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HomeMy WebLinkAboutC-3591 - Investment Advisory Agreement - Discretionary (Fifth Investment Adviser)03511 MBIA MUNICIPAL INVESTORS SERVICE CORPORATION Investment Advisory Agreement — Discretionary This Agreement, dated as of the 13 th day of November 2002 (the "Agreement "), is by and between MBIA Municipal Investors Service Corporation (the "Adviser") and the City of Newport Beach (the "Client "). The parties agree as follows: f. Appointment The Client hereby appoints the Adviser as the investment adviser of those assets designated by the Client (the "Advisory Account "). 2. Duties of the Adviser The Adviser shall invest the assets of the Advisory Account in strict accordance with the written investment objectives, policies and restrictions of the Client. The Client shall provide the Adviser with an initial Investment Policy or list of authorized investments which shall be incorporated in Exhibit A. The Adviser will provide to the Client monthly a written report detailing transactions for the period and an inventory of the investments in the Advisory Account. It is agreed that the Adviser, in the maintenance of records, does not assume responsibility for the accuracy of information furnished by the Client. Any additional investment management services the Adviser shall provide to.the Client are listed in Exhibit B. 3. Discretionary Authority The Adviser, with full investment authority and discretion, and consistent with all applicable state and federal laws, as well as the Client's investment objectives, policies and restrictions referred to above, may buy or sell securities and place orders for the execution of such transactions with or through such brokers, dealers, or issuers as the Adviser may select, from the group of brokers and dealers the Client has pre- approved, in writing. All transactions are to be at "arms length," and Adviser will receive no compensation, discount, or other incentive from brokers, securities dealers, or any other party, directly or indirectly, involving trades or transactions for Client's advisory account, that are not fully credited to that account for the benefit of Client. The words, "other incentive" in the previous paragraph are not intended to include research material and other data received by the Adviser from brokers and dealers, which is used by the Adviser for the benefit of the Client and its other.clients. 4. Changes in Investment Policies or Assets in the Account The Client is required to notify the Adviser promptly in writing of any modifications to the investment objectives, policies or restrictions applicable to the Advisory Account. The Client agrees to notify the Adviser promptly of any withdrawal of securities from the Advisory Account initiated by the Client. 5. Allocation of Brokerage When placing orders for the execution of transactions for the Advisory Account, the Adviser will take into consideration not only the available prices but also other relevant factors such as, without limitation, execution capabilities and safekeeping arrangements. The Adviser will exercise good faith in obtaining the best price and execution for each transaction for the Advisory Account. 6. Safekeeping and Custody The Adviser will not have custody or possession of the assets of the Advisory Account of the Client. The Client shall select and authorize a custodian bank or brokerage firm to hold the • 0 assets of the Advisory Account in safekeeping for the Client. The Client shall be solely responsible for all fees involved with any custodial arrangements. 7. Fees The compensation of the Adviser for its services under this Agreement shall be calculated and paid in accordance with the Fee Schedule in Exhibit C, as the same may be amended from time to time by mutual agreement of the Client and the Adviser. 8. Limitation of Liability The Adviser will not be liable for any error in judgment or any acts or omissions to act except those resulting from the Adviser's negligence, willful misconduct or disregard of its duties and obligations under this Agreement. 9. Services to Other Clients It is understood that the Adviser performs investment advisory services for other clients. The Client agrees that the Adviser may give advice and take action with respect to any of its other clients which may differ from advice given, or the timing, or nature of action taken, with respect to the Advisory Account. 10. Representations by the Client The Client represents that the terms of this Agreement do not violate any obligation by which the Client is bound, whether arising by contract, operation of law, or otherwise, and that this Agreement has been duly authorized by appropriate action and is binding upon the Client in accordance with its terms. 11. Acknowledgment of Receipt of Brochure (Form ADV Part II) The Client hereby acknowledges receipt of the Adviser's Brochure (Form ADV Part II) at least 48 hours prior to the date of execution of this Agreement in compliance with Rule 204 -3 of the Investment Advisers Act of 1940 (the "Act "). 12. Notice All notices shall be deemed effective when received, in writing; at the address appearing below. Receipt of written notice shall be presumed if mailed postpaid first class mail to the appropriate address specified below. . Each party shall be entitled to presume the correctness of such address until notified in writing to the contrary. 13. Termination; Assignment; Amendment This Agreement may be terminated, without cause, at any time by either party giving to the other at least thirty (30) days' prior notice of such termination confirmed in writing. If any fees have been paid in advance, the Adviser will refund to the Client a prorata share of the fee. No assignment, as that term is defined in the Act, of this Agreement shall be made by either party without the prior written consent of the other. This Agreement may be amended or modified at any time by mutual agreement in writing. 14. Counterparts This Agreement may be executed in two or more counterparts, each one of which shall be deemed to be an original. 