Investments of the City, or of funds held in its possession in a fiduciary capacity, shall be made with the exercise of that 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. B. Investment Strategy (M&C G-11199, August 21, 1995 - Modified March 31, 1997) The City of Fort Worth maintains a Consolidated Portfolio in which it pools its funds for investment purposes. The City s cash management program seeks to achieve four objectives in this order of priority* safety of principal, adequate liquidity to meet daily cash needs, diversification, and finally a reasonable yield commensurate with the preservation of principal and liquidity. The following investment strategy has been designed to accomplish these objectives: 1. The City invests in "money market instruments," high credit quality, highly liquid investments with maturities of one year or less, and in intermediate -term securities of high credit quality with maturities no greater than five years The City will only invest in those secutities specified in its "List of Eligible Investments". These include U.S. Treasury Bills and Notes, high quality obligations of certain U.S. agencies and instrutnentalities, and AAA -rated local government investment pools and no-load money market mutual funds. Any securities not on this list will not be eligible investments. 2. At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. This will be accomplished by maintaining approximately 15 percent of the total portfolio in money market funds local government investment pools, bank accounts, and/or overnight repurchase agreements. The City shall also position some investments to provide liquidity for certain predictable obligations such as debt service payments. 3. The City shall not exceed a weighted average maturity of two years for the Consolidated Portfolio. The City shall strive to maintain this weighted average maturity by investing funds according to the following general maturity diversification guidelines: Maturity Cash 1 Year 2 Year 3 Year 4 Year 5 Year Day Range 0 1-365 365-730 730-1095 1095-1460 1460-1825 15 28 14.25 14 25 14.25 14.25 Portfolio There may be times when the City has more or less of its funds in any one maturity cell due to cash flow needs, prevailing market conditions, and other factors. The maturity diversification schedule serves as a general guideline for making investment decisions. In this way, the portfolio will be able to take advantage of rising interest rates by re -investing maturing securities at higher yields. In falling rate environments, it will profit from having investments that were made at higher interest rates. Following this discipline ensures that the City will always have sufficient cash available for daily needs, preserves its principal and encourage diversification in multiple maturity areas, short-term or long-term. In this manner, the Consolidated Portfolio will endeavor to earn a competitive market yield without assuming unacceptable risk C. Interest Earnings Interest earned from investments shall be distributed to the operating, internal service, and other City funds from which the money was provided with the exception that interest earnings received on the investment of bond ptoceeds shall be attributed and allocated to those debt service funds responsible for paying the principal and interest due on the particular bond issue. D. Designated Investment Committee Upon Council adoption of the Cash Management Policy and the promulgation of the Statement of Cash Management Rules and Regulations, a Cash Management Task Force comprised of the Assistant City Manager over Finance, the Finance Department Director, the City Treasu►er, and other City staff as deemed appropriate by the City Manager is established This group serves as the City s designated investment committee required under the State Public Funds Investment Act. The Task Force will regularly examine and evaluate the City's cash management and investment activities and recommend revisions to operational rules and regulations, the Cash Management Policy, and the Investment Strategy Modifications to the administrative rules and regulations will be submitted to the City Manager for approval. Amendments to the Cash Management Policy and/or Investment Strategy will be presented to the Council for adoption. Accoi ding to State statute, the Investment Policy and Strategy will be reviewed and adopted by Council at least annually. E. Investment Portfolio Rating The City will strive to maintain the highest possible portfolio rating. The City will manage its cash according to procedures and strategies to maintain such a rating. FORT WORTH THE CITY OF FORT WORTH, TEXAS STATEMENT OF CASH MANAGEMENT RULES & REGULATIONS I. INTRODUCTION A. Purpose Prevailing Texas Revised Statutes provide the City of Fort Worth, Texas (hereinafter referred to as the "City") with the legal authority to promulgate and implement reasonable standards for its cash management and investment operations. Specifically the Public Funds Investment Act (Chapter 2256 of Title 10 of the Local Government Code) requires the City to adopt a written investment policy regarding the investment of its funds and funds under its control. In order to comply with all statutes, rules and regulations governing the investment of public funds, and subject to approval by the City Council, the City Manager and the Finance Director, the City Treasurer is authorized and required to promulgate reasonable rules, regulations and other appropriate procedures to ensure the effective and judicious management of City funds. To this end, this Statement of Cash Management Rules and Regulations has been prepared. On March 12, 1992, the City Council approved M&C G-9552 and formally adopted the Statement of Cash Management Rules and Regulations. B. Establishment of Cash Management Task Force as Designated Investment Committee Both the City's formal policies and administrative rules and regulations have been designed to reflect a prudent, conservative, orderly and exacting approach in the conduct of its cash management activities. In support of its ongoing efforts, the City has established a permanent Cash Management Task Force comprised of an Assistant City Manager, the Finance Director, the City Treasurer and other City staff deemed appropriate by the City Manager and approved by the City Council to serve as its designated investment committee as required under the Public Funds Investment Act. This group regularly examines and evaluates the City's cash management activities and considers any potential need for refinement or revision of its operational rules and regulations The Cash Management Task Force will also periodically review the Consolidated Portfolio and monitor compliance with the City's Investment Strategy. C. Ongoing Review The Statement of Cash Management Rules and Regulations will be reviewed and evaluated on an annual basis to ensure that the rules and regulations expressed herein are responsive to the prevailing cash management and investment environment. The City Treasurer is directed to appropriately amend and/or revise the City's rules and regulations as conditions warrant, subject to administrative approval by the City Manager and Finance Director and legislative oversight by the City Council. If any changes ate contemplated which substantially alter or deviate from the intent and purpose of the policies adopted by the City Council (other than to effect administrative or procedural efficiencies), the City Treasurer will discuss and submit such changes to the Cash Management Task Force for recommendation to the City Manager and/or the City Council for appropriate administrative and/or legislative action. D. AAA Rating for Portfolio The City has earned a AAA rating for its Investment Portfolio from Fitch Investor Services. This rating reflects the high quality of the portfolio's composition and cash management process as well as the City's commitment to ensure the absolute safety and integrity of its financial assets. The City will manage its cash according to procedures and strategies appropi late to maintain such a t ating. Once this goal has been effectively achieved, the City endorses appropriate operational and strategic activities designed to address its secondary concern - optimization of the City's overall investment performance. II. CITY COUNCIL POLICY (adopted by M&C G-9552, March 12, 1992) INVESTMENT STRATEGY (adopted by M&C G-11199, August 22, 1995) The City Council has formally adopted the following cash management policy statement and investment strategy statement which form the basis for the City's related toles and regulations: A. STATEMENT OF CASH MANAGEMENT POLICY Subject to approval by the City Manager and the Finance Director, the City Treasurer is both authorized and required to promulgate a written Statement of Cash Management Rules and Regulations governing the City's cash management and investment activities (exclusive of the investment activities of the Employees' Retirement Fund), and to institute and administer such specific procedures and criteria as may be necessary to ensure compliance with the City's cash management policy. Specifically, this policy mandates the pursuit of the following overall goals and objectives: 1. All aspects of cash management operations shall be designed to ensure the absolute safety and integrity of the City's financial assets 2. Cash management activities shall be conducted in full compliance with prevailing local, state and federal regulations. Furthermore, such activities shall be designed to adhere to guidelines and standards promulgated by such professional organizations as the American Institute of Certified Public Accountants (AICPA), the Governmental Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA). 3. Operating within appropriately -established administrative and procedural parameters, the City shall aggressively pursue optimum financial rewards while simultaneously controlling its related expenditures Therefore, cash management functions which engender interaction with outside financial intermediaries shall be conducted in the best financial and administrative interests of the City. In pursuit of these interests, the City will utilize competitive bidding practices wherever practicable, affording no special financial advantage to any individual or corporate member of the financial or investment community. 4. The City shall design and enforce written standards and guidelines relating to a variety of cash management issues, such as the eligibility or selection of various financial intermediaries; documentation and safekeeping requirements; philosophical and operational aspects of the investment function; and such other functional and administrative aspects of the cash management program which necessitate standard setting in pursuit of appropriate prudence enhanced protection of assets or procedural improvements 5. Investments of the City, or of funds held in its possession in a fiduciary capacity, shall be made with the exercise of that 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. B. STATEMENT OF INVESTMENT STRATEGY 2 The City of Fort Worth maintains a Consolidated Portfolio in which it pools its funds for investment purposes. The City's cash management program seeks to achieve three objectives in this order of priority• safety of principal adequate liquidity to meet daily cash needs, and finally a reasonable yield commensurate with the preservation of principal and liquidity. The following investment strategy has been designed to accomplish these objectives: The City invests in "money market instruments " very creditworthy, highly liquid investments with maturities of one year or less, and in intermediate -term securities of high credit quality with maturities no greater than five years. The City will only invest in those securities specified in Section V. Investment Criteria of the Cash Management Rules and Regulations. These include U.S. Treasury Bills and Notes high quality obligations of certain U.S. agencies and instrumentalities, and AAA rated local government investment pools and no-load money market mutual funds Any securities not on this list will not be eligible investments. 2. At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. This will be accomplished by maintaining approximately 15 percent of the total portfolio in money market funds, local government investment pools and/or over night repurchase agreements. The City shall also position some investments to provide liquidity for certain predictable obligations such as debt service payments. 3. The City shall not exceed a weighted average maturity of two years for the Consolidated Portfolio. The City shall strive to maintain this weighted average maturity by investing funds according to the following general maturity diversification guidelines: Maturity Cash 1 year 2 year 3 year 4 year 5 year Day Range 0 1-365 365-730 730-1095 1095-1460 1460-1825 % Portfolio 15 28 14.25 14.25 14.25 14.25 There may be times when the City has more or less of its funds in any one maturity cell due to cash flow needs, prevailing market conditions, and other factors. The maturity diversification schedule serves as a general guideline for making investment decisions. In this way, the portfolio will be able to take advantage of rising interest rates by re -investing maturing securities at higher yields. In falling rate environments, it will profit from having investments that were made at higher interest rates. Following this discipline ensures that the City will always have sufficient cash available for daily needs, preserves its principal and never has too much money in any one maturity area, whether it be short-term or long. In this manner, the Consolidated Portfolio will earn a competitive yield without assuming unacceptable risk. C. Annual ReN iew by City Council The City Council will annually adopt the Financial Management Policy Statements stating that it has reviewed the Cash Management Policy and Statement of Investment Strategy. The Financial Management Policy Statements so adopted shall record any changes made to either the policy or strategy. III. OVERVIEW OF CASH MANAGEMENT 3 Inasmuch as both the legislative policies and administrative rules and regulations of the City are designed to be completely congruent all of the City's cash management activities shall be conducted within the carefully - defined framework which is described throughout this Statement. Activities which represent any departure from this procedural or conceptual framework are unacceptable. A. Cash Management Capabilities and Qualifications: Chapter 2, Section 2-114 of the Code of the City of Fort Worth and City Council Resolutions No. 1185 (adopted October 7, 1986) and No. 1719 (adopted May 14, 1991) authorize the City Treasurer or his designee to conduct transactions necessary for investment of City finds. Pursuant to the Public Funds Investment Act 2256.005 (b)(3), this document must also address the quality and capability of investment management. Accordingly the City Treasurer shall have the following investment and cash management capabilities and qualifications as stated in the City's Job Classification for that position: 1. Knowledge of: a. Functions and operations of municipal government. b. Techniques and systems of cash management. c. Techniques of financial ratio analysis. d. Principles and practices of municipal finance, investment securities, and financial money markets. e. Methods of financial and economic analysis and forecasting. f. Principles of supervision, training and performance evaluation. g. Research and analysis methods. h. Pertinent Federal, State and local laws, codes and regulations governing municipal funds and investments. 2. Ability to: a. Conduct cash flow and financial ratio analysis. b. Monitor and report money market investments. c. Present financial asset and investment information to the City Administration, City Council, and citizens. d. Analyze complex financial and economic data e. Prepare clear and concise reports. f. Communicate clearly and concisely both orally and in writing. g. Communicate effectively at all levels both internal and external to the City, in order to obtain or provide information. B. Cash Management Programs and Activities: In the City's view, overall cash management success can only be achieved by carefully coordinating a broad range of disparate but interdependent activities; and success in each area is crucial to the achievement of the City's ultimate objectives Therefore the City has designed ongoing programs which address a wide variety of issues, including the following: 1. The design and implementation of reliable and effective cash -flow forecasting programs to assist in the determination of the amounts of cash available for investment the time period for which the finds may be invested with a reasonable level of confidence; and a measure of the volatility of its internally -generated forecasts, allowing for viable determination of the required liquidity which must characterize the City's investment portfolio. 2. The design and implementation of appropriate "revenue acceleration" programs, aimed at enhancing the speed at which monies are collected and deposited. 4 3. The design and implementation of suitable and appropriate 'controlled disbursement' programs, ensuring that City expenses are met in a timely manner, but not in such a way as to jeopardize the earnings potential of the City's investment portfolio. 4. The utilization of modern and efficient techniques for the physical movement of money, taking advantage of the various technological and operational procedures which have evolved in recent years. 5. The design of specific investment policies which will allow the City to maximize its interest earnings while at the same time establishing operational rules and regulations which will ensure the total safety of all funds entrusted to the care and control of City personnel. 6. The cost-effective utilization of independent investment advisory support services. 7. The design and implementation of banking relationships which are both favorable to the City and responsive to the day-to-day requirements of the City's complex financial operations. 8. The design and implementation of appropriate administrative approaches and operational procedures with regard to the proper and effective use of the City's municipal credit authority. 9. Access to ongoing cash management training, designed both to maintain the technical skills of assigned personnel and to ensure adequate cross -training of back-up personnel. 10. The design and administrative implementation of specific, written documentational requirements in support of the City's formal policies, rules and regulations. C. Financial Disclosure Statement, Ethics Disclosure and Conflicts of Interest Ordinance No. 7650, adopted by the City Council of the City of Fort Worth, Texas, on October 25, 1977, requires the City Treasurer annually to complete and file a financial disclosure statement with the City Secretary Futhermore the Public Funds Investment Act requires the ins estment officer(s) to file a disclosure statement with the Texas Ethics Commission and the governing body if: 1. the officer has a personal business relationship with a business organization offering to engage in an investment transaction with the City (as defined in 2256.005 (i)(I-3)); or 2. the officer is related within the second degree by affinity or consanguinity, as determined under Chapter 573 of the Texas Government Code, to an individual seeking to transact investment business with the entity. PFIA 2256.005 (I). IV. CRITERIA FOR SELECTING THE CITY'S FINANCIAL INTERMEDIARIES Day-to-day implementation of the City's diverse cash management programs and activities typically necessitates regular interaction with a variety of financial intermediaries, such as commercial banks, savings and loan associations, broker/dealers (who make markets in negotiable investment securities) and professional independent investment advisors. Since any failure, inadequacy or ineptness on the part of any one of these financial intermediaries can potentially result in financial disaster for the City, it is imperative that such entities meet the highest standards of both reliability and capability in the performance of their various functions. There are also a number of procedural and documentational issues which must be properly observed in the dispatch of such external functions. However, this segment of the City's rules and regulations deals primarily with eligibility criteria; while many of the City's procedural and documentational requirements are addressed in Section V. A. Commercial Banks: 5 The creditworthiness, liquidity, and overall financial strength of financial institutions into which the City deposits money, insofar as such elements can be measured through recognized industry rating services, shall be the primary determining factor in the City's eligibility criteria. Furthermore, eligible financial institutions shall demonstrate acceptable rating compliance under the terms of the Community Reinvestment Act, thereby supporting the City s ongoing efforts to encourage lending in low and moderate income areas. In all events, deposits of City monies in commercial banks may only be made with institutions which possess the overall financial strength, capitalization and liquidity to reasonably ensure the safety and availability of such monies. To assess the overall financial strength of potential depositories, the City may utilize third -party rating agencies to perform periodic reviews of various commercial banks, and relies upon such reports to determine the appropriateness and eligibility of depositories. B. Savings and Loan Associations: Deposits of City monies in Texas savings and loan associations shall be subject to the same kinds of rating criteria which are applied to commercial banks. Therefore, their acceptability as depositories will be based on the third -party rating of appropriate rating organizations. City policy prohibits deposits (in savings and loan associations) of any amount (including accrued interest) which exceeds prevailing federal insurance limits. C. Securities Dealers and Other Qualified Representatives: The "primary" securities dealers are those major investment banking firms listed by the Market Reports Division of the Federal Reserve Bank of New York. These dealers are unique within the government securities industry in that they both "report" and are "regulated" in an industry that is typically "non -reporting" and 'unregulated " Included on this 'blue chip" list are major securities firms and some of the world's largest banks. City policy is generally to restrict transactions relating to the purchase and sale of U. S Government securities to this list of "primary" securities dealers. Such policy, therefore, will preclude the City from doing business with other brokers and dealers whose financial strength and operational capabilities cannot be confidently determined, given the absence of "reporting" and "regulation" requirements, except as permitted below. I. Certification Form for Qualified Representatives The Public Funds Investment Act requires that investments shall only be made with those business organizations (including money market mutual funds and local government investment pools) that have provided the City with a written instrument, executed by a qualified representative of the firm, acknowledging that the business organization has: a. received and reviewed the City's investment policy and strategy as included in The Cash Management Rules & Regulations; and b. implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the City and the organization that are not authorized by the City's investment policy as presented in The Cash Management Rules & Regulations. (PFIA Section 2256.005 (k-1)) Given the foregoing, the City has designed a form entitled The City of Fort Worth, Texas Public Funds Investment Act Cer tification Forn for Qualified Rept esentatives which must be submitted to the City for its approval prior to designation of an individual as a representative who is eligible to conduct securities business with the City. A copy of this document is available for inspection upon request 2. Selection and Annual Review for Qualified Representatives 6 Ultimately, the City must satisfy itself that the individual representative with whom the City has direct day-to- day contact can demonstrate the prerequisite skill, experience and reputation to deservedly conduct business with the City. Therefore, only individuals who can clearly demonstrate this professionalism and business integrity will qualify as financial intermediaries with regard to the City's investment portfolio. The Cash Management Task Force, serving as the City's designated investment committee, will annually review and adopt a list of qualified representatives who are authorized to engage in investment transactions with the City. 3. Selection of Non -primary Securities Dealers From time to time the Cash Management Task Force may approve up to three non -primary securities dealers to do business with the City in order to maintain an adequate list of experienced, knowledgeable representatives. These firms and their representatives must submit a completed The City of Foi t Woath, Texas Public Funds Investment Act Certification Form for Qualified Representatives Furthermore, as with representatives of primary securities dealers, the fact that an individual representative seeks to do business with the City is insufficient reason for the Cash Management Task Force to approve such a representative. Preference will be given to those individual dealers who demonstrate a clear understanding of the Texas Public Funds Investment Act and the City's cash management program through prior experience with the City or with other Texas cities. 4. Documentation of Investment Authority The City will furnish qualified representatives with a copy of the City's resolution authorizing the Director of Finance and the City Treasurer to establish and maintain accounts for the purpose of purchasing and selling securities authorized under the laws of the State of Texas and the guidelines outlined in this Statement. D. Investment Advisors: The City may elect to seek professional investment advisory support services. Such services will allow the City to improve its investment capabilities in several areas, including enhanced competitive market access, reliable estimates of interest -rate trends, isolation and realization of portfolio trading profits, advanced investment accounting technology and meaningful access to computer -based evaluation models. The City has established strict guidelines regarding the selection of such investment advisors to ensure that such support services are consistent with the City s established policies, rules and regulations. These guidelines include but are not limited to, the following: 1. Any investment advisor wishing to advise the City shall be a "Registered Investment Advisor" as defined and regulated by the Securities and Exchange Commission (SEC). 2. It is preferred that any such investment advisor shall be completely independent of any financial institution or securities brokerage firm. Any investment advisor lacking such complete independence shall fully and continuously disclose any relationships with any financial institution(s) and/or securities brokerage firm(s) and shall further fully disclose any commissions, bonuses, or soft -dollar payments resulting from his/her relationship with the City. 3. Any such investment advisor shall not take possession of any City monies or investment securities, nor have access to or control over such monies and/or securities. [Procedures for delivery, possession and safekeeping are described in Section V of this statement. Such procedures shall remain precisely the same regardless of the City's relationship with an investment advisor.] 4. Any such investment advisor shall not be empowered to execute investment or liquidation transactions on behalf of the City. All such transactions shall be executed by City personnel. 7 5. And such investment advisor shall provide the City with periodic reports regarding the accounting treatment and performance level of the City's investment portfolio. Such ►eports shall be verifiable within the definition of generally accepted accounting principles (GAAP). 6. Fees for investment advisory services shall be established in advance and fully disclosed in a written agreement. It is imperative that any investment advisor who provides support services to the City be both highly qualified and demonstrably independent. Furthermore, a prospective advisor should be able to provide clear evidence of his/her capabilities on behalf of clients similar to the City. The City has designed a form entitled Investment Adi isor Questionnaire & Certification which must be submitted to the City for its approval before an investment advisor will be considered by the City to serve in an advisory capacity. A copy of this document is available for inspection upon request. V. INVESTMENT CRITERIA Generally, the City invests only in "money market instruments" which are defined as very creditworthy, highly liquid investments with maturities of one year or less, in intermediate -term securities with maturities no greater than five years, in public funds investment pools created under the State of Texas Interlocal Cooperation Act with a AAA or AAA-m rating, and in SEC -registered, no-load money market mutual funds rated AAA. A. Eligible Investments The Public Funds Investment Act, Sections 2256.009 — 2256.016 and Section 2256.019 — 2256.0201, lists the authorized investments permitted to investing public entities. The City Treasurer and/or his designee(s) shall invest the City's investable funds in those instruments which are listed below, insofar as they satisfy the City's maturity and liquidity requirements: 1. Fully -insured and/or fully -collateralized Certificates of Deposit, maturities no greater than five years, issued by eligible commercial banks and savings and loan associations located within the State of Texas. 2. Direct obligations of the United States Treasury, including Bills, Notes, Bonds and STRIPS. However, there are a number of instruments which may be generically represented as "Treasury" securities which are not actually direct Treasury obligations. For example, U. S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are direct U. S. Treasury obligations while seemingly - similar instruments such as CATS (Certificates of Accrual on Treasury Securities) and TIGRs (Treasury Investment Growth Receipts) are not. Instead, they are certificates and receipts issued by entities other than the U S. Treasury. 3. Obligations of certain United States government agencies rated AAA and which are backed by the full faith and credit of the United States government. Eligible agency obligations include Export Import Bank issues (XMs), Farmers Home Administration Insured Notes (FHAs), and certain securities issued by the Government National Mortgage Association (GNMAs). However, other agency obligations, even though guaranteed by the full faith and credit of the United States government enjoy less active secondary markets than the more traditional Bills, Notes Bonds and STRIPS, or the broad and orderly markets enjoyed by certain GNMA issues Therefore, the City will refrain from purchasing such instruments as "SBA" loans, 'AID" bonds, Penn Central Transportation Certificates, Washington Metropolitan Transit Authority bonds, etc. unless special circumstances prevail which suggest their appropriate use for specific investments. Any such "special circumstances' must be fully documented at the time of such purchases, and approved in writing by the Finance Director. The City will restrict investments in eligible obligations described in this section to discount notes, coupon -bearing issues medium term notes, and callable issues. 8 4. Obligations of certain U. S. Government instrumentalities rated AAA including (but not limited to) such instruments as Federal Home Loan Bank debt (FHLBs) Federal National Mortgage Association debt (FNMAs) Federal Horne Loan Mortgage Corporation debt (FHLMCs), Federal Farm Credit Bank debt (FFCBs) and certain discount notes issued by instrumentalities such as the foregoing. Other U. S. Government instrumentality issues, such as Asian Development Bank notes, InterAmerican Development Bank bonds, World Bank bonds, Postal Service bonds, Tennessee Valley Authority bonds, and intermediate- and long-term "Federal Farm Credit"' and "Student Loan Marketing Association" instruments do not enjoy widespread, orderly marketplaces, and are therefore ineligible. The City will restrict investments in eligible obligations described in this section to discount notes, coupon -bearing issues, medium term notes, and callable issues. 5. Purchases of the "Treasury", "agency" or "instrumentality" securities mentioned in paragraphs 2, 3 and 4 above, under the terms of repurchase agreements (or in support of the City's "Sweep Account') which meet the City's established criteria for such transactions The City's standards for such purchases (under terms of repurchase agreements) are somewhat different than the standards applied to actual "hold to maturity" or "long" purchases held within the City's portfolio. For example, the City might never purchase GNMA securities with a final stated maturity date which is 10 years in the fixture for its permanent portfolio; but such securities should be perfectly acceptable as the securities purchased under the terms of a repurchase agreement. [See Section VI for additional detail regarding repurchase agreements.] 6. Commercial paper with an original stated maturity date of 270 days or less, subject to the following criteria: a. The paper must be rated by at least two of the nationally -recognized credit rating agencies at the time of purchase and the minimum rating must be A1+ (Standard and Poors), PI (Moodys), or DI (Duff and Phelps). b. If the issuer has senior debt outstanding, such debt must be rated at least A+ (Standard and Poors) and A l (Moodys). 7. Public funds investment pools created under the State of Texas Interlocal Cooperation Act which have attained a AAA or AAA-m rating from at least one nationally recognized rating agency and which comply with the Public Funds Investment Act. Eligible pools must also explicitly follow Securities and Exchange Commission Rule 2a 7. This rule, which regulates the operation of money market mutual funds, limits funds' average maturity to 90 days maximum, requires them to maintain a constant $1.00 net asset value, and restricts their investments to Treasury Bills and Notes and obligations of U.S. agencies and instrumentalities with maturities less than 13 months. Staff will consider other characteristics of pools before authorizing them as eligible investments. These characteristics include the size of the pool, number of participants and the size of their deposits, and the pool's use of reverse repurchase agreements. In general the City will avoid pools with less than $1 billion in deposits and a small number of participants because of possible instability in the pools and the resulting threat to the City's funds. 8. SEC -registered, no-load money market mutual funds rated AAA which meet the criteria prescribed in the Public Funds Investment Act of the State of Texas. Currently policy limits investments to those listed in paragraphs 1 through 8 above. However, there are numerous other money market instruments which are widely recognized as prudent vehicles for effective cash management; even though they may not be currently utilized by the City. Such money market investments include "eligible" domestic bankers' acceptances (BAs); negotiable, variable rate, Eurodollar, or Yankee 9 certificates of deposit (CDs); etc. As the City develops appropriate investment sophistication, it may examine and eventually utilize such alternatives, assuming that such alternatives are at that time legally authorized by Texas Revised Statutes. Under normal circumstances, no variation from the criteria listed above shall be allowed. However, the City may elect, at its discretion, to amend and/or refine its List of Eligible Investments as conditions warrant. This process will be initiated by the City's permanent Cash Management Task Force, with oversight by the City Manager and/or the City Council. In any event, no variances from the list will be allowed in the absence of specific, written approval from the Finance Director. The Public Funds Investment Act does not require the City and other local government entities to liquidate investments that were authorized investments at the time of purchase and subsequently were made ineligible by amendments to the Act. On occasion, the City may elect to "reverse" certain of its portfolio securities under the terms of a "reverse repurchase agreement" or "portfolio lending" program. This authority shall be restricted requiring written authorization from the Finance Director. However, under no circumstances will the City utilize reverses as a tool to effect "margined purchases" of investment securities or as an activity which might essentially serve to 'disguise" or 'cover up" unrecognized portfolio losses. The City will only enter into reverse repurchase agreements with defined maturity dates. The proceeds may not be invested in any security with a maturity date longer than the maturity date of the reverse repurchase agreement. Reverse repurchase agieements will not have a term exceeding 90 days. B. Credit Risk and Market Price Changes The City Treasurer, acting in accordance with procedures specified herein and exercising due diligence, shall not be held personally responsible for a specific security's credit risk or market price changes, provided that these changes are reported in a timely manner and the appropriate actions are taken to control adverse developments. 1. Credit Risk — Loss of Required Rating All prudent measures will be taken to liquidate an investment that is downgraded to less than the required minimum rating. The City Treasurer shall immediately inform the Cash Management Task Force of any rating downgrade. 2. Market Price Changes All fixed income securities, even direct obligations of the United States Treasury, are subject to market price changes. During times of economic expansion and inflation, fixed income securities generally decline in value as interest rates rise. During times of economic contraction and falling prices, fixed income securities generally increase in value as interest rates fall. While the City will strive to avoid investment losses the incurrence of a "book" or "accounting" loss does not necessarily indicate an inappropriate investment activity or faulty portfolio management strategy. In fact, incurrence of a "book" loss may actually be part of a transaction producing an aggregate gain. In other cases incurrence of a smaller "book" loss may be preferable to incurrence of a much larger potential loss. Therefore, no legal or administrative prohibitions are imposed against incurrence of portfolio losses so long as such transactions can be justified in the overall portfolio management process or are explained by trends in the economy. C. Diversification The City shall rnaintain a weighted average maturity no greater than 2 years by investing finds according to the following schedule: Maturity Cash 1 year 2 year 3 year 4 year 5 year 10 Day Range 0 1-365 365-730 730-1095 1095-1460 1460-1825 % Portfolio 15 28 14.25 14.25 14.25 14.25 At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. There may be times when the City has more or less of its funds in any one maturity cell. This maturity diversification schedule serves as a general guideline for making investment decisions. In this way, the portfolio will be able to take advantage of rising yields by re -investing maturing securities at higher yields In falling rate environments, it will profit from having investments that were made at higher interest rates. Setting targets for positions in each maturity cell puts in place an additional safeguard. Following this discipline ensures that the City never has too much money in any one maturity, whethei it be short-term or long. Just as there are i isks from having too much money invested in the 5 year area, there are risks in short maturities. In the former, one runs the risk of having to sell before maturity at a loss to raise cash. In the latter, one misses the added return offered by longer maturities. While there may be certain circumstances in which long-term securities are utilized such as investments of long-term sinking fiord contributions, maturity -matched construction funds, or securities purchased under the terms of short-term repurchase agreements, the general use of long-term securities shall be avoided. Such long- term instruments are typically inappropriate for the City, since the purchase of such securities infers a certain level of "speculation,' given the significant "market risk" and/or "interest -rate risk' which characterizes long- term investments The exception to this rule involves securities purchased under the terms of short-term repurchase agreements, as specifically discussed in this document. Prevailing Texas statues require that entities such as the City of Fort Worth give appropriate consideration to 'diversification" of its investment portfolio. Traditionally, diversification is a logical methodology for minimizing overall portfolio risk by limiting (either in percentage or dollar amount) the amount of the City's investments in certain classes of investments which may be exposed to measurable credit and/or market risk. Alternatively, diversification may be viewed as a procedure which "spreads the risk" throughout the aggregate portfolio. However, the City's currently -eligible investments are all virtually "riskless," given their inherent individual creditworthiness and the maturity limitations which the City has specifically imposed. In such circumstances simply requiring some designed "mixture" (of security types) neither improves the portfolio's level of safety nor enhances its yield. Therefore, no maximums or minimums are currently observed with regard to the City's portfolio mix. D. Ineligible Investments (in permanent portfolio) I. All United States Treasury, Agency or Instrumentality securities with maturity dates in excess of 5 years from the date of purchase. 2. All United States Government Agency or Instrumentality securities which are defined as "mortgage - backed" securities (Since such securities are inherently "callable," regardless of their final stated maturity date, they are ineligible as permanent City investments.) 3. Certain United States Government Agency securities, including those issued by the Small Business Administration (SBA), the Agency for International Development (AID), Penn Central Transportation Certificates, Washington Metropolitan Transit Authority bonds, and any other U. S. Government Agency securities which do not enjoy a wide -spread, competitive marketplace. 4. Certain United States Government Instrumentality securities, including those issued by the Asian Development Bank, the Inter -American Development Bank, the World Bank, the U S. Postal Service, the Tennessee Valley Authority, the Student Loan Marketing Association, and any other U. S. Government Instrumentality securities which do not enjoy a widespread, competitive marketplace. 11 5. Any investment securities which have been 'securitized," constructed or otherwise invented by the investment banking community, and subsequently represented (either by commission or omission) as being some form of "U.S. Government securities." Examples of such instruments include CATS (Ce►tificates of Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts), CMOs (Collateralized Mortgage Obligations), or even stranger "invented securities," such as CARs and REMICs. VI. SAFEKEEPING, COLLATERALIZATION AND INVESTMENT PROCESSING While the investment criteria established in Section V of this policy are designed to afford significant protection to the City, there are required procedural and operational elements of the investment program which are essential to the ultimate protection of the City's portfolio. Specifically, these elements deal with the delivery, possession and safekeeping criteria which must be observed in all investment activities. A. Safekeeping Criteria All ownership of investment securities shall be evidenced by an acceptable safekeeping receipt issued by a third -party financial institution which is acceptable to the City (or by a safekeeping receipt from a Federal Reserve Bank, should such services become available). 