15. Governing Law To the extent federal law does not apply, this Agreement shall be construed in accordance with and governed by the laws of the State of California. Page 2 16. Entire Agreement This Agreement constitutes the entire agreement of the parties with respect to the management of the Advisory Account. The Exhibits referenced herein are incorporated into the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective representatives as of the date first above written. City of Newport Beach APPROVED BY: %Ld - Homer Bludau City Manager ADDRESS: 3300 Newport Boulevard Newport Beach, CA 92663 MBIA Municipal Investors Service C F --W Ra . y Palomba, CFA Vic President ADDRESS: 1700 Broadway, Suite 2050 Denver, CO 80290 Page 3 0 0 Exhibit A STATEMENT OF INVESTMENT POLICY PURPOSE To set forth the City's policy concerning the investment of temporarily idle funds. It is the policy of the City to invest funds not required for immediate expenditures. Investments will be in compliance with governing provisions of law and the policy contained herein. Primary investment goals are security of principal, adequate liquidity maintenance, and yield, in that order. Investments shall be placed only in securities as outlined below. The balance between various investment instruments may change in order to provide the City with the best combination of yield, liquidity, and a consideration for other factors, such as placement of an appropriate percentage of available investment funds locally. It shall be the main responsibility of the City Council, in adopting this policy and reviewing the investment holdings on a monthly basis, to preserve the investment principal. INVESTMENT AUTHORITY Under the direction of the City Manager, the investment authority has been delegated to the Director of Administrative Services, who is responsible for administration of the City's investment program. This authority shall be renewed annually as part of the review and update of this Policy. In addition to the monthly investment report that is submitted to the City Council, the Administrative Services Director shall provide more detailed investment information to the City Council as requested. The City Council shall be briefed directly by the City's investment advisors on a quarterly basis whenever possible. Sections 53600 -53601 of the California Government Code provide basic investment limits and guidelines for government entities. In the event an apparent discrepancy is found between this policy and Sections 53600- 53601, the more restrictive parameters will take precedence. FINANCIAL INSTITUTIONS The City shall not deposit funds with any financial institution not receiving a minimum overall satisfactory rating for meeting the credit needs of California Communities in its most recent evaluation ( §53635.2). LIQUIDITY Sufficient funding to accommodate at least two- week's projected cash outflow is to be maintained in immediately available investments, such as the State Local Agency Investment Fund, maturing certificates of deposit, or similar liquid instruments. An analysis of cash flow must be conducted at least weekly to serve as the basis for determining appropriate maturities for investments. At no time shall the liquid cash on hand be less than 5 percent of the City's total investment portfolio. For purposes of this policy, cash on hand includes all cash and investments accessible within 48 hours. ACCEPTABLE INVESTMENT INSTRUMENTS The following are types of investments made each. In all cases, investments shall be made states, in part, that: by the City and the guidelines for investing in in the context of the "Prudent Man" rule, which "When investing, reinvesting, purchasing, acquiring, exchanging, selling, and managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section Page 4 9 0 and considering individual investments as part to (sic) an overall investment strategy, a trustee is authorized to acquire investments as authorized by law." In this light, the City of Newport Beach does not purchase or sell securities on margin. Additionally, any institution, which holds either the collateral or the investment instruments themselves in safekeeping for the City, must maintain at least one billion dollars ($1,000,000,000) in assets. A. Certificates of Deposit Only fully collateralized certificates of deposit with FDIC insured institutions will be utilized in investment of City funds. Government securities having a market value of 110 percent of the total amount of investment are acceptable as collateral. Noncollateralized CD investments may be made in amounts less than $100,000 so long as they are fully insured by the FDIC. Not more than 10 percent of the City's investment portfolio shall be invested in certificates of deposit with any one institution. CD's will not be placed for a period of longer than one year. Further, an institution must meet the following criteria to be considered by the City: 1. The institution must maintain at least $1 billion in assets ($100 million for fully insured CD's of $100,000 or less). 2. The institution must have been in business at least three years. 3. The institution must have a net worth to asset ratio of at least 6 percent. 4. The institution must place and maintain on file with the City an audited financial statement not more than one year old. 5. Interest shall be paid to the City on a monthly basis. B. Negotiable Certificates of Deposit As a matter of policy, the City invests in Negotiable Certificates of Deposit only with U.S. Banks whose underlying securities are rated A -1 or P -1 by one of the top two rating agencies and having assets in excess of $10 billion, so as to insure security and a large, well - established secondary market. Ease of subsequent marketability is further ascertained prior to initial investment by examining currently quoted bids by primary dealers and the acceptability of the issuer by these dealers. No one issuer shall exceed more than 10 percent of the portfolio, and maturity shall not exceed one year. The California Government Code Section 53601 limits investment in negotiable certificates of deposit to 30 percent of the portfolio. C. Bankers Acceptances The City may invest only in Bankers Acceptances issued by the 100 largest banks in the world, which are eligible for purchase by the Federal Reserve System, the short term paper of which is rated at the highest category by Moody's and Standard & Poor's. In the case of foreign banks, the Bankers Acceptances must be written by their U.S. branches. Maximum maturity shall be 180 days. No more than 30 percent of the City's overall investment portfolio shall be placed in Bankers Acceptances, with no more than 10 percent of the City's portfolio invested in the banker's acceptances of any one commercial bank. D. U.S. Treasury Issues The City may invest in treasury notes, bills and bonds. Safekeeping documentation of these instruments in an acceptable and secure account in the City's name is required. Maximum maturity of any U.S. Treasury issue shall be five years. E. Federal Agency Securities Securities of this type that are acceptable for the City's investments are Federal Home Loan Bank notes, Federal National Mortgage Association notes, Federal Farm Credit Bank notes, or any other U. S. Government Agency security. Security requirements and maturity limitations are the same as those for U.S. Treasury issues. Page 5 0 0 F. Commercial Paper The City may only invest in commercial paper issued by large, exceptionally well- established firms (firms with assets greater than $1 billion and their subsidiaries) organized and operating in the United States with the highest Moody's or Standard & Poor's ratings (A1 /P1). Commercial paper shall be used solely as a short-term investment not to exceed 270 days. No more than 25 percent of the City's portfolio may be invested in commercial paper. Security requirements are the