1. Securities Safekeeping with Depository Bank In most cases, the City will accept a safekeeping receipt issued by its "lead bank" which clearly indicates that the securities are being held by the City's lead bank in the City's name, accompanied by a copy of the lead bank's safekeeping receipt from the Federal Reserve Bank. (The latter receipt will indicate that the securities are held in the lead bank's name "on behalf of a customer,' as indicated by an '02" classification.) However the lead bank may not provide securities safekeeping services in cases in which the lead bank is a 'principal" or "counterparty" in the investment transaction itself. In such cases, safekeeping documentation similar to that described in the preceding paragraph must be provided by a "third -party bank" which is acceptable to the City. Furthermore, such third -party bank safekeeping may not be provided by a "parent" or "holding company' bank which is financially related to any bank which is a principal in a specific securities transaction. The City has designed a form entitled Third -Party Custodial Agent Agreement which specifically delineates the role and responsibilities of such third -party banks. A copy of this document is available for inspection upon request. [Note: In cases in which the City's lead bank merely 'executes" the necessary wire -transfer services to support the City s investment transactions, and is not a principal in the transaction, the bank's role is defined as that of a 'settlement Agent," rather than that of a "counterparty," as described by the Governmental Accounting Standards Board (GASB).] 2. Securities Lending Program Securities lending is a cash management strategy involving the lending of the City's investment securities to a primary dealer with the substitution of securities of greater market value being safekept by a third party custodial bank in an account in the City's name. The program is designed so that the City earns supplemental income on the portfolio without losing ownership or interest payments on the loaned securities. The City Council first approved the contract for a securities lending program with Morgan Stanley and with the Bank of New York as custodian on October 17, 1989. The agreement, Paired Repurchase Transactions Custody Agreement, establishes a Bank of New York safekeeping account in the City's Warne to hold all securities submitted by Morgan Stanley as collateral for the City s investment securities Collateral reports are faxed to the City daily for review. 3. Deposit Collateral Policy 12 In addition to the securities which are actually "owned" by the City, Texas Revised Statutes, the Public Funds Investment Act and Chapter 2257, Texas Government Code, Collateral for Public Funds, require that all uninsured collected balances, plus accrued interest, if any, of the City held in commercial banks be frilly collateralized by acceptable securities. The Federal Reserve Bank (the "Fed') has specifically designed a system by which the Fed itself may act as the safekeeping agent of both the City and the bank which is "pledging" the collateral (to secure City deposits). Upon acceptance by the City and proper transfer by the pledging bank into a "joint custody account" (classification "07"), the Fed will issue a "joint custody receipt" to both the pledging bank and the City. Thereafter, the Fed will not release the securities prior to their maturity (for purposes of reassignment or liquidation) without the express consent of both parties. Collateral will be valued monthly, and reports will be sent from the depository bank and the Fed on a monthly basis for review. The collateral agreement is part of the City's Banking Services Agreement with its depository bank. The City has established its own joint custody account at the Federal Reserve Bank, represented by a ' psuedo" ABA number. All joint custody receipts issued by the Fed shall note that the City's ABA number. (The City has signature cards on file with the Fed, and has established telephonic and written documentation procedures for the release of securities so held.) B. Delivery vs. Payment All investment (or divestment) transactions will be implemented on a "delivery vs. payment" (or "payment vs. delivery") basis as specified in the City s Banking Services Agreement. In the absence of acceptable delivery (oi payment), the City will refuse to enter the transaction. All securities processing required to implement the aforementioned purchase and sale transactions will be supported by written instructions to the City's bank, unless the timely preparation of such written instructions would hinder the orderly completion of the transaction itself. In such cases, the City will prepare follow-up letters confirming the oral (typically telephonic) instructions, and forward such written instructions to the bank without undue delay, either by mail or facsimile transmission. C. Repurchase Agreements Repurchase agreements will meet the aforementioned delivery criteria, and will be accompanied by an acceptable "haircut" (i.e., excess of the market value of securities over the principal amount of the investment). The required haircut will be established by the City, and shall be specifically addressed in a written Master Repurchase Agi eement which supports the repurchase transaction. In general the extent of the haircut requirement will increase in direct proportion to the length of maturity of the securities purchased under the terms of the repurchase agreement. Furthermore, securities purchased under the terms of a repurchase agreement shall generally have maturity dates of ten yeas s or less, and shall be "wirable" instruments through the U. S Federal Reserve system. Any departure from these 'maturity" or "wirability' standards shall require the specific, written authorization of the Finance Director. In the absence of authorization to the contrary, the City will require the following minimum ratios of market value of securities purchased (under the terms of the repurchase agreement) to the principal dollar amount of such investments: U. S. Treasury Bills, Notes, Bonds and STRIPS which mature in 1 year or less: 101 % U. S. Treasury Notes, Bonds, and STRIPS which mature in 1 to 10 years: 102% U. S. Government agency or instrumentality issues which mature in up to 10 years: 102% Naturally, the haircut ratios listed above must be examined on a daily basis, to ensure that the haircut or 'margin" does not drop below minimum acceptable levels. In cases of securities which require "physical" 13 rather than "book entry" delivery and safekeeping, the City will require a higher haircut ratio, and must approve the acceptability of such securities. Similarly, if securities have maturities in excess of ten years, the City may •equire a higher haircut ratio, and must specifically approve the acceptability of such securities. [Whenever possible, the City will only accept ' wirable securities with maturities of 10 years or less. However, the City may accept (at its discretion) certain physical delivery and safekeeping of nonwirable and/or longer -term securities.] D. Competitive Bidding All individual security purchases and sales (excluding transactions with money market mutual funds and local government investment pools, which are deemed to be made at prevailing market rates) will require at least three competitive offers or bids. VII. PERFORMANCE EVALUATION AND REPORTING A. Recording The City will use an appropriate portfolio management software system to record investment purchases, sales and maturities. The selected system will maintain the portfolio inventory, accrue interest, amortize/accrete (premiums/discounts), calculate yields and provide other accounting and performance data as necessary. Monthly investment reports are produced from this data for periodic financial reporting and management review B. Treasurer's Cash Management Reports On a monthly basis, the City Treasurer and/or his designee(s) will prepare a cash management report. The report will be reviewed by the Cash Management Task Force and signed by the Treasurer, Deputy Treasurer and Finance Director. Periodically but no less than quarterly this report will be provided to the City Council. The Treasurer's Cash Mangement Report will be included in any periodic Financial Report provided to the City Council by the Finance Director. The Public Funds Investment Act requires that the cash management reports be formally reviewed at least annually by an independent auditor and reported to the governing body. This shall be completed by the City's external auditors in the process of the preparation of the City's Comprehensive Annual Financial Report. 1. Reporting Requirements This report will include, but not be limited to, a summary of the securities held at the end of the month; a portfolio cash -flow report, showing the purchases, sales maturities accrued interest sold/purchased and the interest received; and a report on the return on investment, showing the interest earned, the gain or loss on any sales during the month, the accretion/amortization, any "securities lending" earnings and any fees paid. Furthermore, the Public Funds Investment Act requires the report to: a. describe in detail the investment position of the City on the date of the report; b. be signed by the City Treasurer, Deputy Treasurer and Finance Director; c. contain a summary statement that states the: (1) beginning market value for the reporting period; (2) additions and changes to the market value during the period; (3) ending market value for the period; and 14 (4) fully accrued interest for the reporting period; d. state the book value and market value of each investment at the beginning and end of the reporting period; e. state the maturity date of each investment; f. state the compliance of the investment portfolio as it relates to: (1) the Cash Management Rules and Regulations including the Cash Management Policy and Statement of Investment Strategy and (2) the Public Funds Investment Act. 2. Calculation of Return on the Portfolio The return on the portfolio will be calculated by adding the interest earned, the gain or loss on any sale, the accretion or amortization of any discounts or premiums and any 'securities lending" fees. The estimated annualized return for the month will be computed by using the daily weighted average book value for the month. Unrealized gains and/or losses will not be considered in the computation of the portfolio's monthly return. 3. Performance Benchmark The benchmark for comparing the performance of the City s investment portfolio will be the 12 month moving average of the yield of the 1-year Treasury Bill on the last day of the month being reported. The 1-year Treasur} Bill is the simplest, safest security a portfolio can ovm. The 12 month moving average of its yield represents the return of a purely passive management approach in which equal amounts of the portfolio are invested in every month's current Treasury Bill. As one month's investment matures, it is automatically invested in the new I -year Bill. The City's objective is to exceed the 12 month moving average of the 1-year Treasury Bill rate each month through active portfolio management as governed by its Cash Management Rules and Regulations. 4. Portfolio Pricing As of the end of each month, the City will re -price each security using Interactive Data Corporation's database of market prices or by pricing the security based on its spread to the appropriate Treasury security. By this method, the City will monitor the market price of its investments. 5. Annual Audit of Cash Management Program In conjunction with the annual audit and the preparation of City's Comprehensive Annual Financial Report, a compliance audit of management controls on investments and adherence to the City's established investment policies will be conducted. C. Daily Operating Procedures Manual The City Treasurer and/or his designee(s) will develop and maintain a procedures manual, describing in detail how to obtain bank balances, calculate the City's liquidity needs, make daily investments, record investment purchases and sales, and distribute daily bank reports. The procedures manual will include forms, agreements reports and other documents utilized to carry out the intent of the City Council's policy and this Statement. D. Cash Management Task Force 15 The City's Cash Management Task Force will be comprised of an Assistant City Manager, the Finance Director, the City Treasurer and other appropriate City personnel. The Task Force will meet periodically to review and 'approve the Cash Mangement Report, to review portfolio performance, to discuss investment strategies and to resolve any challenges and opportunities arising in the cash management process. E. Outside Professional Support Services The City may, from time to time, engage the support services of outside professionals, so long as it can be clearly demonstrated that such engagements produce "net financial advantage" or necessary financial piotection of the City's resources Such services may include engagement of financial advisors in conjunction with debt issuances; portfolio management advisory support services; special legal representation; appropriate independent rating services; third -party custodial services; and other supportive services which cannot be efficiently addressed through "in- house" treatments. All such engagements shall require the written authorization of the Finance Director, who will provide written justification for the engagement to the City Manager and/or the City Council. VIII. UTILIZATION OF MUNICIPAL CREDIT AUTHORITY A. Utilization of Debt The City, like other governmental and quasi -governmental entities throughout the United States, has authority to issue various forms of tax-exempt debt. The interest on such debt is exempt from federal (and sometimes, state) taxation. While the unrestrained use of this authority is inappropriate, there are many circumstances in which the application of specific borrowing techniques is in the financial interest of the City. Such borrowing is closely regulated by federal law, Internal Revenue Service regulations, specific provisions of the Tax Equity and Fiscal Responsibility Act (TEFRA), and various elements of Texas Revised Statutes. Within the established regulations and guidelines, however the City has a great deal of latitude with regard to the timing and general nature of its financing activities. The City will utilize those financing alternatives and techniques which produce positive financial advantages. The Finance Director will, from time to time recommend to the City Manager and/or the City Council various financing opportunities which should be of ultimate financial and operational benefit to the City City personnel will constantly monitor the City's existing and potential financing alternatives to ensure that hall advantage is being taken of the financing alternatives which are available to the City. B. Arbitrage Rebate Compliance For any tax exempt municipal bonds issued after August 31, 1986, the City must remit to the Internal Revenue Service any cumulative interest earnings from the investment of bond proceeds that are in excess of the yield on a particular bond issue. In arbitrage regulations released in May, 1989, the U. S Treasury Department stated its approval of commingling bond proceeds for compliance purposes. As a result, the City has changed its arbitrage -compliance approach from a specific bond issue portfolio method to a pooled -funds method. This approach uses the City's accounting records to determine the daily remaining balance of funds on hand for each issue. Interest is then allocated to daily remaining balance based on the average monthly yield from the investment of bond proceeds in the City s consolidated portfolio. Interest earnings in excess of the allowable amount are set up as a liability in the City's accounting records and rebated to the Federal government at least once every five years. SECTION IX. CASH MANAGEMENT AND INVESTMENT TRAINING 16 As required by the Public Funds Investment Act, all designated investment officers of the City will attend a training session not less than once in a two-year period and receive not less than 10 hours of instruction relating to cash management and investment responsibilities. These officers include the Finance Director, the Assistant Finance Director, the City 1 reasurer and the Deputy Treasurer. The following organizations are approved by the Cash Management Task Force as training providers: the Government Treasurers Organization of Texas, the Treasury Management Association, the Government Finance Officers Association, the Government Finance Officers Association of Texas the Texas Municipal League the Municipal Treasurers Association, and the Fort Worth Treasury Management Association. The Cash Management Task Force will annually review and approve the list of authorized training providers. 1. August, 1992: 2. April, 1994: 3. April, 1994: 4. January, 1995: 5. August, 1995: 6. August, 1995: 7. August, 1995: 8. March, 1997: 9. September, 1997: 10. January, 1998 11. July 21, 2002 RECORD OF AMENDMENTS Section V - Addition of money market mutual funds as eligible investments. Section V - Change in average maturity limit of portfolio and addition of maturity diversification schedule. Section VII - Change in benchmark from 4 week average of 1-year Treasury Bill to 12 month average of 1-year Treasury Bill. Section V - Further restrictions on eligible investments. Section V - Change in criteria for eligible local government investment pools. Section V - Establish maximum term for reverse repurchase agreements. Section II - Add Investment Strategy Statement. Section I1 - Change maturity distribution schedule to increase investments maturing in one year or less and to decrease the maximum portfolio maturity from 2.5 year to 2.0 years. Section I - Name Cash Management Task Force as City's designated investment committee. Section IV - Authorize the Cash Management Task Force to review and Approve list of qualified broken/dealers on annual basis. Section VII - Describe method for re -pricing securities. Section IX - List authorized providers of required investment training. Section IV - Authorize the Cash Management Task Force to review and approve up to three non -primary broker -dealers to do business with the City. Section I — Clarify to explicitly state the purpose of the document is to comply with provisions of the Public Funds Investment Act Section III — Add sub -sections A. and C. to comply with the Public Funds Investment Act requirements that the policy specifically designate investment officer(s), list qualifications and address ethics and financial disclosure. Section IV Sub -Section C. 1. — Specify Public Funds Investment Act compliance requirements for investment policy certification form to be signed by representatives seeking to transact investment transactions with the City. Section V, Sub -Section D. — Add listing of Ineligible Investments once specified in a separate document to comply with the Public Funds Investment Act requirements. Section VI, Sub -Section A. 2. — Add description of security lending program and related custodial procedures and agreements to comply with the Public Funds Investment Act requirements. Section VI, Sub -Section A. 3. — Add reference to Banking Services Agreement to describe collateralization requirements of Public Funds Investment Act and Collateral of Public Funds Act. Section VII, Sub -Section B. 1 — List specific reporting requirements of the Public Funds Investment Act. Section VII Sub -Section B. 5 — Add requirement for annual review of cash management program by external auditor as part of Comprehensive Annual Financial Report to comply with the Public Funds Investment Act requirements. 18 Patterson Capital Management ADV PART 2 — 2011 Brochure ITEM 1 COVER PAGE BROCHURE DATE March 31, 2011 Patterson Capital Management LP dba Patterson & Associates 301 Congress Avenue Suite 570 Austin, TX 78701 www.oatterson.net Primary contact for the firm is: (800) 817-2442 / (512) 320-5042 Linda Thomson Patterson Lindac patterson.net President (512) 320-5042 Though registered and regulated by the Securities and Exchange Commission that registration does not imply any particular or certain level of skill or training. This brochure provides information about the qualification and business practices of Patterson & Associates. If you have any questions about the contents of this brochure, please contact the firm at 800-817-2442 or (512)320-5042 or through info@patterson.net. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Additional information about Patterson & Associates is also available on the SEC's website at www.advisorinfo.sec.eov. ITEM 2 MATERIAL CHANGES The information regarding Patterson & Associates and its employees included in this brochure has not materially changed since the last annual update to the Securities and Exchange Commission (SEC) dated April 1, 2010. 1 Patterson Capital Management ADV PART 2 — 2011 Brochure ITEM 3 TABLE OF CONTENTS This Brochure is presented in nineteen separate sections fulfilling the requirements of SEC Rule 204 although not all sections are applicable to the Firm. Those items not applicable have been so designated and completed in the Brochure. Item 1 Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 8 Item 9 Item 10 Item 11 Item 12 Item 13 Item 14 Item 15 Item 16 Item 17 Item 18 Cover Page 1 Material Changes 1 Table of Contents 2 Advisory Business 2 Fees and Compensation 3 Performance Based Fees and Side -by -Side Management 4 Types of Clients 4 Methods of Analysis, Investment Strategies and Risk of Loss 4 Disciplinary Information (not applicable) 6 Other Financial Industry Activities and Affiliations 6 Code of Ethics, Participation/ Interest in Client Transactions & Personal Trading6 Brokerage Practices 7 Review of Accounts 8 Client Referrals and Other Compensation 8 Custody (not applicable) 8 Investment Discretion 9 Voting Client Securities (not applicable) 9 Financial Information (not applicable) 9 ITEM 4 ADVISORY BUSINESS Patterson Capital Management LP, dba Patterson & Associates, was founded in 1994 in Austin, Texas as a SEC registered investment advisory firm for public and corporate institutional clients. The firm was originally established and remains structured as a partnership, but currently the sole principal/owner of the firm is Linda T. Patterson. Patterson & Associates is firm independent from any other financial or other company. As such, the firm believes it can best objectively analyze investment decisions for price, composition and value. The firm offers investment advisory services and treasury consulting services within a philosophy that funds management is a part of the wider treasury function. Public advisory clients currently are located in Texas, New Mexico, Arizona and Illinois. In addition, we furnish investment advice through consultations not included in a direct management service agreement. The firm offers investment advisory services for a percentage of assets under management, hourly charges, or fixed fees, dependent upon the needs of the clients. The firm does not serve individuals. The focus of the firm has been the institutional public sector. Primarily serving the institutional public sector in the US, the firm invests client funds in short and intermediate range US domestic money markets 2 Patterson Capital Management ADV PART 2 — 2011 Brochure and fixed income markets The firm generally uses US government and GSEs securities, commercial paper, municipals and certificates of deposit. The operating and bond funds of public entities (cities, school, airports, hospitals, higher education, etc.) are by nature short term and are working funds with a higher need for liquidity than long term funds Most portfolios the firm manages can not buy longer than five years to stated maturity. Clients not statutorily required to have an adopted investment policy, are strongly encouraged to adopt a formal investment policy to set portfolio limitations and to explain risks inherent in the management of the funds. An additional supporting service the firm provides is treasury consulting; ranging from internal control and procedural development/review to banking. This service is available to all funds management clients and to non -management clients alike. The short-term and operating profile of most public funds requires that few portfolios can rarely be managed on a purely discretionary basis because the cash flows of the moneys is dynamic and requires on going communication The firm manages longer -term reserve funds on a discretionary basis. As of December 31, 2010, the firm managed $ 5,212,296,954 in non -discretionary funds based on book value and $ 30,900,000 on a discretionary basis. All clients of the firm have written investment policies (and if, in Texas, a policy adopted by the governing body of the client) which imposes controls on all aspects of the covered portfolios with maximum maturities maximum weighted average maturities and market sectors. In addition, the clients have ultimate approval rights on the broker/dealers the firm utilizes. The clients' policy and the internal needs and cash flows of the clients guide the portfolios and the firm therefore tailors each portfolio to the unique needs of each portfolio. See also Item 8. ITEM 5 FEES AND COMPENSATION Patterson & Associates offers investment advisory services on the basis of a percentage of assets under management, hourly charges, or fixed fees, dependent upon the needs and requirements of the client. We do not deduct our fees from the client's assets. The firm does not custody client assets or securities. Paterson & Associate s basic fee schedule for the provision of investment advisory services is as follows: Up to $5 million 0.20 % $5 million to $10 million 0.18 % $10 million to $25 million 0.15 % $25 million to $50 million 0.10 % Over $50 million negotiable Advisory fees may vary, but generally will not exceed the fees noted in the schedule above. In addition, the basic fee schedule described may vary due to the particular circumstances of the client or as negotiated with particular clients. Fees for non -discretionary and discretionary management services are generally billed in arrears on either a monthly or quarterly basis. In the event a client terminates its contract with Patterson prior to the end of a billing cycle, the fee for that period is prorated based on actual days in the period At times, Patterson may also recommend that a client utilize a money market 3 Patterson Capital Management ADV PART 2 — 2011 Brochure fund. If the client invests in such a fund, the client may have to pay a fee in addition to that paid to Patterson. Certain clients are charged a fixed fee, or an hourly fee, which varies from client to client, and which are billed in arrears on a quarterly or monthly basis. All fees paid to Patterson for investment advisory services are separate and distinct from the fees and expenses charged by LGIP pools or mutual funds to their shareholders. These fees and expenses are disclosed in the statement (pool) or prospectus (funds). Clients can invest in pools or funds directly without the services of Patterson. Clients will incur brokerage and custodial costs in connection with the services Patterson provides. Please see Item 12, Brokerage Practices, of the Brochure for a description of those costs. ITEM 6 PERFRORMANCE BASED FEES AND SIDE -BY -SIDE MANAGEMENT Patterson & Associates does not charge any performance -based fees to clients, accounts or funds. ITEM 7 TYPES OF CLIENTS Patterson & Associates provides investment advisory and investment consulting services to both public and private institutional clients, including cities, school districts, hospitals, foundations, airports counties. These services are provided in accordance with clients liquidity and risk tolerances and within the clients' investment policies and objectives. There are no minimum investment amounts or requirements for a client. Patterson & Associates generally recommends a minimum account size of $1 million to justify a net positive return for the service (earnings minus fees) See also Item 4. ITEM 8 METHODS OF ANALYSIS, INVESTMENT STRATEGIES AND RISK OF LOSS Patterson & Associates manages all client funds as separately managed portfolios defined by their unique objectives. Certain clients have several separately managed portfolios that are based on the specific type of and use of moneys (such as operating money, bond money, and reserves). Strategies for each unique client portfolio are discussed with the client initially and included as part their investment policy. Discussions are held with clients on a periodic basis, at least annually, to identify 4 Patterson Capital Management ADV PART 2 — 2011 Brochure strategic opportunities for the portfolios and to explain associated market and credit risks. Strategies are limited generally by cash flow needs of the funds. The firm primarily utilizes fundamental and technical analysis along with charting and cyclical analysis to support the individual strategies for the separately managed portfolios. The basic tools used include yield curve analysis, market trends and actual and perceived monetary policy. The generally short-term nature of the majority of clients' assets focuses market analysis in the short and intermediate term markets. Patterson relies primarily, but not exclusively, on multiple unaffiliated, nationally recognized securities rating organizations (NRSRO) such as Standard & Poor s and Moody Investor Services for basic analysis of credit risk on corporate entities. Such ratings are supplemented by an on -going monitoring of corporate actions, influences and developments derived from all available independent news sources. As discussed in Advisory Business, Patterson & Associates invests client funds in short and intermediate range US domestic money and fixed income instruments. Portfolios for operating and bond funds are policy controlled and generally use a buy -and -hold strategy. Securities are normally laddered in a manner reflecting the cash flow needs of the funds. Each portfolio is defined by policy with a maximum maturity and a maximum weighted average maturity which is continuously monitored by the firm. The primary risk associated with such investments is liquidity risk because these funds are used for ongoing operations and projects. Liquidity risk is mitigated with (a) maturities targeting cash needs, (b) a periodic cash flow review with the client and (c) a verification of viability before each trade. Any market risk is reduced through the buy -and -hold process which matches the maturity of investments with known liability dates. Debt and Other Income Producing Risk. Income securities including money market instruments, are subject to interest rate, market and credit risk. Interest rate risk relates to changes in a security's value as a result of changes in interest rates generally. Even though such instruments are investments that may promise a stable stream of income, the prices of such securities are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. In general, the values of fixed income securities increase when prevailing interest rates fall and decrease when interest rates rise Market risk relates to the changes in the risk and perceived risk of an issuer, country or region. Credit risk relates to the ability of the issuer to make payments of principal and interest. A clients could lose money if the issuer of a fixed income security is unable to pay interest or repay principal when due. Credit risk applies to most fixed income securities. The values of income securities may also be affected by changes in the credit rating or financial conditions of the issuing entities. Municipal Bond Risks. Municipal securities can be significantly affected by political changes as well as uncertainties related to taxation, legislative changes or the rights of municipal security holders Because many municipal securities are issued to finance similar projects (for example, education healthcare or transportation), conditions in those securities can affect the overall municipal market. Money Market Mutual Fund Risks — Money market funds, and local government investment pools structured as a "2a-7 fund", are subject to market, credit and interest rate risk. Interest rate risk relates to changes in the value of securities held in the portfolio as a result of changes in interest rates generally. Credit risk relates to the ability of the issuer to make payments of principal on securities held in the portfolio. Credit risk applies to the securities in the portfolio as well as any credit rating on the fund or pool itself. The strategy for reserve funds are also reviewed on the basis of potential fund usage and are restricted by policy as to maximum maturity and maximum weighted average maturity. If market or volatility risks are expected to affect the client s access to the funds and that access is in question by the client, the portfolios are shortened to reduce this risk. 5 Patterson Capital Management ADV PART 2 — 2011 Brochure ITEM 9 DISCIPLINARY INFORMATION Not applicable. ITEM 10 OTHER FINANCIAL INDUSTRY ACTIVITIES AND AFFILIATIONS Patterson & Associates, its employees and supervised persons, have no financial affiliates. The firm is not actively engaged in any business other than giving investment advice and treasury consulting ITEM 11 CODE OF ETHICS. PARTICIPATION OR INTEREST IN CLIENT TRANSACTIONS AND PERSONAL TRADING Patterson & Associates has adopted a Code of Ethics and Personnel Regulations. The Code includes: - Mission statement ▪ standards of conduct protection of material non-public information - personal trading procedures and reporting - reporting requirements and violations • reviews and enforcement - SEC requirements - Affirmative action statements • Confidentiality - Internal controls Systems controls brokerage controls trade controls settlement and clearing controls The Mission Statement and Code of Conduct are available on request to any client or prospective client. Neither Patterson & Associates nor any employee, supervisor, or management persons have any financial interest in any related financial industry participant. Patterson & Associates, its employees and its supervisory or management persons may invest in the same securities it recommends to its clients. With strict client written and policy limitations of investments: to the US Government and GSE markets, money markets and commercial paper, the firm sees no conflict of interest. The markets are deep and broad and, unlike equities, investments in the securities could not affect market prices. All related persons of Patterson & Associates are required to report quarterly, to the Chief Compliance Officer, all investment transactions. These records are reviewed for potential conflicts of interest and the investment records are maintained. 6 Patterson Capital Management ADV PART 2 — 2011 Brochure Also included in the Patterson Code of Ethics is the provision that no employee or member of their family may accept gifts or gratuities when there is an attempt to influence or reward the employee in connection with any business or investment transaction. ITEM 12 BROKERAGE PRACTICES Soft Dollars Patterson & Associates does not participate in any soft dollar arrangements. The firm has no incentive to select or recommend any broker/dealer No fees or any type compensation is paid to Patterson & Associates from broker/dealers or funds. No research is done for any broker/dealer. Broker/Dealers Patterson & Associates requires that all public clients approve a list of authorized broker/dealers for Patterson to use on their behalf. Patterson will only recommend a broker/dealer for a client that suits the client's portfolio needs. It may consider client referrals from a broker/dealer in selecting broker/dealers for an account; however, all investments are made on a competitive basis eliminating any potential conflict of interest. Broker/dealers are not selected based on client referrals to Patterson. Clients may require that a specific broker/dealer be included in the competitive list of client authorized broker/dealers; however all investments are made on a competitive basis eliminating any potential conflict of interest. Not all clients direct brokerage. Clients should understand that if they direct the firm to utilize a specific broker/dealer, Patterson may not be able to obtain best execution on the client's trade as they may incur additional costs. Under Texas law, Patterson & Associates may not place a trade for Texas governmental clients with a broker/dealer unless Patterson has received a certification from the broker/dealer that it has received the client's investment policy and the broker/dealer agrees to establish procedures which control the purchase of unauthorized securities. Prior to placing a trade for any client, Patterson obtains at least three bids/offers from authorized broker/dealers who have provided the requisite certification or who are on the client's authorized list Internally, Patterson will only seek bids/offers from a broker/dealer that has provided Patterson with the following documents at a minimum: the broker/dealer's state registration, a completed Patterson questionnaire for background and contact information, FINRA registration and CRD numbers, and annual financial statements. All information on broker/dealers is maintained by Patterson. Aggregation of Trades Patterson & Associates does occasionally aggregate the purchase and sale of securities for various clients. Trade aggregation is addressed in the Patterson's Code of Ethics. In its sole discretion Patterson may aggregate trades for several clients with similar needs. Individual accounting for the security is applied on each client's documentation. Each client participating in an aggregated trade will receive a client confirmation. When trades are aggregated, (a) the actual price shall be applied to each client s exact portion of the transaction, (b) all transactions costs are assessed in a pro rata basis to each client (as applicable), (c) each clients receives a complete and separate broker/dealer confirmation on the trade designating their ownership in their portion (par value) of the trade. 7 Patterson Capital Management ADV PART 2 — 2011 Brochure ITEM 13 REVIEW OF ACCOUNTS In order to understand client needs and objectives and to assure that those objectives are met, Patterson & Associates completes a thorough review and discussion with each new client to obtain necessary guidance and policy documents and establish guidelines. On a periodic basis, and no less than annually, Patterson reviews the client portfolio(s) and all pertinent client documents, cash flows, and policies. The procedures of separate account management are thoroughly reviewed with each new client and as needed. The review includes: proposed portfolio structure, portfolio policy limitations, pricing mechanisms and sources, and assignment of responsibilities inside Patterson. These reviews are noted but not written. A Patterson internal team review with all advisory persons, including the firm's President/CIO and client adviser, is made at least quarterly. An annual review of each client portfolio, expectations and needs is made. In addition, should conditions or personnel change at the client or in Patterson a complete review of client needs and the existing portfolio(s) is made immediately. The client does not receive any report of these reviews. ITEM 14 CLIENT REFERRALS AND OTHER COMPENSATION The firm has no incentive to select or recommend any broker/dealer. No soft dollars are offered by the firm to clients No fees or any type compensation is paid to Patterson & Associates from broker/dealers or funds. The firm has no intention of relying upon the safe harbor provisions of the Exchange Act of 1934 Section 28(e) for soft dollar use. Also included in the Patterson Code of Ethics is the provision that no employee or member of their family may accept gifts or gratuities when there is an attempt to influence or reward the employee in connection with any business or investment transaction. No other person provides benefits in connection with the firm services. No one provides client referrals to the firm. See also Item 12. ITEM 15 CUSTODY Not applicable, Patterson & Associates never takes custody, nor directs custody, for clients. 8 Patterson Capital Management ADV PART 2 — 2011 Brochure ITEM 16 INVESTMENT DISCRETION Patterson & Associates provides discretionary and non -discretionary management services to its clients. Where discretionary authority has been granted, Patterson manages the portfolio and makes investment decisions without consultation with the client that would involved determinations regarding which securities are bought and sold, the broker/dealer with whom orders for the purchase or sale of securities are placed for execution. In some instances Patterson's discretionary authority in making these determinations may be limited by conditions imposed by the client in their investment guidelines, cash flow needs or objectives or instructions otherwise provided to Patterson. If discretionary authority is granted by the client it is documented in the advisory contract. See also Items 4, 11, and 12. ITEM 17 VOTING CLIENT SECURITIES Not applicable in fixed income and money market instruments. ITEM 18 FINANCIAL INFORMATION Patterson & Associates is not subject to any the financial condition that would likely impair its ability to meet contractual commitments. 9 Exhibit A NVESTMENTS To invest the City's cash in such a manner so as to ensure the safety of principal and interest, to meet the liquidity needs of the City, and to achieve the highest reasonable market yield. A. Cash Management Policy (M&C G-9552, March 12, 1992) Subject to approval by the City Manager and the Director of Finance, the City Treasurer is both authorized and required to promulgate a written Statement of Cash Management Rules and Regulations governing the City's cash management and investment activities (exclusive of the investment activities of the Employees' Retirement Fund), and to institute and administer such specific procedures and criteria as may be necessary to ensure compliance with the City's cash management policy and the Public Funds Investment Act (Texas Government Code Chapter 2256). Specifically, this policy mandates the pursuit of the following overall goals and objectives: 1. All aspects of cash management operations shall be designed to ensure the safety and integrity of the City's financial assets. 2. Cash management activities shall be conducted in full compliance with prevailing local, state, and federal regulations. Furthermore, such activities shall be designed to adhere to guidelines, standards, and practices promulgated by such professional organizations as the American Institute of Certified Public Accountants (AICPA), the Governmental Accounting Standards Board (GASB), and the Government Finance Officers Association (GFOA). 3. Operating within appropriately established administrative and procedural parameters, the City shall aggressively pursue optimum financial rewards, while simultaneously controlling its related expenditures. Therefore, cash management functions that engender interaction with outside financial intermediaries shall be conducted in the best financial and administrative interests of the City. In pursuit of these interests, the City will utilize competitive bidding practices wherever practicable, affording no special financial advantage to any individual or corporate member of the financial or investment community. 4. The City shall design and enforce written standards and guidelines relating to a variety of cash management issues, such as the eligibility or selection of various financial intermediaries and counterparties, documentation and safekeeping requirements; philosophical and operational aspects of the investment function; and such other functional and administrative aspects of the cash management program which necessitate standard setting in pursuit of appropriate prudence, enhanced protection of assets or procedural improvements. Financial Management lent a4.5! Niateinen0. . 5. Investments of the City, or of funds held in its possession in a fiduciary capacity, shall be made with the exercise of that 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. B. Investment Strategy (M&C G- 11199, August 21. 1995 - Afodijied March 31, 1997) The City of Fort Worth maintains a Consolidated Portfolio in which it pools its funds for investment purposes. The City's cash management program seeks to achieve four objectives in this order of priority: safety of principal, adequate liquidity to meet daily cash needs, diversification, and finally a reasonable yield commensurate with the preservation of principal and liquidity. The following investment strategy has been designed to accomplish these objectives: The City invests in "money market instruments," high credit quality, highly liquid investments with maturities of one year or less, and in intermediate -term securities of high credit quality with maturities no greater than five years. The City will only invest in those securities specified in its "List of Eligible Investments ". These include U.S. Treasury Bills and Notes, high quality obligations of certain U.S. agencies and instrumentalities, and AAA -rated local government investment pools and no -load money market mutual funds. Any securities not on this list will not be eligible investments. 