same as those listed above. Investment in commercial paper of any one issuer shall not exceed 10 percent of the portfolio. G. Repurchase Agreements (Repos) and Reverse Repurchase Agreements Repos and reverse repos shall be used solely as a short-term investment not to exceed 30 days. The institution from which the City purchases a Repo must deliver adequate collateral to the City's safekeeping account (either directly or through a third party safekeeping agent), consisting of U.S. Treasury or Agency securities at the rate of 102 percent of the face value of the repo. The amount of this collateral must be sufficient to compensate for fluctuating market conditions. Repos will only be purchased from Primary Dealers. The City must own assets for more than 30 days before they can be used as collateral for a reverse repurchase agreement. No more than 10 percent of the portfolio can be involved in reverse repos. H. Passbook Savings Accounts Savings accounts may be used as a repository for customer deposits, or for similar purposes. Consistent with the requirements for CD investments, funds deposited in savings accounts must either be FDIC insured or collateralized. I. Local Agency Investment Fund (LAIF) (State of California) State Regulation currently limits any one City's investment in this fund to $30 million at any one time, and prohibits more than 15 transactions (deposits or withdrawals) per month. Investment in this Pool is intended to be used as a temporary repository for short-term funds used for liquidity purposes. J. County Investment Funds Los Angeles County provides a service similar to LAIF for municipal and other government entities. This Fund is available to certain cities outside of Los Angeles County, including Newport Beach. Investment in this pool is intended to be used as a temporary repository for short-term funds used for liquidity purposes. At no time shall more than 5 percent of the City's total investment portfolio be placed in this Pool. The City shall not invest funds with the Orange County Pool. K. Medium Term Corporate Bonds /Notes Investments of this type will normally only be in corporations rated in the top three note categories by two of the three largest nationally recognized rating services. Maximum term to maturity for individual securities shall not exceed five years, and not more than 25 percent of the portfolio shall be invested in medium term notes of maturity greater than 2 years. No more than 30 percent of the City's investment funds shall be placed in securities of this type. As an additional restriction, not more than 10 percent can be invested in "A," rated securities, and none of those investments shall exceed two years to maturity. L. Asset- backed Securities Investment in asset - backed securities is limited to those collateralized with consumer receivables, rated "AAA," or the equivalent, by Moody's Investor Services or Standard & Poor's, Page 6 0 0 Inc., and which have a final, stated maturity of five years or less from the date of purchase. No more than 10 percent of the City's investment funds shall be placed in securities of this type. M. Municipal Bonds Municipal bonds rated AAA, or AA and insured, are acceptable investments for the City. Not more than 15 percent of the portfolio shall be in investments of this type. N. Money Market Funds The City may invest in Money Market Funds subject to the following constraints. Investment in these funds is primarily intended for short-term "sweep account" purposes, not for longer -term investments. 1. Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a -1.) 2. The company shall have met either of the following criteria: a. Attained the highest ranking or the highest letter and numerical rating provided by not less than two nationally recognized statistical rating organizations. b. Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than ten years' experience managing money market mutual funds with assets under management in excess of one billion dollars ($1,000,000,000). 3. The purchase price of shares of beneficial interest purchased shall not include any commission that the companies may charge. 4. No more than 20 percent of the City's investment portfolio shall be invested in money market funds. 5. The City shall not invest in funds the market value of which is or has been less than $1 per share. PROHIBITED INVESTMENTS Consistent with California Government Code 53601.6, inverse floaters, range notes, mortgage derived interest -only strips, or any security that could result in zero interest accrual if held to maturity are specifically prohibited, except to the extent that they are shares of diversified management companies registered under the Investment Company Act of 1940. The City shall not purchase any security rated Al and or A+ or below if that security has been placed on "credit watch" for a possible downgrade by either Moody's Investor Services or Standard and Poor's. Investments not specifically approved by this policy are prohibited. ASSETIINVESTMENT MANAGEMENT AGREEMENTS The City may employ the services of assetlinvestment management companies. Such companies must have a history of producing no losses and relatively high net returns. They must also be well established and exceptionally reputable. Members of the staffs of such companies who will have primary responsibility for managing the City's investments must have a working familiarity with the special requirements and constraints of investing municipal funds in general and this City's funds in particular. They must contractually agree to conform to all provisions of governing law and the collateral ization and other requirements contained herein. At no time shall more than 30 percent of the City's total investment portfolio be placed in any one investment management account. In order to implement this requirement, the City's portfolio assets will be reallocated annually among its investment managers. SAFEKEEPING/THIRD PARTY CUSTODIANS Cash and securities in the City's portfolio, which are being managed by private sector asset/investment management companies, will not be in the custody of those companies. The City will contract separately with major banks or other well - established, reputable financial Page 7 0 9 institutions, which provide custodial services to maintain custody of cash and securities in this category. In the case of a major financial institution, the City may have an asset/investment management relationship, and a custodial relationship, with the same entity. However, the services must be provided by separately managed departments within that entity, and the City's portfolio must be completely separate and distinct from the assets of the institution and from all other portfolios managed by the institution. BOND PROCEEDS The investment of bond proceeds will be made in accordance with applicable bond indentures. RATING AGENCY CHANGES In the event a security held by the City is the subject of a rate drop which brings it below accepted