2. At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. This will be accomplished by maintaining approximately 15 percent of the total portfolio in money market funds, local government investment pools, bank accounts, and/or overnight repurchase agreements. The City shall also position some investments to provide liquidity for certain predictable obligations such as debt service payments. 3. The City shall not exceed a weighted average maturity of two years for the Consolidated Portfolio. The City shall strive to maintain this weighted average maturity by investing funds according to the following general maturity diversification guidelines: Maturity Cash I Year 2 Year 3 Year 4 Year 5 Year Day Range 0 1 -365 365 -730 730-I095 1095 -1460 1460-1825 % 15 28 14.25 14.25 14.25 14.25 Portfolio There may be times when the City has more or less of its funds in any one maturity cell due to cash flow needs, prevailing market conditions, and other factors. The maturity diversification schedule serves as a general guideline for making investment decisions. In this way, the portfolio will be able to take advantage of rising interest rates by re- investing maturing securities at higher yields. In falling rate environments, it will profit from having investments that were made at higher interest rates. Following this discipline ensures that the City will always have sufficient cash available for daily needs, preserves its principal and encourage diversification in multiple maturity areas, short-term of long -term. In this manner, the Consolidated Portfolio will endeavor to earn a competitive market yield without assuming unacceptable risk. C. Interest Earnings Interest earned from investments shall be distributed to the operating, internal service, and other City funds from which the money was provided with the exception that interest earnings received on the investment of bond proceeds shall be attributed and allocated to those debt service funds responsible for paying the principal and interest due on the particular bond issue. D. Designated Investment Committee Upon Council adoption of the Cash Management Policy and the promulgation of the Statement of Cash Management Rules and Regulations, a Cash Management Task Force comprised of the Assistant City Manager over Finance, the Finance Department Director, the City Treasurer, and other City staff as deemed appropriate by the City Manager is established This group serves as the City s designated investment committee required under the State Public Funds Investment Act. The Task Force will regularly examine and evaluate the City's cash management and investment activities and recommend revisions to operational rules and regulations, the Cash Management Policy, and the Investment Strategy Modifications to the administrative rules and regulations will be submitted to the City Manager for approval. Amendments to the Cash Management Policy and/or Investment Strategy will be presented to the Council for adoption. According to State statute, the Investment Policy and Strategy will be reviewed and adopted by Council at least annually. E. Investment Portfolio Rating The City will strive to maintain the highest possible portfolio rating. The City will manage its cash according to procedures and strategies to maintain such a rating. THE CITY OF FORT WORTH, TEXAS STATEMENT OF CASH MANAGEMENT RULES & REGULATIONS I. INTRODUCTION A. Purpose Prevailing Texas Revised Statutes provide the City of Fort Worth, Texas (hereinafter referred to as the "City") with the legal authority to promulgate and implement reasonable standards for its cash management and investment operations. Specifically the Public Funds Investment Act (Chapter 2256 of Title 10 of the Local Government Code) requires the City to adopt a written investment policy regarding the investment of its funds and funds under its control. In order to comply with all statutes, rules and regulations governing the investment of public funds, and subject to approval by the City Council, the City Manager and the Finance Director the City Treasurer is authorized and required to promulgate reasonable rules, regulations and other appropriate procedures to ensure the effective and judicious management of City funds. To this end, this Statement of Cash Management Rules and Regulations has been prepared. On March 12, 1992, the City Council approved M&C G-9552 and formally adopted the Statement of Cash Management Rules and Regulations. B. Establishment of Cash Management Task Force as Designated Investment Committee Both the City's formal policies and administrative rules and regulations have been designed to reflect a prudent, conservative, orderly and exacting approach in the conduct of its cash management activities. In support of its ongoing efforts, the City has established a permanent Cash Management Task Force comprised of an Assistant City Manager, the Finance Director, the City Treasurer and other City staff deemed appropriate by the City Manager and approved by the City Council to serve as its designated investment committee as required under the Public Funds Investment Act. This group regularly examines and evaluates the City's cash management activities and considers any potential need for refinement or revision of its operational rules and regulations The Cash Management Task Force will also periodically review the Consolidated Portfolio and monitor compliance with the City's Investment Strategy. C. Ongoing Review The Statement of Cash Management Rules and Regulations will be reviewed and evaluated on an annual basis to ensure that the rules and regulations expressed herein are responsive to the prevailing cash management and investment environment. The City Treasurer is directed to appropriately amend and/or revise the City's rules and regulations as conditions warrant, subject to administrative approval by the City Manager and Finance Director and legislative oversight by the City Council. If any changes are contemplated which substantially alter or deviate from the intent and purpose of the policies adopted by the City Council (other than to effect administrative or procedural efficiencies), the City Treasurer will discuss and submit such changes to the Cash Management Task Force for recommendation to the City Manager and/or the City Council for appropriate administrative and/or legislative action. D. AAA Rating for Portfolio The City has earned a AAA rating for its Investment Portfolio from Fitch Investor Services. This rating reflects the nigh quality of the portfolio's composition and cash management process as well as the City's commitment to ensure the absolute safety and integrity of its financial assets. The City will manage its cash according to procedures and strategics appropriate to maintain such a rating. Once this goal has been effectively achieved, the City endorses appropriate operational and strategic activities designed to address its secondary eoncern - optimization of the City's overall investment performance, II. CITY COUNCIL POLICY (adopted by M &C G -9552, March 12, 1992) INVESTMENT STRATEGY (adopted by M &C G- 11199, August 22,, 1995) The City Council has formally adopted the following cash management policy statement and investment strategy statement which form the basis for the City's related rules and regulations: A. STATEMENT OF CASH MANAGEMENT POLICY Subject to approval by the City Manager and the Finance Director, the City Treasurer is both authorized and required to promulgate a written Statement of Cash Management Rules and Regulations governing the City's eash management and investment activities (exclusive of the investment aetivities of the Employees' Retirement Fund), and to institute and administer such specific proeedures and criteria as may be necessary to ensure compliance with the City's cash management policy. Specifically, this policy mandates the pursuit of the following overall goals and objectives: I . All aspects of cash management operations shall be designed to ensure the absolute safety and integrity of the City's financial assets. 2. Cash management aetivities shall be conducted in full compliance with prevailing local, state and federal regulations. Furthermore, such activities shall be designed to adhere to guidelines and standards promulgated by such professional organizations as the American Institute of Certified Public Accountants (AICPA), the Governmental Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA). 3. Operating within appropriately - established administrative and procedural parameters, the City shall aggressively pursue optimum financial rewards, while simultaneously controlling its related expenditures. Therefore, cash management functions which engender interaction with outside financial intermediaries shall be conducted in the best financial and administrative interests of the City. In pursuit of these interests, the City will utilize competitive bidding practices wherever practicable, affording no special financial advantage to any individual or corporate member of the financial or investment community. 4. The City shall design and enforce written standards and guidelines relating to a variety of cash management issues, such as the eligibility or selection of various financial intermediaries; documentation and safekeeping requirements; philosophical and operational aspects of the investment function; and such other functional and administrative aspects of the cash management program which necessitate standard setting in pursuit of appropriate prudence, enhanced proteetion ofassets or procedural improvements. 5. Investments of the City, or of funds held in its possession in a fiduciary capacity, shall be made with the exercise of that 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. B. STATEMENT OF INVESTMENT STRATEGY 2 The City of Fort Worth maintains a Consolidated Portfolio in which it pools its funds for investment purposes. The City's cash management program seeks to achieve three objectives in this order of priority safety of principal adequate liquidity to meet daily cash needs, and finally a reasonable yield commensurate with the preservation of principal and liquidity. The following investment strategy has been designed to accomplish these objectives: 1. The City invests in "money market instruments " very creditworthy, highly liquid investments with maturities of one year or less, and in intermediate -term securities of high credit quality with maturities no greater than five years. The City will only invest in those securities specified in Section V. Investment Criteria of the Cash Management Rules and Regulations. These include U.S. Treasury Bills and Notes, high quality obligations of certain U.S. agencies and instrumentalities, and AAA rated local government investment pools and no-load money market mutual funds. Any securities not on this list will not be eligible investments. 2. At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. This will be accomplished by maintaining approximately 15 percent of the total portfolio in money market funds, local government investment pools and/or overnight repurchase agi eements. The City shall also position some investments to provide liquidity for certain predictable obligations such as debt service payments. 3. The City shall not exceed a weighted average maturity of two years for the Consolidated Portfolio. The City shall strive to maintain this weighted average maturity by investing funds according to the following general maturity diversification guidelines: Maturity Cash 1 year 2 year 3 year 4 year 5 year Day Range 0 1-365 365-730 730-1095 1095-1460 1460-1825 % Portfolio 15 28 14.25 14.25 14.25 14.25 There may be times when the City has more or less of its funds in any one maturity cell due to cash flow needs, prevailing market conditions, and other factors. The maturity diversification schedule serves as a general guideline for making investment decisions. In this way, the portfolio will be able to take advantage of rising interest rates by re -investing maturing securities at higher yields. In falling rate environments, it will profit from having investments that were made at higher interest rates. Following this discipline ensures that the City will always have sufficient cash available for daily needs, preserves its principal and never has too much money in any one maturity area, whether it be short-term or long. In this manner, the Consolidated Portfolio will earn a competitive yield without assuming unacceptable risk. C. Annual Review by City Council The City Council will annually adopt the Financial Management Policy Statements stating that it has reviewed the Cash Management Policy and Statement of Investment Strategy. The Financial Management Policy Statements so adopted shall record any changes made to either the policy or strategy. III. OVERVIEW OF CASH MANAGEMENT 3 Inasmuch as both the legislative policies and administrative rules and regulations of the City are designed to be completely congruent, all of the City's cash management activities shall be conducted within the carefully - defined framework which is described throughout this Statement. Activities which represent any departure from this procedural or conceptual framework are unacceptable. A. Cash Management Capabilities and Qualifications: Chapter 2, Section 2-114 of the Code of the City of Fort Worth and City Council Resolutions No. 1 185 (adopted October 7, 1986) and No. 1719 (adopted May 14. 1991) authorize the City Treasurer or his designee to conduct transactions necessary for investment of City funds. Pursuant to the Public Funds Investment Act 2256.005 (b)(3), this document must also address the quality and capability of investment management. Accordingly the City Treasurer shall have the following investment and cash management capabilities and qualifications as stated in the City's Job Classification for that position: 1. Knowledge of: a. Functions and operations of municipal government. b. Techniques and systems of cash management. c. Techniques of financial ratio analysis. d. Principles and practices of municipal finance, investment securities, and financial money markets. e. Methods of financial and economic analysis and forecasting. f. Principles of supervision, training and performance evaluation. g. Research and analysis methods. h. Pertinent Federal, State and local laws, eodes and regulations govern ing municipal funds and investments. 2. Ability to: a. Conduct cash flow and financial ratio analysis. b. Monitor and report money market investments. c. Present financial asset and investment information to the City Administration, City Council, and citizens. d. Analyze complex financial and economie data. e. Prepare clear and concise reports. f. Communicate clearly and concisely, both orally and in writing. g. Communicate effectively at all levels, both internal and external to the City, in order to obtain or provide information. B. Cash Management Programs and Activities, In the City's view, overall cash management success can only be achieved by carefully coordinating a broad range of disparate but interdependent activities; and success in each area is crucial to the achievement of the City's ultimate objectives. Therefore, the City has designed ongoing programs which address a wide variety of issues, including the following: 1. The design and implementation of reliable and effective cash -flow forecasting programs to assist in the determination of the amounts of cash available for investment; the time period for which the funds may be invested with a reasonable level of confidence: and a measure of the volatility of its internally- generated forecasts, allowing for viable determination of the required liquidity which must characterize the City's investment portfolio. 2. The design and implementation of appropriate "revenue acceleration" programs, aimed at enhancing the speed at which monies are colleeted and deposited. 4 3. The design and implementation of suitable and appropriate "controlled disbursement' programs, ensuring that City expenses are met in a timely manner, but not in such a way as to jeopardize the earnings potential of the City's investment portfolio. 4. The utilization of modern and efficient techniques for the physical movement of money, taking advantage of the various technological and operational procedures which have evolved in recent years. 5. The design of specific investment policies which will allow the City to maximize its interest earnings, while at the same time establishing operational rules and regulations which will ensure the total safety of all funds entrusted to the care and control of City personnel 6. The cost-effective utilization of independent investment advisory support services. 7. The design and implementation of banking relationships which are both favorable to the City and responsive to the day-to-day requirements of the City's complex financial operations. 8. The design and implementation of appropriate administrative approaches and operational procedures with regard to the proper and effective use of the City's municipal credit authority. 9. Access to ongoing cash management training, designed both to maintain the technical skills of assigned personnel and to ensure adequate cross -training of back-up personnel. 10. The design and administrative implementation of specific, written documentational requirements in support of the City's formal policies, rules and regulations. C. Financial Disclosure Statement, Ethics Disclosure and Conflicts of Interest Ordinance No. 7650, adopted by the City Council of the City of Fort Worth, Texas, on October 25, 1977, requires the City Treasurer annually to complete and file a financial disclosure statement with the City Secretary Futhermore the Public Funds Investment Act requires the investment officer(s) to file a disclosure statement with the Texas Ethics Commission and the governing body if: 1. the officer has a personal business relationship with a business organization offering to engage in an investment transaction with the City (as defined in 2256.005 (i)(1-3)); or 2. the officer is related within the second degree by affinity or consanguinity, as determined under Chapter 573 of the Texas Government Code, to an individual seeking to transact investment business with the entity. PFIA 2256.005 (I). IV. CRITERIA FOR SELECTING THE CITY'S FINANCIAL INTERMEDIARIES Day-to-day implementation of the City's diverse cash management programs and activities typically necessitates regular interaction with a variety of financial intermediaries, such as commercial banks, savings and loan associations, broker/dealers (who make markets in negotiable investment securities) and professional independent investment advisors. Since any failure, inadequacy or ineptness on the part of any one of these financial intermediaries can potentially result in financial disaster for the City, it is imperative that such entities meet the highest standards of both reliability and capability in the performance of their various functions. There are also a number of procedural and documentational issues which must be properly observed in the dispatch of such external functions. However, this segment of the City's rules and regulations deals primarily with eligibility criteria; while many of the City's procedural and documentational requirements are addressed in Section V. A. Commercial Banks: 5 The creditworthiness, liquidity, and overall financial strength of financial institutions into which the City deposits money, insofar as such elements can be measured through recognized industry rating services, steal l be the primary determining factor in the City's eligibility criteria. Furthermore, eligible financial institutions shall demonstrate acceptable rating compliance under the terms of the Community Reinvestment Act, thereby supporting the City's ongoing efforts to encourage lending in low and moderate income areas. In all events, deposits of City monies in commercial banks may only be made with institutions which possess the overall financial strength, capitalization, and liquidity to reasonably ensure the safety and availability of such monies. To assess the overall financial strength of potential depositories, the City may utilize third- party rating agencies to perform periodic reviews of various commercial banks, and relies upon such reports to deterrnine the appropriateness and eligibility of depositories. B. Savings and Loan Associations: Deposits of City monies in Texas savings and loan associations shall be subject to the same kinds of rating criteria which are applied to commercial banks. Therefore, their acceptability as depositories will be based on the third -party rating of appropriate rating organizations. City policy prohibits deposits (in savings and loan, associations) of any amount (including accred interest) which exceeds prevailing federal insurance limits. C. Securities Dealers and Other QualiCed Representatives: The "primary" securities dealers are those major investment banking firms listed by the Market Reports Division of the Federal Reserve Bank of New York. These dealers are unique within the government securities industry in that they both "report" and are "regulated" in an industry that is typically "non- reporting" and "unregulated." Included on this "bloc chip" list are major securities firms and some of the world's largest banks. City policy is generally to restrict transactions relating to the purchase and sale of U. S. Government securities to this list of "primary" securities dealers. Such policy, therefore, will preclude the City from doing business with other brokers and dealers whose financial strength and operational capabilities eartnot be confidently determined, given the absence of "reporting" and "regulation" requirements, except as permitted below. 