minimums specified herein, or the security is placed on negative credit watch, where downgrade could result in a rate drop below acceptable levels, the investment advisor who purchased the security will immediately notify the Administrative Services Director or Deputy Director of that fact. The course of action to be followed will then be decided on a case by case basis, considering such factors as the reason for the rate drop, prognosis for recovery or further drop, and market price of the security. The City Council will be advised of the situation and intended course of action by e-mail or fax. REPORTING REQUIREMENTS In addition to the Monthly Investment Report, the City Council shall receive a detailed quarterly listing of all investments in the City portfolio. The report must show the type of investment, issuer, date of maturity, par and dollar amount of deposit/investment, and rate of interest. Quarterly reports from outside investment managers must also include market valuation of assets under their management and the source of that valuation, and shall also include a statement of compliance with investment policy. Current ratings of non - government securities, either Moody's or Standard & Poor's, will be included. In his report to Council, the Director of Administrative Services shall include a statement denoting the ability of the City to meet its expenditures for the next six months, and shall also include a statement of compliance with investment policy for assets under his direct management. In addition, the City Council shall be notified whenever 5 percent or more of the total portfolio is invested, withdrawn, or moved from one Investment Advisor or Pool to another. Adopted - April 6, 1959 Amended - November 9, 1970 Amended - February 11, 1974 Amended - February 9, 1981 Amended - October 27, 1986 Rewritten - October 22, 1990 Amended -January 28, 1991 Amended - January 24, 1994 Amended - January 9, 1995 Amended -April 22, 1996 Corrected - January 27, 1997 Amended - February 24, 1997 Amended - May 26, 1998 Reaffirmed - March 22, 1999 Reaffirmed - March 14, 2000 Amended & Reaffirmed - May 8, 2001 Amended & Reaffirmed - April 23, 2002 Page 8 0 9 Exhibit B Work to be Performed MBIA Municipal Investors Service Corporation will provide the following services for the City of Newport Beach: 1) Provide full -time discretionary management of the Advisory Account. 2) Develop and implement investment strategies for the Advisory account that will enhance portfolio performance under current and future market conditions within the parameters of the investment policy and cash flow needs. 3) Provide technical and fundamental market research including yield curve analysis. 4) Obtain and document competitive prices for securities transactions. 5) Assist with trade settlements. 6) Provide monthly investment reports for the portfolio detailing securities holdings, portfolio composition and sector analyses, portfolio return and weighted average maturity, and daily transaction activity. 7) Provide quarterly performance reports that include custom benchmarks as agreed upon with the City. 8) Perform due diligence reviews of current and proposed broker /dealers. 9) Monitor the creditworthiness of the City's depository and custodian banks and investments in the portfolio. 10) Evaluate safekeeping and custodial procedures and agreements. 11) Review and recommend updates to the City's investment policy and written investment procedures. 12) Work with the City's staff to develop and update cash flow projections. 13) Provide training to staff on cash and investment management subjects. 14) Attend meetings with the City's finance director, finance committee and/or governing body upon request. Page 9 • • Exhibit C Fee Schedule for Investment Advisory Services The annual fee for providing investment advisory services for the City of Newport Beach is as follows: 10 basis points (.10 %) per annum The fees for investment advisory services shall be calculated and paid monthly based on the average value (cost basis) of assets in the Advisory Account. A prorata portion of the annual fee (1/12) is billed each month based on the average asset value of the portfolio for the month. The fee shall be payable upon receipt of billing from the Adviser. Fees are calculated monthly based upon the average daily historical cost value of the portfolio. Average Daily Historical Cost includes original Principal dollars and any accrued interest purchased (up until the first coupon payment). The Average Daily Historical Cost figure is then multiplied by the annual fee rate (10 basis points) and divided by 12 to derive a monthly figure. Example: Average Daily Historical Cost for Newport Beach ($19,951,938.45) for the month of November: $19,951,838.45 *.10% = $19,951.84 (annual fee), / 12 = $1,662.65 (November monthly fee) Page 10 NOV 12 2002 G-���/ CITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Agenda Item No. 14 November 12, 2002 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Administrative Services Department Dennis Danner, Director, ext. 3123, ddanner @city.newport- beach.ca.us SUBJECT: Adding a Fifth Investment Adviser ISSUE: Consistent with Finance Committee guidance, staff has identified a fifth investment adviser. We are prepared to open an account with cash and securities initially valued at $15.1 million. This agenda item requests City Council authorization to proceed. RECOMMENDATION: Authorize the City Manager to sign a contract establishing an investment adviser relationship between the City and MBIA Municipal Investors Service Corporation. DISCUSSION: The City's investment portfolio has grown over the past few years. This is partly the result of City Council policy and budgetary action establishing a stronger cash reserve posture, and partly the result of cash infusion connected with the Newport Coast annexation. For eleven years, the City's practice has been to employ investment advisers to handle the 75% to 90% of the investment portfolio that is in relatively long -term investment accounts. Four separate investment advisers each manage a share of these assets, which are held in separate institutional custodial accounts to which the advisers themselves do not have direct access. The managed accounts have varied over the years from a low of $8 million to about $24 million each. Current balances average about $20 million. Although we have made some changes in the past, we are satisfied with the performance of our current stable of advisers at this time. For about ten months, the City has had $15 million available that could tentatively be added to the long -term managed accounts. Pending the outcome of several issues, primarily the Assessment District Relief in the Newport Coast area, this money was kept in a separate custodial account (with the Bank of New York) temporarily managed directly by City staff. 0 Addioa Fifth Investment Adviser November 12, 2002 Page 2 The Finance Committee previously expressed a preference for adding a fifth investment adviser account, rather than increasing the amounts with the present advisers much beyond the levels already experienced. To that end, staff made inquiries and received interest from several firms who would like to do this work for the City. Unfortunately, we have found it difficult to identify firms who meet..our. -basic minimum criteria, which consist of experience and a detailed working knowledge of laws and conventions regarding investment of municipal funds. Municipal investing is different from other institutional investment, and we simply do not want to be providing training to someone who would like to get into it. There were several quality firms who could provide almost the same type of service we receive from our current advisers, but each wanted us to establish a slightly different relationship and day -to -day working procedure than we had in mind. We only found one firm (other than the four we already employ) that comfortably met our criteria. The good news is that that firm is well qualified; and they have proposed a rate structure (10 basis points (.10 %) of funds under management) which is consistent with what we are paying the other four. That firm is MBIA Municipal Investors Service Corporation. This is a subsidiary of MBIA, the largest Municipal Bond Insurance Company in the United States. MBIA is active in a number of other aspects of municipal finance as well; to include various revenue identification and debt related services. We have done business with them in the past, but not in the particular area of investment management. They also provide this same service, as well as similar services, for other municipalities. We called three of their current clients, all of whom provided positive telephonic endorsements. Environmental Review: There is no environmental impact related to this action. Public Notice: None required (for Finance Committee). Funding Availability: Funding is available. Investment Adviser fees are paid as an abatement to investment earnings. Alternatives: The alternatives are to increase the amounts managed by the existing investment advisers, or for staff to. continue .to invest the funds directly. . Addingoifth Investment Adviser November 12, 2002 Page 3 Prepared by: Submitted by: Deputy Richard C. Kurth, Director Dennis C. Danner, Director MBIA ININICIPAL INVESTORS SERVICE CCOORATION Investment Advisory Agreement— Discretionary This Agreement, dated as of the day of by and between MBIA Municipal Investors Service Corporation Newport Beach (the "Client "). The parties agree as follows: _ 2002 (the "Agreement"), is (the "Adviser") and the City of 1. Appointment The Client hereby appoints the Adviser as the investment adviser of those assets designated by the Client (the "Advisory Account "). 2. Duties of the Adviser The Adviser shall invest the assets of the Advisory Account in strict accordance with the written investment objectives, policies and restrictions of the Client. The Client shall provide the Adviser -with an initial. Investment Policy or list of authorized investments which shall be incorporated in Exhibit A. The Adviser will provide to the Client monthly a written report detailing transactions for the period and an inventory of the investments in the Advisory Account. It is agreed that the Adviser, in the maintenance of records, does not assume responsibility for the accuracy of information furnished by the Client. Any additional investment management services the Adviser shall provide to the Client are listed in Exhibit B. 3. Discretionary Authority The Adviser, with full investment authority and discretion, and consistent with all applicable state and federal laws, as well as the Client's investment objectives, policies and restrictions referred to above, may buy or sell securities and place orders for the execution of such transactions with or through such brokers, dealers, or issuers as the Adviser may select, from the group of brokers and dealers the Client has pre- approved, in writing. All transactions are to be at "arms length," and Adviser will receive no compensation, discount, or other incentive from brokers, securities dealers, or any other party, directly or indirectly, involving trades or transactions for Client's advisory account, that are not fully credited to that account for the benefit of Client. The words, "other incentive" in the previous paragraph are not intended to include research material and other data received by the Adviser from brokers and dealers, which is used by the Adviser for the benefit of the Client and its other clients. 4. Changes in Investment Policies or Assets in the Account The Client is required to notify the Adviser promptly in writing of any modifications to the investment objectives, policies or restrictions applicable to the Advisory Account. The Client agrees to notify the Adviser promptly of any withdrawal of securities from the Advisory Account initiated by the Client. 5. Allocation of Brokerage When placing orders for the execution of transactions for the Advisory Account, the Adviser will take into consideration not only the available prices but also other relevant factors such as, without limitation, execution capabilities and safekeeping arrangements. The Adviser will exercise good faith in obtaining the best price and execution for each transaction for the Advisory Account. 6. Safekeeping and Custody The Adviser will not have custody or possession of the assets of the Advisory Account of the Client. The Client shall select and authorize a custodian bank or brokerage firm to hold the assets of the Advisory Aunt in safekeeping for the Client. *e Client shall be solely responsible for all fees involved with any custodial arrangements. 7. Fees The compensation of the Adviser for its services under this Agreement shall be calculated and paid in accordance with the Fee Schedule in Exhibit C, as the same may be amended from time to time by mutual agreement of the Client and the Adviser. 8. Limitation of Liability The Adviser will not be liable for any error in judgment or any acts or omissions to act except those resulting from the Adviser's negligence, willful misconduct or disregard of its duties and obligations under this Agreement. 9. Services to Other Clients It is understood that the Adviser performs investment advisory services for other clients. The Client agrees that the Adviser may give advice and take action with respect to any of its other clients which may differ from advice given, or the timing, or nature of action taken, with respect to the Advisory Account. 10. Representations by the Client The Client represents that the terms of this Agreement do not violate any obligation by which the Client is bound, whether arising by contract, operation of law, or otherwise, and that this Agreement has been duly authorized by appropriate action and is binding upon the Client in accordance with its terms. 