1. Certification Form for Qualified Representatives The Public Funds Investment Act requires that investments shall only be made with those business organizations (irneluding money market mutual funds and local government investment pools) that have provided the City with a written instrument, executed by a qualified representative of the firm, acknowledging that the business organization has: a. received and reviewed the City's investment policy and strategy as included in The Cash Management Rules & Regulations: and b. implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the City and the organization that are not authorized by the City's investment policy as presented in The Cash Management Rules & Regulations. (PFIA Section 2256.005 (k -1)) Given the foregoing, the City has designed a form entitled The Cary of Fort worth, Texan Pvblr'c Funds Investment ,4rt Certification Form for Qualified Representatives which trust be submitted to the City for its approval prior to designation of an individual as a representative who is eligible to conduct securities business with the Cite. A copy of this document is available for inspection upon request. 2. Selection and Annual Review for Qualified Representatives 6 Ultimately, the City must satisfy itself that the individual representative with whom the City has direct day-to- day contact can demonstrate the prerequisite skill, experience and reputation to deservedly conduct business with the City. Therefore, only individuals who can clearly demonstrate this professionalism and business integrity will qualify as financial intermediaries with regard to the City's investment portfolio. The Cash Management Task Force, serving as the City's designated investment committee, will annually review and adopt a list of qualified representatives who are authorized to engage in investment transactions with the City. 3. Selection of Non -primary Securities Dealers From time to time the Cash Management Task Force may approve up to three non -primary securities dealers to do business with the City in order to maintain an adequate list of experienced, knowledgeable representatives. These firms and their representatives must submit a completed The City of Fort Wo •th, Texas Public Funds Investment Act Certfrcation Form for Q ralifed Representatives. Furthermore, as with representatives of primary securities dealers, the fact that an individual representative seeks to do business with the City is insufficient reason for the Cash Management Task Force to approve such a representative. Preference will be given to those individual dealers who demonstrate a clear understanding of the Texas Public Funds Investment Act and the City's cash management program through prior experience with the City or with other Texas cities. 4. Documentation of Investment Authority The City will furnish qualified representatives with a copy of the City's resolution authorizing the Director of Finance and the City Treasurer to establish and maintain accounts for the purpose of purchasing and selling securities authorized under the laws of the State of Texas and the guidelines outlined in this Statement. D. Investment Advisors: The City may elect to seek professional investment advisory support services. Such services will allow the City to improve its investment capabilities in several areas, including enhanced competitive market access, reliable estimates of interest -rate trends, isolation and realization of portfolio trading profits, advanced investment accounting technology and meaningful access to computer -based evaluation models. The City has established strict guidelines regarding the selection of such investment advisors to ensure that such support services are consistent with the City s established policies, rules and regulations. These guidelines include but are not limited to, the following: 1. Any investment advisor wishing to advise the City shall be a "Registered Investment Advisor" as defined and regulated by the Securities and Exchange Commission (SEC). 2. It is preferred that any such investment advisor shall be completely independent of any financial institution or securities brokerage firm. Any investment advisor lacking such complete independence shall fully and continuously disclose any relationships with any financial institution(s) and/or securities brokerage firm(s) and shall further fully disclose any commissions, bonuses, or soft -dollar payments resulting from his/her relationship with the City. 3. Any such investment advisor shall not take possession of any City monies or investment securities, nor have access to or control over such monies and/or securities. [Procedures for delivery, possession and safekeeping are described in Section V of this statement. Such procedures shall remain precisely the same regardless of the City's relationship with an investment advisor.] 4. Any such investment advisor shall not be empowered to execute investment or liquidation transactions on behalf of the City. All such transactions shall be executed by City personnel. 7 5. Any such investment advisor shalt provide the City with periodic reports regarding the accounting treatment and performance level of the City's investment portfolio. Such reports shall be verifiable within the definition of generally accepted accounting principles (GAAP). 6. Fees for investment advisory services shall be established in advance and fully disclosed in a written agreement. It is imperative that any investment advisor who provides support services to the City be both highly qualified and demonstrably independent. Furthermore, a prospective advisor should be able to provide clear evidence of his/her capabilities on behalf of clients similar to the City. The City has designed a form entitled Investment Advisor Questionnaire & Certification which must be submitted to the City for its approval before an investment advisor will be considered by the City to serve in an advisory capacity. A copy of this document is available for inspection upon request. V. INVESTMENT CRITERIA Generally, the City invests only in "money market instruments" which are defined as very creditworthy, highly liquid investments with maturities of one year or less, in intermediate -term securities with maturities no greater than five years, in public funds investment pools created under the State of Texas interlocal Cooperation Act with a AAA or .AAA -m rating, and in SEC - registered, no -load money market mutual funds rated AAA. A. Eligible Investments The Public Funds Investment. Act, Sections 2256.009 — 2256.016 and Section 2256.019 — 2256.0201, lists the authorized investments permitted to investing public entities. The City Treasurer and/or his designee(s) shall invest the City's investable funds in those instruments which are listed below, insofar as they satisfy the City's maturity and liquidity requirements: 1. Fully- insured and/or fully- collateralized Certificates of Deposit, maturities no greater than five years, issued by eligible commercial banks and savings and loan associations located within the State of Texas. 2. Direct obligations of the United States Treasury, including Bills, Notes, Bonds and STRIPS. However, there are a number of instruments which may be generically represented as "Treasury" securities which are not actually direct Treasury obligations. For example, U. S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are direct U. S. Treasury obligations, white seemingly - similar instruments such as CATS (Certificates of Accrual on Treasury Securities) and TIGRs (Treasury Investment Growth Receipts) are Trot. Instead, they are certificates and receipts issued by entities other than the U. S. Treasury. 3. Obligations of certain United States government agencies rated AAA and which are backed by the full faith and credit of the United States government. Eligible agency obligations include Fxport import Bank issues (XMs), Fanners Home Administration insured Notes (FHAs), and certain securities issued by the Government National Mortgage Association (GNMAs). However, other agency obligations, even though guaranteed by the full faith and credit of the United States government, enjoy less active secondary markets than the more traditional Bills, Notes, Bonds and STRIPS, or the broad and orderly markets enjoyed by certain GNMA issues. Therefore, the City will refrain from purchasing such instruments as "SBA" loans, "AID" bonds, Penn Central Transportation Certificates, Washington Metropolitan Transit Authority bonds, etc., unless special circumstances prevail which suggest their appropriate use for speeific investments. Any such "special circumstances" must be fully documented at the time of such purchases, and approved in writing by the Finance Director. The City will restrict investments in eligible obligations described in this section to discount notes, coupon - bearing issues, medium term notes. and callable issues. E' _� 4. Obligations of certain U. S. Government instrumentalities rated AAA, including (but not limited to) such instruments as Federal Home Loan Bank debt (FHLBs), Federal National Moitgage Association debt (FNMAs) Federal Home Loan Mortgage Corporation debt (FHLMCs), Federal Farm Credit Bank debt (FFCBs) and certain discount notes issued by instrumentalities such as the foregoing. Other U. S. Government instrumentality issues, such as Asian Development Bank notes, InterAmerican Development Bank bonds, World Bank bonds, Postal Service bonds, Tennessee Valley Authority bonds, and intermediate- and long-term "Federal Farm Credit' and "Student Loan Marketing Association" instruments do not enjoy widespread, orderly marketplaces, and are therefore ineligible. The City will restrict investments in eligible obligations described in this section to discount notes, coupon -bearing issues, medium term notes, and callable issues 5. Purchases of the "Treasury", ' agency" or "instrumentality" securities mentioned in paragraphs 2, 3 and 4 above, under the terms of repurchase agreements (or in support of the City's "Sweep Account') which meet the City's established criteria for such transactions. The City's standards for such purchases (under terms of repurchase agreements) are somewhat different than the standards applied to actual "hold to maturity" or "long" purchases held within the City's portfolio. For example, the City might never purchase GNMA securities with a final stated maturity date which is 10 years in the fixture for its permanent portfolio; but such securities should be perfectly acceptable as the securities purchased under the terms of a repurchase agreement. [See Section VI for additional detail regarding repurchase agreements.] 6. Commercial paper with an original stated maturity date of 270 days or less, subject to the following criteria: a. The paper must be rated by at least two of the nationally -recognized credit rating agencies at the time of purchase and the minimum rating must be A1+ (Standard and Poors), P1 (Moodys), or D1 (Duff and Phelps). b. If the issuer has senior debt outstanding, such debt must be rated at least A+ (Standard and Poors) and Al (Moodys). 7. Public funds investment pools created under the State of Texas Interlocal Cooperation Act which have attained a AAA or AAA-m rating from at least one nationally recognized rating agency and which comply with the Public Funds Investment Act. Eligible pools must also explicitly follow Securities and Exchange Commission Rule 2a 7. This rule, which regulates the operation of money market mutual funds, limits funds' average maturity to 90 days maximum, requires them to maintain a constant $1.00 net asset value, and restricts their investments to Treasury Bills and Notes and obligations of U.S. agencies and instrumentalities with maturities less than 13 months. Staff will consider other characteristics of pools before authorizing them as eligible investments. These characteristics include the size of the pool, number of participants and the size of their deposits, and the pool's use of reverse repurchase agreements. In general the City will avoid pools with less than $1 billion in deposits and a small number of participants because of possible instability in the pools and the resulting threat to the City's funds. 8. SEC -registered, no-load money market mutual funds rated AAA which meet the criteria prescribed in the Public Funds Investment Act of the State of Texas. Currently policy limits investments to those listed in paragraphs 1 through 8 above. However, there are numerous other money market instruments which are widely recognized as prudent vehicles for effective cash management; even though they may not be currently utilized by the City. Such money market investments include "eligible" domestic bankers' acceptances (BAs); negotiable, variable rate, Eurodollar, or Yankee 9 certificates of deposit (CDs); etc. As the City develops appropriate investment sophistication, it may examine and eventually utilize such alternatives, assuming that such alternatives are at that time legally authorized by Texas Revised Statutes. Under normal circumstances, no variation from the criteria listed above shall be allowed. However, the City may elect, at its discretion, to amend and/or reline its List of Eligible Investments as conditions warrant. This process will be initiated by the City's permanent Cash Management Task Force, with oversight by the City Manager and/or the City Council. In any event, no variances from the list will be allowed in the absence of specific, written approval from the Finance Director. The Public Funds Investment Act does not require the City and other local government entities to liquidate investments that were authorized investments at the time of purchase and subsequently were made ineligible by amendments to the Act. On occasion, the City may elect to "reverse" certain of its portfolio securities under the terms of a " reversc repurchase agreement" or "portfolio lending" program. This authority shall be restricted, requiring written authorization from the Finance Director. However, under no circumstances will the City utilize reverses as a tool to effect "margined purchases" of investment securities, or as an activity which might essentially serve to "disguise" or "cover up" unrecognized portfolio losses. The City will only enter into reverse repurchase agreements with defined maturity dates. The proceeds may not be invested in any security with a maturity date longer than the maturity date of the reverse repurchase agreement. Reverse repurchase agreements will not have a term exceeding 90 days. B. Credit Risk and Market Price Changes The City Treasurer, acting in accordance with procedures specified herein and exercising due diligence, shall not be held personally responsible for a specific security's credit risk or market price changes, provided that these changes are reported in a timely manner and the appropriate actions are taken to control adverse developments. 1. Credit Risk — Loss of Required Rating All prudent measures will be taken to liquidate an investment that is downgraded to less than the required minimum rating. The City Treasurer shall immediately inform the Cash Management Task Force of any rating downgrade. 2. Market Price Changes All fixed income securities, ever, direct obligations of the United States Treasury, are subject to market price changes. During times of economic expansion and inflation, fixed income securities generally decline in value as interest fates rise. During times of economic contraction and falling prices, fixed income securities generally increase in value as interest rates fall. While the City will strive to avoid investment losses, the incurrence of a "book" or "accounting" loss does not necessarily indicate an inappropriate invcstment activity or faulty portfolio management strategy. In fact, incurrence of a "book" loss may actually be park of a transaction producing an aggregate gain. In other cases, incurrence of a smaller "book" loss may be preferable to incurrence of a much larger potential loss. Therefore, no legal or administrative prohibitions are imposed against incurrence of portfolio losses, so long as such transactions can be justified in the overall portfolio management process or are explained by trends in the economy. C. Diversification The City shall maintain a wcighted average maturity no greater than 2 years by investing funds according to the following schedule: Maturity Cash 1 year 2 year 3 year 4 year 5 year 10 Day Range 0 1-365 365-730 730-1095 1095-1460 1460-1825 % Portfolio 15 28 14.25 14.25 14.25 14.25 At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. There may be times when the City has more or less of its funds in any one maturity cell. This maturity diversification schedule serves as a general guideline for making investment decisions. In this way, the portfolio will be able to take advantage of rising yields by re -investing maturing securities at higher yields In falling rate environments, it will profit from having investments that were made at higher interest rates. Setting targets for positions in each maturity cell puts in place an additional safeguard. Following this discipline ensures that the City never has too much money in any one maturity, whether it be short-term or long. Just as there are risks from having too much money invested in the 5 yeai area, there are risks in short maturities. In the former, one runs the risk of having to sell before maturity at a loss to raise cash. In the latter, one misses the added return offered by longer maturities. While there may be certain circumstances in which long-term securities are utilized such as investments of long-term sinking fund contributions, maturity -matched construction funds, or securities purchased under the terms of short-term repurchase agreements, the general use of long-term securities shall be avoided. Such long- term instruments are typically inappropriate for the City, since the purchase of such securities infers a certain level of "speculation, ' given the significant "market risk" and/or "interest -rate risk' which characterizes long- term investments The exception to this rule involves securities purchased under the terms of short-term repurchase agreements, as specifically discussed in this document. Prevailing Texas statues require that entities such as the City of Fort Worth give appropriate consideration to 'diversification" of its investment portfolio. Traditionally, diversification is a logical methodology for minimizing overall portfolio risk by limiting (either in percentage or dollar amount) the amount of the City's investments in certain classes of investments which may be exposed to measurable credit and/or market risk. Alternatively, diversification may be viewed as a procedure which "spreads the risk" throughout the aggregate portfolio. However, the City's currently -eligible investments are all virtually "riskless," given their inherent individual creditworthiness and the maturity limitations which the City has specifically imposed. In such circumstances simply requiring some designed "mixture" (of security types) neither improves the portfolio's level of safety nor enhances its yield. Therefore, no maximums or minimums are currently observed with regard to the City's portfolio mix. D. Ineligible Investments (in permanent portfolio) 1. All United States Treasury, Agency or Instrumentality securities with maturity dates in excess of 5 years from the date of purchase. 2. All United States Government Agency or Instrumentality securities which are defined as "mortgage - backed" securities. (Since such securities are inherently "callable," regardless of their final stated maturity date, they are ineligible as permanent City investments.) 3. Certain United States Government Agency securities, including those issued by the Small Business Administration (SBA), the Agency for International Development (AID), Penn Central Transportation Certificates, Washington Metropolitan Transit Authority bonds, and any other U. S. Government Agency securities which do not enjoy a wide -spread, competitive marketplace. 4. Certain United States Government Instrumentality securities, including those issued by the Asian Development Bank, the Inter -American Development Bank, the World Bank, the U S. Postal Service, the Tennessee Valley Authority, the Student Loan Marketing Association, and any other U. S. Government Instrumentality securities which do not enjoy a widespread, competitive marketplace. 11 5. Any investment securities which have been "seeuritized," constructed or otherwise invented by the investment banking community, and subsequently represented (either by commission or omission) as being some form of "U.S. Government securities." Examples of such instruments include CATS (Certificates of Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts), CMOs (Collateralized Mortgage Obligations), or even stranger "invented securities," such as CARS and REMICs. VI. SAFEKEEPING, COLLATERALIZ kTION AND INVESTMENT PROCESSING While the investment criteria established in Section V of this policy are designed to afford significant protection to the City, there are required procedural and operational elements of the investment program which are essential to the ultimate protection of the City's portfolio. Specifically, these elements deal with the delivery, possession and safekceping criteria which must be observed in all investment activities. A. Safekeeping Criteria All ownership of investment securities shall be evidenced by an acceptable safekceping receipt issued by a third -party financial institution which is acceptable to the City (or by a safekeeping receipt from a Federal Reserve Bank, should such services became available). 1. Securities Safekeeping with Depository Bank In most cases, the City will accept a safekeeping receipt issued by its "lead bank" which clearly indicates that the securities are being held by the City's lead bank in the City's name, accompanied by a copy of the lead bank's safekeeping receipt from the Federal Reserve Bank. (The latter receipt will indicate that the securities are held in the lead bank's name "on behalf of a customer," as indicated by an "02 " classification.) However, the lead bank may not provide securities safekeeping services in cases in which the lead bank is a "principal" or "counterparty" in the investment transaction itself in such cases, safekeeping documentation similar to that described in the preceding paragraph must be provided by a "third -party bank" which is acceptable to the City. Furthermore, such third -party bank safekeeping may not be provided by a "parent" or "holding company" bank which is financially related to any bank which is a principal in a specific securities transaction. Ibe City has designed a form entitled Third -Party Currodial Agent Agreement which specifically delineates the role and responsibilities of such third -party banks. A copy of this document is available for inspection upon request. [Note: In cases in which the City's lead bank merely "executes" the necessary wire- transfer services to support the City's investment transactions, and is not a principal in the transaction, the bank's role is defined as that of a "settlement Agent," rather than that of a "counterparty," as described by the Governmental Accounting Standards Board (GASB).] 