11. Acknowledgment of Receipt of Brochure (Form ADV Part II) The Client hereby acknowledges receipt of the Adviser's Brochure (Form ADV Part II) at least 48 hours prior to the date of execution of this Agreement in compliance with Rule 204 -3 of the Investment Advisers Act of 1940 (the "Act "). 12. Notice All notices shall be deemed effective when received, in writing, at the address appearing below. Receipt of written notice shall be presumed if mailed postpaid first class mail to the appropriate address specified below. . Each party shall be entitled to presume the correctness of such address until notified in writing to the contrary. 13. Termination; Assignment; Amendment This Agreement may be terminated, without cause, at any time by either party giving to the other at least thirty (30) days' prior notice of such termination confirmed in writing. If any fees have been paid in advance, the Adviser will refund to the Client a prorata share of the fee. No assignment, as that term is defined in the Act, of this Agreement shall be made by either party without the prior written consent of the other. This Agreement may be amended or modified at any time by mutual agreement in writing. 14. Counterparts This Agreement may be executed in two ur more counterparts, each one of which shall be deemed to be an original. 15. Governing Law To the extent federal law does not apply, this Agreement shall be construed in accordance with and governed by the laws of the State of California. Page 2 16. Entire Agreement • • This Agreement constitutes the entire agreement of the parties with respect to the management of the Advisory Account. The Exhibits referenced herein are incorporated into the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective representatives as of the date first above written. City of Newport Beach APPROVED BY: Homer Bludau City Manager ADDRESS: 3300 Newport Boulevard Newport Beach, CA 92663 MBIA Municipal Investors Service Corporation M Randy Palomba, CFA Vice President ADDRESS: 1700 Broadway, Suite 2050 Denver, CO 80290 Page 3 • Exhibit A • STATEMENT OF INVESTMENT POLICY PURPOSE To set forth the City's policy concerning the investment of temporarily idle funds. It is the policy of the City to invest funds not required for immediate expenditures. Investments will be in compliance with governing provisions of law and the policy contained herein. Primary investment goals are security of principal, adequate liquidity maintenance, and yield, in that order. Investments shall be placed only in securities as outlined below. The balance between various investment instruments may change in order to provide the City with the best combination of yield, liquidity, and a consideration for other factors, such as placement of an appropriate percentage of available investment funds locally. It shall be the main responsibility of the City Council, in adopting this policy and reviewing the investment holdings on a monthly basis, to preserve the investment principal. INVESTMENT AUTHORITY Under the direction of the City Manager, the investment authority has been delegated to the Director of Administrative Services, who is responsible for administration of the City's investment program. This authority shall be renewed annually as part of the review and update of this Policy. In addition to the monthly investment report that is submitted to the City Council, the Administrative Services Director shall provide more detailed investment information to the City Council as requested. The City Council shall be briefed directly by the City's investment advisors on a quarterly basis whenever possible. Sections 53600 -53601 of the California Government Code provide basic investment limits and guidelines for government entities. In the event an apparent discrepancy is found between this policy and Sections 53600 - 53601, the more restrictive parameters will take precedence. FINANCIAL INSTITUTIONS The City shall not deposit funds with any financial institution not receiving a minimum overall satisfactory rating for meeting the credit needs of California Communities in its most recent evaluation ( §53635.2). LIQUIDITY Sufficient funding to accommodate at least two- week's projected cash outflow is to be maintained in immediately available investments, such as the State Local Agency Investment Fund, maturing certificates of deposit, or similar liquid instruments. An analysis of cash flow must be conducted at least weekly to serve as the basis for determining appropriate maturities for investments. At no time shall the liquid cash on hand be less than 5 percent of the City's total investment portfolio. For purposes of this policy, cash on hand includes all cash and investments accessible within 48 hours. ACCEPTABLE INVESTMENT INSTRUMENTS The following are types of investments made each. In all cases, investments shall be made states, in part, that: by the City and the guidelines for investing in in the context of the "Prudent Man" rule, which "When investing, reinvesting, purchasing, acquiring, exchanging, selling, and managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section Page 4 and considering tividual investments as part to (sicon overall investment strategy, a trustee is authorized to acquire investments as authorized by law." In this light, the City of Newport Beach does not purchase or sell securities on margin. Additionally, any institution, which holds either the collateral or the investment instruments themselves in safekeeping for the City, must maintain at least one billion dollars ($1,000,000,000) in assets. A. Certificates of Deposit Only fully collateralized certificates of deposit with FDIC insured institutions will be utilized in investment of City funds. Government securities having a market value of 110 percent of the total amount of investment are acceptable as collateral. Noncollateralized CD investments may be made in amounts less than $100,000 so long as they are fully insured by the FDIC. Not .more .than. 10 percent. of the City's investment portfolio shall be invested in certificates of deposit with any one institution. CD's will not be placed for a period of longer than one year. Further, an institution must meet the following criteria to be considered by the City: 1. The institution must maintain at least $1 billion in assets ($100 million for fully insured CD's of $100,000 or less). 2. The institution must have been in business at least three years. 3. The institution must have a net worth to asset ratio of at least 6 percent. 4. The institution must place and maintain on file with the City an audited financial statement not more than one year old. 5. Interest shall be paid to the City on a monthly basis. B. Negotiable Certificates of Deposit As a matter of policy, the City invests in Negotiable Certificates of Deposit only with U.S. Banks whose underlying securities are rated A -1 or P -1 by one of the top two rating agencies and having assets in excess of $10 billion, so as to insure security and a large, well- established secondary market. Ease of subsequent marketability is further ascertained prior to initial investment by examining currently quoted bids by primary dealers and the acceptability of the issuer by these dealers. No one issuer shall exceed more than 10 percent of the portfolio, and maturity shall not exceed one year. The California Government Code Section 53601 limits investment in negotiable certificates of deposit to 30 percent of the portfolio. C. Bankers Acceptances The City may invest only in Bankers Acceptances issued by the 100 largest banks in the world, which are eligible for purchase by the Federal Reserve System, the short term paper of which is rated at the highest category by Moody's and Standard & Poor's. In the case of foreign banks, the Bankers Acceptances must be written by their U.S. branches. Maximum maturity shall be 180 days. No more than 30 percent of the City's overall investment portfolio shall be placed in Bankers Acceptances, with no more than 10 percent of the City's portfolio invested in the banker's acceptances of any one commercial bank. D. U.S. Treasury Issues The. City, may invest in treasury notes, bills and bonds. Safekeeping documentation of these instruments in an acceptable and secure account in the City's name is required. Maximum maturity of any U.S. Treasury issue shall be five years. E. Federal Agency Securities Securities of this type that 'are acceptable for the City's investments are Federal. Home Loan Bank notes, Federal National Mortgage Association notes, Federal Farm Credit Bank notes, or any other U. S. Government Agency security. Security requirements and maturity limitations are the same as those for U.S. Treasury issues. Page 5 41 0 F. Commercial Paper The City may only invest in commercial paper issued by large, exceptionally well - established firms (firms with assets greater than $1 billion and their subsidiaries) organized and operating in the United States with the highest Moody's or Standard & Poor's ratings (A1 /P1). Commercial paper shall be used solely as a short-term investment not to exceed 270 days. No more than 25 percent of the City's portfolio may be invested in commercial paper. Security requirements are the same as those listed above. Investment in commercial paper of any one issuer shall not exceed 10 percent of the portfolio. G. Repurchase Agreements (Repos) and Reverse Repurchase Agreements Repos and reverse repos shall be used solely as a short-term investment not to exceed 30 days. The institution from which the City purchases a Repo must deliver adequate collateral to the City's safekeeping account (either directly or through a third party safekeeping agent), consisting of U.S. Treasury or Agency securities at the rate of 102 percent of the face value of the repo. The amount of this collateral must be sufficient to compensate for fluctuating market conditions. Repos will only be purchased from Primary Dealers. The City must own assets for more than 30 days before they can be used as collateral for a reverse repurchase agreement. No more than 10 percent of the portfolio can be involved in reverse repos. H. Passbook Savings Accounts Savings accounts may be used as a repository for customer deposits, or for similar purposes. Consistent with the requirements for CD investments, funds deposited in savings accounts must either be FDIC insured or collateralized. I. Local Agency Investment Fund (LAIF) (State of California) State Regulation currently limits any one City's investment in this fund to $30 million at any one time, and prohibits more than 15 transactions (deposits or withdrawals) per month. Investment in this Pool is intended to be used as a temporary repository for short-term funds used for liquidity purposes. J. County Investment Funds Los Angeles County provides a service similar to LAIF for municipal and other government entities. This Fund is available to certain cities outside of Los Angeles County, including Newport Beach. Investment in this pool is intended to be used as a temporary repository for short-term funds used for liquidity purposes. At no time shall more than 5 percent of the City's total investment portfolio be placed in this Pool. The City shall not invest funds with the Orange County Pool. K. Medium Term Corporate Bonds /Notes Investments of this type will normally only be in corporations rated in the top three note categories by two of the three largest nationally recognized rating services. Maximum term to maturity for individual securities shall not exceed five years, and not more than 25 percent of the portfolio shall be invested in medium term notes of maturity greater than 2 years. No more than 30 percent of the City's investment funds shall be placed in securities of this type. As an additional restriction, not more than 10 percent can be invested in "A," rated securities, and none of those investments shall exceed two years to maturity. L. Asset - backed Securities Investment in asset - backed securities is limited to those collateralized with consumer receivables, rated "AAA," or the equivalent, by Moody's Investor Services or Standard & Poor's, Page 6 Inc., and which have a fiPlal, stated maturity of five years or lessom the date of purchase. No more than 10 percent of the City's investment funds shall be placed in securities of this type. M. Municipal Bonds Municipal bonds rated AAA, or AA and insured, are acceptable investments for the City. Not more than 15 percent of the portfolio shall be in investments of this type. N. Money Market Funds The City may invest in Money Market Funds subject to the following constraints. Investment in these funds is primarily intended for short-term "sweep account" purposes, not for longer -term investments. 1. Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a -1.) 2. The company shall have. met either of the following criteria: a. Attained the highest ranking or the highest letter and numerical rating provided by not less than two nationally recognized statistical rating organizations. b. Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than ten years' experience managing money market mutual funds with assets under management in excess of one billion dollars ($1,000,000,000). 3. The purchase price of shares of beneficial interest purchased shall not include any commission that the companies may charge. 4. No more than 20 percent of the City's investment portfolio shall be invested in money market funds. 