2. Securities Lending Program Securities lending is a cash management strategy involving the lending of the City's investment securities to a primary deafer with the substitution of securities of greater market value being safekept by a third party custodial bank in an account in the City's name. The program is designed so that the City cams supplemental income on the portfolio without losing ownership or interest payments on the loaned securities. The City Council first approved the contract for a securities lending program with Morgan Stanley and with the Bank of New York as custodian on October 17, 1999. The agreement, Paired Repurchase Transactions Custody Agreement, establishes a Bank of New York safekeeping account in the City's name to hold all securities submitted by Morgan Stanley as collateral for the City's investment securities. Collateral reports are faxed to the City daily for review. 3. Deposit Collateral Policy 12 In addition to the securities which are actually "owned" by the City Texas Revised Statutes, the Public Funds Investment Act and Chapter 2257, Texas Government Code, Collateral for Public Funds, require that all uninsured collected balances, plus accrued interest, if any, of the City held in commercial banks be fully collateralized by acceptable securities. The Federal Reserve Bank (the "Fed') has specifically designed a system by which the Fed itself may act as the safekeeping agent of both the City and the bank which is "pledging" the collateral (to secure City deposits). Upon acceptance by the City and proper transfer by the pledging bank into a "joint custody account" (classification "07"), the Fed will issue a "joint custody receipt' to both the pledging bank and the City. Thereafter, the Fed will not release the securities prior to their maturity (for purposes of reassignment or liquidation) without the express consent of both parties. Collateral will be valued monthly, and reports will be sent from the depository bank and the Fed on a monthly basis for review. The collateral agreement is part of the City's Banking Services Agreement with its depository bank. The City has established its own joint custody account at the Federal Reserve Bank, represented by a ' psuedo" ABA number. All joint custody receipts issued by the Fed shall note that the City's ABA number. (The City has signature cards on file with the Fed, and has established telephonic and written documentation procedures for the release of securities so held.) B. Delivery vs. Payment All investment (or divestment) transactions will be implemented on a "delivery vs. payment" (or "payment vs. delivery") basis as specified in the City's Banking Services Agreement. In the absence of acceptable delivery (or payment), the City will refuse to enter the transaction. All securities processing required to implement the aforementioned purchase and sale transactions will be supported by written instructions to the City's bank, unless the timely preparation of such written instructions would hinder the orderly completion of the transaction itself. In such cases, the City will prepare follow-up letters confirming the oral (typically telephonic) instructions, and forward such written instructions to the bank without undue delay, either by mail or facsimile transmission. C. Repurchase Agreements Repurchase agreements will meet the aforementioned delivery criteria, and will be accompanied by an acceptable "haircut" (i.e. excess of the market value of securities over the principal amount of the investment). The required haircut will be established by the City, and shall be specifically addressed in a written Master Repurchase Agreement which supports the repurchase transaction. In general the extent of the haircut requirement will increase in direct proportion to the length of maturity of the securities purchased under the terms of the repurchase agreement. Furthermore, securities purchased under the terms of a repurchase agreement shall generally have maturity dates of ten years or less and shall be "wirable" instruments through the U. S Federal Reserve system. Any departure from these 'maturity" or "wirability' standards shall require the specific, written authorization of the Finance Director. In the absence of authorization to the contrary, the City will require the following minimum ratios of market value of securities purchased (under the terms of the repurchase agreement) to the principal dollar amount of such investments: U . S. Treasury Bills, Notes, Bonds and STRIPS which mature in 1 year or less: 101% U . S. Treasury Notes, Bonds, and STRIPS which mature in 1 to 10 years: 102% U . S. Government agency or instrumentality issues which mature in up to 10 years: 102% Naturally, the haircut ratios listed above must be examined on a daily basis, to ensure that the haircut or 'margin" does not drop below minimum acceptable levels. In cases of securities which require "physical" 13 rather than "book entry" delivery and safekeeping, the City will require a higher haircut ratio, and must approve the acceptability of such securities. Similarly, if securities have maturities in excess often years, the City may require a higher haircut ratio, and must specifically approve the acceptability of such securities. [Whenever possible, the City will only accept "wirable" securities with maturities of 10 years or less. However, the City may accept (at its discretion) certain physical delivery and safekeeping of nonwirable and/or longer -term securities.] D. Competitive Bidding All individual security purchases and sales (excluding transactions with money market mutual funds and local government investment pools, which are deemed to be made at prevailing market rates) will require at least three competitive offers or bids. VII. PERFORMANCE EVALUATION AND REPORTING A. Recording The City will use an appropriate portfolio management software system to record investment purchases, sales and maturities. The selected system will maintain the portfolio inventory, accrue interest, amortize /accrete (premiums /discounts), calculate yields and provide other accounting and performance data as necessary. Monthly investment reports are produced from this data for periodic financial reporting and management review. B. Treasurer's Cash Management Reports On a monthly basis, the City Treasurer and/or his designee(s) will prepare a cash management report. The report will be reviewed by the Cash Management Task Force and signed by the Treasurer, Deputy Treasurer and Finance Direetor. Periodically but no less than quarterly this report Kill he provided to the City Council. The Treasurer's Cash Mangement Report will be included in any periodic Financial Report provided to the City Council by the Finance Director. The Public Funds Investment Act requires that the cash management reports be formally reviewed at least annually by an independent auditor and reported to the governing body. This shall be completed by the City's external auditors in the process of the preparation of the City's Comprehensive Annual Financial Report. 1. Reporting Requirements This report will inelude, but not be limited to, a summary of the securities held at the end of the month; a portfolio Cash -flow report, showing the purchases, sales, maturities, accrued interest sold/purchased and the interest received; and a report on the return on investment, showing the interest earned, the gain or loss on any sales during the month, the accretion /amortization, any "securities lending" earnings and any fees paid. Furthennore, the Public Funds Investment Act requires the report to: a. describe in detail the investment position of the City on the date of the report; b. be signed by the City Treasurer, Deputy Treasurer and Finance Director; c. contain a summary statement that states the: (1) beginning market value for the reporting period; (2) additions and changes to the market value during the period: (3) ending market value for the period; and 14 (4) fully accrued interest for the reporting period; d. state the book value and market value of each investment at the beginning and end of the reporting period; e. state the maturity date of each investment; f. state the compliance of the investment portfolio as it relates to: (1) the Cash Management Rules and Regulations including the Cash Management Policy and Statement of Investment Strategy and (2) the Public Funds Investment Act. 2. Calculation of Return on the Portfolio The return on the portfolio will be calculated by adding the interest earned, the gain or loss on any sale, the accretion or amortization of any discounts or premiums and any "securities lending" fees. The estimated annualized return for the month will be computed by using the daily weighted average book value for the month. Unrealized gains and/or losses will not be considered in the computation of the portfolio's monthly return. 3. Performance Benchmark The benchmark for comparing the performance of the City s investment portfolio will be the 12 month moving average of the yield of the 1-year Treasury Bill on the last day of the month being reported. The 1-year Treasury Bill is the simplest, safest security a portfolio can own. The 12 month moving average of its yield represents the return of a purely passive management approach in which equal amounts of the portfolio are invested in every month's current Treasury Bill. As one month's investment matures, it is automatically invested in the new 1-year Bill. The City's objective is to exceed the 12 month moving average of the 1-year Treasury Bill rate each month through active portfolio management as governed by its Cash Management Rules and Regulations. 4. Portfolio Pricing As of the end of each month, the City will re -price each security using Interactive Data Corporation's database of market prices or by pricing the security based on its spread to the appropriate Treasury security. By this method, the City will monitor the market price of its investments. 5. Annual Audit of Cash Management Program In conjunction with the annual audit and the preparation of City's Comprehensive Annual Financial Report, a compliance audit of management controls on investments and adherence to the City's established investment policies will be conducted. C. Daily Operating Procedures Manual The City Treasurer and/or his designee(s) will develop and maintain a procedures manual, describing in detail how to obtain bank balances, calculate the City's liquidity needs make daily investments, record investment purchases and sales, and distribute daily bank reports The procedures manual will include forms, agreements reports and other documents utilized to carry out the intent of the City Council's policy and this Statement. D. Cash Management Task Force 15 The City's Cash Management Task Force will be comprised of an Assistant City Manager, the Finance Director, the City Treasurer and other appropriate City personnel. The Task Force will meet periodically to review and approve the Cash Mangement Report, to review portfolio performance, to discuss investment strategies and to resolve any challenges and opportunities arising in the cash management process. E. Ontside Professional Support Services The City may, from time to time, engage the support services of outside professionals, so long as it can be clearly demonstrated that such engagements produce "net financial advantage" or necessary financial protection of the City's resources. Such services may include engagement of financial advisors in conjunction with debt issuances; portfolio management advisory support services-. special legal representation; appropriate independent rating services; third -party custodial services: and other supportive services which cannot be efficiently addressed through "in- house" treatments. All such engagements shall require the written authorization of the Finance Director, who will provide written justification for the engagement to the City Manager and/or the City Couneil. VIII. UTILIZATION OF MUNICIPAL CREDIT AUTHORITY A. Utilization of Debt The City, like other governmental and quasi - governmental entities throughout the United States, has authority to issue various forms of tax - exempt debt. The interest on such debt is exempt from federal (and sometimes, state) taxation. While the unrestrained use of this authority is inappropriate, there are many eircumstances in which the application of specific borrowing techniques is in the financial interest of the City, Such borrowing iselosely regulated by federal law, Internal Revenue Service regulations, specific provisions of the Tax Equity and Fiscal Responsibility Act (TEFRA), and various elements of Texas Revised Statutes. Within the established regulations and guidelines, however, the City has a great deal of latitude with regard to the timing and general nature of its financing activities. The City will utilize those financing alternatives and techniques which produce positive financial advantages. The Finance Director will, from time to time, recommend to the City Manager and /or the City Council various financing opportunities which should be of ultimate financial and operational benefit to the City. City personnel will constantly monitor the City's existing and potential financing alternatives to ensure that full advantage is being taken of the financing alternatives which are available to the City. B. Arbitrage Rebate Compliance For any tax exempt municipal bonds issued after August 31, 1986, the City must remit to the Internal Revenue Service any cumulative interest earnings from the investment of bond proceeds that are in excess of the yield on a particular bond issue. In arbitrage regulations released in May, 1989, the U. S. Treasury Department stated its approval of commingling bond proceeds for compliance purposes. As a result, the City has changed its arbitrage - compliance approach from a specific bond issue portfolio method to a pooled -funds method. This approach uses the City's accounting records to determine the daily remaining balance of funds on hand for each issue. Interest is then allocated to daily remaining balance based on the average monthly yield from the investment of bond proceeds in the City's consolidated portfolio. Interest earnings in excess of the allowable amount are set up as a liability in the City's aceounting records and rebated to the Federal government at least once every five years. SECTION IBC. CASH MANAGEMENT AND INVESTMENT TRAINING 16 As required by the Public Funds Investment Act, all designated investment officers of the City will attend a training session not less than once in a two-year period and receive not less than 10 hours of instruction relating to cash management and investment responsibilities. These officers include the Finance Director, the Assistant Finance Director, the City Treasurer and the Deputy Treasurer. The following organizations are approved by the Cash Management Task Force as training providers: the Government Treasurers Organization of Texas, the Treasury Management Association, the Government Finance Officers Association, the Government Finance Officers Association of Texas the Texas Municipal League, the Municipal Treasurers Association, and the Fort Worth Treasury Management Association. The Cash Management Task Force will annually review and approve the list of authorized training providers. 17 1. 2. 4 5 6. 7. [In RECORD OF AMENDMENTS August, 1992: Section V - Addition of money market mutual Funds as eligible investments. April, 1994: Section V - Change in average maturity limit of portfolio and addition of maturity diversification schedule. April, 1994: Section VII - Change in benchmark from 4 week average of 1 -year Treasury Bill to 12 month average of 1 -year Treasury Bi11. January, 1995: Section V - Further restrictions on eligible investments. August, 1995: Section V - Change in criteria for eligible local government investment poufs. A ugust, 1995: Section V - Establish maximum term for reverse repurchase agreements. August, 1995: Section II - Add Investment Strategy Statement. March, 1997: Section 11 - Change maturity distribution schedule to inerease investments maturing in one year or less and to decrease the maximum portfolio maturity from 2.5 year to 2.0 years. September, 1997: Section I - Name Cash Management Task Force as City's designated investment committee. Section IV - Authorize the Cash Management Task Force to review and Approve list of qualified brokcrldealers on annual basis. Section Vil - Describe method for re- pricing securities. Seetion IX - Gist authorized providers of required investment training. January, 1998 Section IV - Authorize the Cash Management Task Force to review and approve up to three non - primary broker- dealers to do business with the City. July 21, 2002 Seetion I — Clarify to explicitly state the purpose of the document is to comply with provisions of the Publie Funds Investment Act Section III — Add sub - seetions A. and C. to comply with the Publie Funds Investment Act requirements that the policy specifically designate investment officer(s), list qualifications and address ethics and financial disclosure. Section IV, Sub - Section C. 1. — Specify Public Funds Investment Act eompliance requirements for investment policy certification form to be signed by representatives seeking to transact investment transactions with the City. Section V, Sub- Section D. — Add listing of Ineligible Investments once speeified in a separate document to Comply with the Public Funds Investment Act requirements. Section V1, Sub- Section A. 2. — Add description of security lending program and related custodial proeedures and agreements to comply with the Public Funds Investment Act requirements. Section VI, Sub - Section A. 3. — Add reference to Banking Services Agreement to describe collateralitation requirements of Public Funds Investment Act and Collateral of Public Funds Act. Section VII, Sub - Section B. 1 — List speeific reporting requirements of the Public Funds Investment Act. Section VII, Sub - Section B. 5 — Add requirement for annual review of cash management program by external auditor as part of Counprehensivc Annual Finaneial Report to comply with the Public Funds Investment Act requirements. IV Patterson Capital Management ADV PART 2 — 2011 Brochure ITEM 1 COVER PAGE BROCHURE DATE March 31, 2011 Patterson Capital Management LP dba Patterson & Associates 301 Congress Avenue Suite 570 Austin, TX 78701 www.natterson.net Primary contact for the firm is: (800) 817-2442 / (512) 320-5042 Linda Thomson Patterson Linda@patterson.net President (512) 320-5042 Exhibit C Though registered and regulated by the Securities and Exchange Commission that registration does not imply any particular or certain level of skill or training. This brochure provides information about the qualification and business practices of Patterson & Associates. If you have any questions about the contents of this brochure, please contact the firm at 800-817-2442 or (512)320-5042 or through infocZbnatterson.net. The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Additional information about Patterson & Associates is also available on the SEC's website at www.advisorinfo.sec.eov. ITEM 2 MATERIAL CHANGES The information regarding Patterson & Associates and its employees included in this brochure has not materially changed since the last annual update to the Securities and Exchange Commission (SEC) dated April 1, 2010. Patterson Capital Management ADV PART 2 — 2011 Brochure ITCM 3 TABLE OF CONTENTS This Brochure is presented in nineteen separate sections fulfilling the requirements of SEC Rule 204 although not all sections are applicable to the Firm. Those items not applicable have been so designated and completed in the Brochure. Itemi Cover Page .......................................................................................... ..............................1 Item2 Material Changes ............................................................................... ..............................1 Item3 Table of Contents ............................................................................... ..............................2 Item4 Advisory Business ............................................................................. ............................... 2 Item S Fees and Compensation ........................... ............................... ...... ..............................3 Item 6 Performance Based Fees and Side -by -Side Management ............ ..............................4 Item7 Types of Clients .................................................................................. ..............................4 Item 8 Methods of Analysis. Investment Strategies and Risk of Loss ..... ..............................4 Item 9 Disciplinary Information ...... (not applicable) ..................................... ..............................6 Item 10 Other Financial Industry Activities and Affiliations ....................... ..............................6 Item 11 Code of Ethics, Participation/ Interest in Client Transactions & Personal Trading -6 Item12 Brokerage Pract ices ............................................................................ ..............................7 Item 13 Review of Ac counts ............................................................................ ..............................8 Item 14 Client Referrals and Other C ompensation ...................................... ..............................8 Item15 Custody ......... (not applkabie) ................................................................. ..............................B Item 16 Investment Dlscretion ....................................................................... ..............................9 Item 17 Voting Client Securities. ........... ( notappllcable) .................................................................. 