5. The City shall not invest in funds the market value of which is or has been less than $1 per share. PROHIBITED INVESTMENTS Consistent with California Government Code 53601.6, inverse floaters, range notes, mortgage derived interest -only strips, or any security that could result in zero interest accrual if held to maturity are specifically prohibited, except to the extent that they are shares of diversified management companies registered under the Investment Company Act of 1940. The City shall not purchase any security rated Al and or A+ or below if that security has been placed on "credit watch" for a possible downgrade by either Moody's Investor Services or Standard and Poor's. Investments not specifically approved by this policy are prohibited. ASSETIINVESTMENT MANAGEMENT AGREEMENTS The City may employ the services of asset/investment management companies. Such companies must have a history of producing no losses and relatively high net returns. They must also be well established and exceptionally reputable. Members of the staffs of such companies who will have primary responsibility for managing the City's investments must have a working familiarity with the special requirements and constraints of investing municipal funds in general and this City's funds in particular. They must contractually agree to conform to all provisions of governing law and the collateralization and other requirements contained herein. At no time shall more than 30 percent of the City's total investment portfolio be placed in any one investment management account. In order to implement this requirement, the City's portfolio assets will be reallocated annually among its investment managers. SAFEKEEPINGITHIRD PARTY CUSTODIANS Cash and securities in the City's portfolio, which are being managed by private sector asset/ investment. management. companies, will not be in the custody of those companies. The City will contract separately with major banks or other well - established, reputable financial Page 7 institutions, which provide cZTstodial services to maintain custody oi'cash and securities in this category. In the case of a, major financial institution, the City may have an assetlinvestment management relationship, and a custodial relationship, with the same entity. However, the services must be provided by separately managed departments within that entity, and the City's portfolio must be completely separate and distinct from the assets of the institution and from all other portfolios managed by the institution. BOND PROCEEDS The investment of bond proceeds will be made in accordance with applicable bond indentures. RATING AGENCY CHANGES In the event a security held by the City is the subject of a rate drop which brings it below accepted minimums specified herein, or the security is placed on negative credit watch, where downgrade could result in a rate drop below acceptable levels, the investment advisor who purchased the security will immediately notify the Administrative Services Director or Deputy Director of that fact. The course of action to be followed will then be decided on a case by case basis, considering such factors as the reason for the rate drop, prognosis for recovery or further drop, and market price of the security. The City Council will be advised of the situation and intended course of action by e-mail or fax. REPORTING REQUIREMENTS In addition to the Monthly Investment Report, the City Council shall receive a detailed quarterly listing of all investments in the City portfolio. The report must show the type of investment, issuer, date of maturity, par and dollar amount of deposit/investment, and rate of interest. Quarterly reports from outside investment managers must also include market valuation of assets under their management and the source of that valuation, and shall also include a statement of compliance with investment policy. Current ratings of non - government securities, either Moody's or Standard & Poor's, will be included. In his report to Council, the Director of Administrative Services shall include a statement denoting the ability of the City to meet its expenditures for the next six months, and shall also include a statement of compliance with investment policy for assets under his direct management. In addition, the City Council shall be notified whenever 5 percent or more of the total portfolio is invested, withdrawn, or moved from one Investment Advisor or Pool to another. Adopted -April 6, 1959 Amended - November 9, 1970 Amended - February 11, 1974 Amended - February 9, 1981 Amended -October 27, 1986 Rewritten -October 22, 1990 Amended - January 28, 1991 Amended - January 24, 1994 Amended - January 9, 1995 Amended -April 22, 1996 Corrected -January 27, 1997 Amended - February 24, 1997 Amended - May 26, 1998 Reaffirmed - March 22, 1999 Reaffirmed - March 14, 2000 Amended & Reaffirmed - May 8, 2001 Amended & Reaffirmed -April 23, 2002 Page 8 • Exhibit B • Work to be Performed MBIA Municipal Investors Service Corporation will provide the following services for the City of Newport Beach: 1) Provide full -time discretionary management of the Advisory Account. 2) Develop and implement investment strategies for the Advisory account that will enhance portfolio performance under current and future market conditions within the parameters of the investment policy and cash flow needs. 3) Provide technical and fundamental market research including yield curve analysis. 4) Obtain and document competitive prices for securities transactions. 5) Assist with trade settlements. 6) Provide monthly investment reports for the portfolio detailing securities holdings, portfolio composition and sector analyses, portfolio return and weighted average maturity, and daily transaction activity. 7) Provide quarterly performance reports that include custom benchmarks as agreed upon with the City. 8) Perform due diligence reviews of current and proposed broker /dealers. 9) Monitor the creditworthiness of the City's depository and custodian banks and investments in the portfolio. 10) Evaluate safekeeping and custodial procedures and agreements. 11) Review and recommend updates to the City's investment policy and written investment procedures. 12) Work with the City's staff to develop and update cash flow projections. 13) Provide training to staff on cash and investment management subjects. 14)Attend meetings with the City's finance director, finance committee and /or governing body upon request. Page 9 0 Exhibit C • Fee Schedule for Investment Advisory Services The annual fee for providing investment advisory services for the City of Newport Beach is as follows: 10 basis points (.10 %) per annum The fees for investment advisory services shall be calculated and paid monthly based on the average value (cost basis) of assets in the Advisory Account. A prorata portion of the annual fee (1112) is billed each month based on the average asset value of the portfolio for the month. The fee shall be payable upon receipt of billing from the Adviser. Fees are calculated monthly based upon the average daily historical cost value of the portfolio. Average Daily Historical Cost includes original Principal dollars and any accrued interest purchased (up until the first coupon payment). The Average Daily Historical Cost figure is then multiplied by the annual fee rate (10 basis points) and divided by 12 to derive a monthly figure. Example: Average Daily Historical Cost for Newport Beach ($19,951,938.45) for the month of November: $19,951,838.45' .10% = $19,951.84 (annual fee), / 12 = $1,662.65 (November monthly fee) Page 10