9 Item 18 Financial Information ..............{noe applicable) ..................................................................... 9 ITEM 4 ADVISORY BUSINESS Patterson Capital Management LP, dba Patterson & Associates, was founded in 1994 in Austin, Texas as a SEC registered investment advisory firm for public and corporate institutional clients. The firm was originally established and remains structured as a partnership, but currently the sole principal/owner of the firm is Linda T. Patterson. Patterson & Associates is firm independent from any other financial or other company. As such, the firm believes it can best objectively analyze investment decisions for price, composition, and value, The firm offers investment advisory services and treasury consulting services within a philosophy that funds management is a part of the wider treasury function. Public advisory clients currently are located in 'texas, New Mexico, Arizona and Illinois. In addition, we furnish investment advice through consultations not included in a direct management service agreement. The firm offers investment advisory services for a percentage of assets under management, hourly charges, or fixed fees, dependent upon the needs of the clients. The firm does not serve individuals. The focus of the firm has been the institutional public sector. Primarily serving the institutional public sector in the US, the firm investstfient funds in short and intermediate range US domestic money markets Pa Patterson Capital Management ADV PART 2 — 2011 Brochure and fixed income markets. The firm generally uses US government and GSEs securities, commercial paper, municipals and certificates of deposit. The operating and bond funds of public entities (cities, school, airports, hospitals, higher education, etc.) are by nature short term and are working funds with a higher need for liquidity than long term funds Most portfolios the firm manages can not buy longer than five years to stated maturity. Clients not statutorily required to have an adopted investment policy, are strongly encouraged to adopt a formal investment policy to set portfolio limitations and to explain risks inherent in the management of the funds. An additional supporting service the firm provides is treasury consulting; ranging from internal control and procedural development/review to banking. This service is available to all funds management clients and to non -management clients alike. The short-term and operating profile of most public funds requires that few portfolios can rarely be managed on a purely discretionary basis because the cash flows of the moneys is dynamic and requires on going communication The firm manages longer -term reserve funds on a discretionary basis. As of December 31, 2010, the firm managed $ 5,212,296,954 in non -discretionary funds based on book value and $ 30,900 000 on a discretionary basis. All clients of the firm have written investment policies (and if, in Texas, a policy adopted by the governing body of the client) which imposes controls on all aspects of the covered portfolios with maximum maturities maximum weighted average maturities and market sectors. In addition, the clients have ultimate approval rights on the broker/dealers the firm utilizes. The clients' policy and the internal needs and cash flows of the clients guide the portfolios and the firm therefore tailors each portfolio to the unique needs of each portfolio. See also Item 8. ITEM 5 FEES AND COMPENSATION Patterson & Associates offers investment advisory services on the basis of a percentage of assets under management, hourly charges, or fixed fees, dependent upon the needs and requirements of the client. We do not deduct our fees from the client's assets. The firm does not custody client assets or securities. Paterson & Associate s basic fee schedule for the provision of investment advisory services is as follows: Up to $5 million $5 million to $10 million $10 million to $25 million $25 million to $50 million 0.20 % 0.18 % 0.15 % 0.10 % Over $50 million negotiable Advisory fees may vary, but generally will not exceed the fees noted in the schedule above. In addition, the basic fee schedule described may vary due to the particular circumstances of the client or as negotiated with particular clients. Fees for non -discretionary and discretionary management services are generally billed in arrears on either a monthly or quarterly basis In the event a client terminates its contract with Patterson prior to the end of a billing cycle, the fee for that period is prorated based on actual days in the period. At times, Patterson may also recommend that a client utilize a money market 3 Patterson Capital Management ADV PART 2 — 2011 Brochure fund. if the client invests in such a fund, the client may have to pay a fee in addition to that paid to Patterson. Certain clients are charged a fixed fee, or an hourly fee, which varies from client to client, and which are billed in arrears on a quarterly or monthly basis. All fees paid to Patterson for investment advisory services are separate and distinct from the fees and expenses charged by LGIP pools or mutual funds to their shareholders. These fees and expenses are disclosed in the statement (pool) or prospectus (funds). Clients can invest in pools or funds directly without the services of Patterson. Clients will incur brokerage and custodial costs in connection with the services Patterson provides. Please see item 12, Brokerage Practices, of the Brochure for a description of those costs. EM 6 PERFRORIMANCE BASED FEES AND SIDE -BY -S OE MANAGEMENT Patterson & Associates does not charge any performance -based fees to clients, accounts or funds. ITEM 7 TYPES OF CLIENTS Patterson & Associates provides investment advisory and investment consulting services to both public and private institutional clients, including cities, school districts, hospitals, foundations, airports, counties. These services are provided in accordance with clients' liquidity and risk tolerances and within the clients' investment policies and objectives. There are no minimum investment amounts or requirements for a client. Patterson & Associates generally recommends a minimum account size of $1 million to justify a net positive return for the service (earnings minus fees) . See also Item 4. ITEM a METHODS OF ANALYSIS I NVESTM ENT STRATEGIES AND RISK OF LOSS Patterson & Associates manages all client funds as separately managed portfolios defined by their unique objectives. Certain clients have several separately managed portfolios that are based on the specific type of and use of moneys (such as operating money, bond money, and reserves). Strategies for each unique client portfolio are discussed with the client initially and included as part their investment policy. Discussions are held with clients on a periodic basis, at least annually, to identify 4 Patterson Capital Management ADV PART 2 — 2011 Brochure strategic opportunities for the portfolios and to explain associated market and credit risks. Strategies are limited generally by cash flow needs of the funds. The firm primarily utilizes fundamental and technical analysis along with charting and cyclical analysis to support the individual strategies for the separately managed portfolios. The basic tools used include yield curve analysis, market trends and actual and perceived monetary policy. The generally short-term nature of the majority of clients' assets focuses market analysis in the short and intermediate term markets. Patterson relies primarily, but not exclusively, on multiple unaffiliated, nationally recognized securities rating organizations (NRSRO) such as Standard & Poor's and Moody Investor Services for basic analysis of credit risk on corporate entities. Such ratings are supplemented by an on -going monitoring of corporate actions, influences and developments derived from all available independent news sources. As discussed in Advisory Business, Patterson & Associates invests client funds in short and intermediate range US domestic money and fixed income instruments. Portfolios for operating and bond funds are policy controlled and generally use a buy -and -hold strategy. Securities are normally laddered in a manner reflecting the cash flow needs of the funds. Each portfolio is defined by policy with a maximum maturity and a maximum weighted average maturity which is continuously monitored by the firm. The primary risk associated with such investments is liquidity risk because these funds are used for ongoing operations and projects. Liquidity risk is mitigated with (a) maturities targeting cash needs, (b) a periodic cash flow review with the client and (c) a verification of viability before each trade. Any market risk is reduced through the buy -and -hold process which matches the maturity of investments with known liability dates. Debt and Other Income Producing Risk. Income securities including money market instruments, are subject to interest rate, market and credit risk. Interest rate risk relates to changes in a security's value as a result of changes in interest rates generally. Even though such instruments are investments that may promise a stable stream of income, the prices of such securities are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. In general the values of fixed income securities increase when prevailing interest rates fall and decrease when interest rates rise Market risk relates to the changes in the risk and perceived risk of an issuer, country or region. Credit risk relates to the ability of the issuer to make payments of principal and interest. A clients could lose money if the issuer of a fixed income security is unable to pay interest or repay principal when due Credit risk applies to most fixed income securities. The values of income securities may also be affected by changes in the credit rating or financial conditions of the issuing entities. Municipal Bond Risks. Municipal securities can be significantly affected by political changes as well as uncertainties related to taxation, legislative changes or the rights of municipal security holders Because many municipal securities are issued to finance similar projects (for example, education healthcare or transportation), conditions in those securities can affect the overall municipal market. Money Market Mutual Fund Risks — Money market funds, and local government investment pools structured as a "2a-7 fund", are subject to market, credit and interest rate risk. Interest rate risk relates to changes in the value of securities held in the portfolio as a result of changes in interest rates generally. Credit risk relates to the ability of the issuer to make payments of principal on securities held in the portfolio. Credit risk applies to the securities in the portfolio as well as any credit rating on the fund or pool itself. The strategy for reserve funds are also reviewed on the basis of potential fund usage and are restricted by policy as to maximum maturity and maximum weighted average maturity. If market or volatility risks are expected to affect the client s access to the funds and that access is in question by the client, the portfolios are shortened to reduce this risk. 5 Patterson Capital Management ADV PART 2 —2011 Brochure ITEM 9 DISCIPLINARY INFORMATION Not applicable. ITEM 10 OTHER FINANCIAL INDUSTRY ACTIVITIES AND AFFILIATIONS Patterson & Associates, its employees and supervised persons, have no financial affiliates. The firm is not actively engaged in any business other than giving investment advice and treasury consulting. ITEM 11 CODE OF ETHICS, PARTICIPATION OR INTEREST IN CLIENT TRANSACTIONS AND PERSONAL TRADING Patterson & Associates has adopted a Code of Ethics and Personnel Regulations. The Code includes: - Mission statement standards of conduct - protection of material non - public information personal trading procedures and reporting reporting requirements and violations reviews and enforcement SEC requirements - Affirmative action statements Confidentiality Internal controls Systems controls brokerage controls trade controls - settlement and clearing controls The Mission Statement and Code of Conduct are available on request to any client or prospective client. Neither Patterson & Associates nor any employee, supervisor, or management persons have any financial interest in any related financial industry participant. Patterson & Associates, its employees and its supervisory or management persons may invest in the same securities it recommends to its clients. With strict client written and policy limitations of investments: to the US Government and GSE markets, money markets and commercial paper, the firm sees no conflict of interest. The markets are deep and broad and, unlike equities, investments in the securities could not affect market prices. All related persons of Patterson & Associates are required to report quarterly, to the Chief Compliance Officer, all investment transactions. These records are reviewed for potential conflicts of interest and the investment records are maintained. 0 Patterson Capital Management ADV PART 2 — 2011 Brochure Also included in the Patterson Code of Ethics is the provision that no employee or member of their family may accept gifts or gratuities when there is an attempt to influence or reward the employee in connection with any business or investment transaction. ITEM 12 BROKERAGE PRACTICES Soft Dollars Patterson & Associates does not participate in any soft dollar arrangements. The firm has no incentive to select or recommend any broker/dealer. No fees or any type compensation is paid to Patterson & Associates from broker/dealers or funds. No research is done for any broker/dealer. Broker/Dealers Patterson & Associates requires that all public clients approve a list of authorized broker/dealers for Patterson to use on their behalf. Patterson will only recommend a broker/dealer for a client that suits the client's portfolio needs. It may consider client referrals from a broker/dealer in selecting broker/dealers for an account; however, all investments are made on a competitive basis eliminating any potential conflict of interest. Broker/dealers are not selected based on client referrals to Patterson. Clients may require that a specific broker/dealer be included in the competitive list of client authorized broker/dealers; however all investments are made on a competitive basis eliminating any potential conflict of interest. Not all clients direct brokerage. Clients should understand that if they direct the firm to utilize a specific broker/dealer, Patterson may not be able to obtain best execution on the client's trade as they may incur additional costs. Under Texas law Patterson & Associates may not place a trade for Texas governmental clients with a broker/dealer unless Patterson has received a certification from the broker/dealer that it has received the client's investment policy and the broker/dealer agrees to establish procedures which control the purchase of unauthorized securities. Prior to placing a trade for any client, Patterson obtains at least three bids/offers from authorized broker/dealers who have provided the requisite certification or who are on the client's authorized list Internally, Patterson will only seek bids/offers from a broker/dealer that has provided Patterson with the following documents at a minimum: the broker/dealer's state registration, a completed Patterson questionnaire for background and contact information, FINRA registration and CRD numbers, and annual financial statements. All information on broker/dealers is maintained by Patterson. Aggregation of Trades Patterson & Associates does occasionally aggregate the purchase and sale of securities for various clients. Trade aggregation is addressed in the Patterson's Code of Ethics. In its sole discretion Patterson may aggregate trades for several clients with similar needs. Individual accounting for the security is applied on each client's documentation Each client participating in an aggregated trade will receive a client confirmation. When trades are aggregated, (a) the actual price shall be applied to each client s exact portion of the transaction, (b) all transactions costs are assessed in a pro rata basis to each client (as applicable), (c) each clients receives a complete and separate broker/dealer confirmation on the trade designating their ownership in their portion (par value) of the trade. 7 Patterson Capital Management ADV PART 2 — 2011 Brochure ITEM 13 REVIEW OF ACCOUNTS In order to understand client needs and objectives and to assure that those objectives are met, Patterson & Associates completes a thorough review and discussion with each new client to obtain necessary guidance and policy documents and establish guidelines. On a periodic basis, and no less than annually, Patterson reviews the client portfofio(s) and all pertinent client documents, cash flows, and policies. The procedures of separate account management are thoroughly reviewed with each new client and as needed. The review includes: proposed portfolio structure, portfolio policy limitations, pricing mechanisms and sources, and assignment of responsibilities inside Patterson. These reviews are noted but not written. A Patterson internal team review with all advisory persons, including the firm's President/CIO and client adviser, is made at least quarterly. An annual review of each client portfolio, expectations and needs is made. In addition, should conditions or personnel change at the client or in Patterson a complete review of client needs and the existing portfollo(s) is made immediately. The client does not receive any report of these reviews. ITEM 14 CLIENT REFERRALS AND OTHER COMPENSATION The firm has no incentive to select or recommend any broker/dealer. No soft dollars are offered by the firm to clients. No fees or any type compensation is paid to Patterson & Associates from broker /dealers or funds. The firm has no intention of relying upon the safe harbor provisions of the Exchange Act of 1934 Section 28(e) for soft dollar use. Also included in the Patterson Cade of Ethics is the provision that no employeeor member of their family may accept gifts or gratuities when there is an attempt to influence or reward the employee in connection with any business or investment transaction. No other person provides benefits in connection with the firm services. No one provides client referrals to the firm. See also Item 12. ITEM 1 CUSTODY Not applicable. Patterson & Associates never takes custody, nor directs custody, for clients. 8 Patterson Capital Management ADV PART 2 — 2011 Brochure ITEM 16 INVESTMENT DISCRETION Patterson & Associates provides discretionary and non -discretionary management services to its clients. Where discretionary authority has been granted, Patterson manages the portfolio and makes investment decisions without consultation with the client that would involved determinations regarding which securities are bought and sold, the broker/dealer with whom orders for the purchase or sale of securities are placed for execution. In some instances Patterson's discretionary authority in making these determinations may be limited by conditions imposed by the client in their investment guidelines, cash flow needs or objectives or instructions otherwise provided to Patterson. If discretionary authority is granted by the client it is documented in the advisory contract. See also Items 4, 11, and 12. ITEM 17 VOTING CLIENT SECURITIES Not applicable in fixed income and money market instruments. ITEM 18 FINANCIAL INFORMATION Patterson & Associates is not subject to any the financial condition that would likely impair its ability to meet contractual commitments. 9 M&' Review Page 1 of 2 U CIL GE COUNCIL ACTION: Approved on 6/12/2012 DATE: 6/12/2012 REFERENCE NO.: TYPE• G-17615 CODE* G NON - CONSENT LOG NAME PUBLIC HEARING: Official site of the City of Fort Worth, Texas FORT WO RTi 1 1312 INVESTMNTSVCS NO SUBJECT: Authorize Execution of an Investment Advisory Services Agreement with Patterson Capital Management, LP, in the Amount of $60,000.00 Per Year with an Initial Three Year Term and Two One Year Renewal Options (ALL COUNCIL DISTRICTS) RECOMMENDATION: It is recommended that the City Council authorize the execution of an Agreement with Patterson Capital Management, LP, for investment advisory services in the amount of $60,000.00 per year with an initial three year term and two one year renewal options. DISCUSSION: As part of the Enterprise Resource Planning (ERP) Phase II staffing model, responsibilities within the Financial Management Services Department will be redistributed and the investment management function will be outsourced during the term of the project. This approach will increase yield and reduce the cost to backfill full-time project team members, thereby creating a positive net impact to the City Patterson Capital Management, LP, is a Securities and Exchange Commission Registered Investment Advisory firm. The firm's professionals will provide non -discretionary investment advisory and coordination services and will work closely with Staff to provide reliable and timely cash flow information and make the portfolio decisions that best meet those needs In order to ensure the cash flow needs and to provide information on market conditions and their portfolio views and investment actions, Patterson Capital Management, LP, will work directly with Staff on a regular basis. The firm will never have access to or control over the City's funds or the securities in the portfolio. The firm will make investment decisions adhering to the City's established Investment Policy and Strategy as market opportunities occur. Staff will have the final approval of any investment transaction and will monitor execution with its safekeeping bank. FISCAL INFORMATION/CERTIFICATION: The Financial Management Services Director certifies that funds are available in the current operating budget of the General Fund. TO Fund/Account/Centers Submitted for City Manager's Office bv: Originating Department Head: FROM Fund/Account/Centers GG01 531200 0134010 $60,000.00 Susan Alanis (8180) Lena Ellis (8517) http://apps.cfwnet.org/council_packet/mc_review.asp?ID=16944&councildate=6/12/2012 6/21/2012 M&C Review Page 2 of 2 Additional Information Contact: James Mauldin (2438) ATTACHMENTS http://apps.cfwnet.org/council packet/mc_review.asp?ID=16944&councildate=6/12/2012 6/21/2012