In the wake of last year's fraud charges against California investment adviser Steven D. Wymer, groups like the Municipal Treasurers' Association of the United States and Canada have been hot on the heels of how best to safeguard public investments.
Mr. Wymer was indicated this winter in a Los Angeles federal court on criminal charges that he defrauded dozens of municipalities of public funds invested with his firm, Institutional Treasury Management. He was charged with making unauthorized trades without telling investors and hiding the losses by illegally shifting funds between accounts.
The indictment "heightens the awareness of potential problems" with investing public funds and emphasizes the need for written investment policies, said Linda T. Patterson, Texas assistant deputy treasurer and director of investments.
The case and others like it point up the significance of work by the treasurers' investment policies, practices, and certification committee, which is charged with emphasizing the importance of written investment policies and adherence to frugal investment practices.
The association was founded in 1965 to provide educational services, programs, and technical assistance to local treasury managers. Headquartered in Washington, D. C., it includes over 1,500 treasurers and finance officers from the United States and Canada; over 15 state finance associations; and 100 corporate members including investment bankers, bond counsel, and municipal brokers.
One focus of the association's committee this year will be to fine-tune the review process for the group's investment policy certification program. Under the program, municipalities are invited to submit policies for review and certification by the committee to see if they measure up to the association's guidelines.
The program aims to provide professional guidance and assistance in developing or improving investment policies. It is designed to help municipalities develop iron-clad investment policies that should prevent problems like the Wymer case.
Committee members will have a chance to examine the review process when the association meets Aug. 9-12 in Calgary, Canada, for its annual conference.
The committee's goal in improving the review program is to set up a grading system whereby policy components are assigned a numerical ranking based on content. Certification would be granted based on a minimum tally of points.
At present, individual reviewers vote on whether to certify a policy. Changing this method could make certification more flexible because reviewers could then place more emphasis on specific components of a policy as areas of importance shift with conditions in the marketplace.
Ranking would allow reviewers to give more weight to particular features of a policy. For example, in light of the Wymer case, reviewers might pay closer attention to collateralization procedures and how authorized financial dealers and institutions will be selected.
Until now, "it's pretty much been the individual reviewer's decision" whether a policy is certified, said Rod Rich, director of investments for Seattle, Washington's treasurer and chairman of the association's investment policy committee. "We're going to try to put some weighting to that."
"We're just trying to get away from a possible individual bias," Mr. Rich added.
The model policy the association developed as the basis for the review process for certifying investment policies is divided into 16 sections covering topics such as the scope of the policy, delegation of authority, ethics, and conflicts of interest. There is also a sample glossary defining technical terms used in creating a policy.
In some instances, municipalities victimized by Mr. Wymer failed to pay close attention to securities transactions his firm conducted on their behalf, to ensure that securities that they paid for had been purchased, or to confirm that the proper collateral was in place. All of these criteria are part of the association's model investment policy.
By the time the dust settled in the Wymer case, several of the 64 localities for which the firm managed more than $1 billion had been bilked out of an estimated $100 million, and Mr. Wymer had been barred from the securities business. In addition, Congress had begun drafting proposals to increase scrutiny and tighten federal standards governing the nation's investment advisory firms.
Written Guidelines
Texas, California, and other states require municipalities to develop written investment guidelines. Proponents say a written policy helps local governing bodies such as city councils and legislatures understand investment practices and the criteria used to make such decisions. It is also argued that such policies can shield finance officials from being pressured into making risky investments on the premise of obtaining high yields.
"It's vital to know the criteria a treasurer will use to make investment decisions. Every municipality needs this kind of tool," said Mary E. Turner, treasurer of Anaheim, Calif. Ms. Turner, a former of the state's Local Agency Investment Fund advisory board, was the first treasurer in her state to have a policy certified by the association.
Over two dozen localities have had policies certified thorough the program since its inception in 1990.
The way it works now, submitted investment policies are evaluated by three reviewers, usually seasoned treasury professionals who volunteer as reviewers. Two of the three must vote in favor of certifying the policy to give it the association's certificate of excellence.
But certifying investment policies by a point system, as opposed to purely subjective review, falls more in line with the association's unwritten tenet of helping municipalities find the right path, rather than dictating their route.
"If they're comfortable operating under the policy, who's to stay it's not right?" Mr. Rich said.
Modifications to the review process might also include a handbook for reviewers explaining the ranking system and why certain aspects of a policy such as collateralization, delegation of authority or safekeeping and custody, might be given heavier emphasis, Ms. Patterson pointed out.
Past Mishaps
Indeed, municipal finance officials can look to problems in the not too distant past that many believe could have been thwarted by following the guidelines of a strong written investment policy program.
In the 1980s, for example, municipalities suffered huge losses due to the bankruptcies of Florida based ESM Government Securities Inc. and New York based-Lion Capital Group. Both firms had entered into repurchase agreements using the same collateral for more than one transaction. Municipalities logged more than $140 million of losses as a result.
Now components of the association's model policy covering collateral, safekeeping, and custody stress the importance of placing collateral with an independent third party and conducting security transactions on a delivery-versus-payment basis to avoid such occurrences. This way, payment for securities is not made to a broker until securities or a cash equivalent are secured by an independent third party, such as a bank.
In addition to reviewing its investment certification guidelines at the Calgary conference, the treasurers group will offer workshops for municipalities and finance officials interested in drafting or working on an existing investment policy, said Stacey, Crane, executive director of the association.
There also will be introductory and more advanced sessions on investments for both large and small localities as well as sessions on new financial products and protecting public funds, Ms. Crane added.
Various types of investment products have been introduced within the last year, Mr. Rich noted. "In some cases they're appropriate investments and in some cases they may not be. So we're trying to do a little educating."
"It's not for the MTA to say what's good or not, but rather how to identify what's good or not," he added.
Meanwhile, treasurers are also getting help elsewhere to safeguard public investments.
In late July, the House of Representatives telecommunications and finance subcommittee, chaired by Rep. Edward Markey, D-Mass., approved by voice vote a bill that would increase federal regulation of financial advisers.
The bill calls for an increase in the fees advisers pay to register with the Securities and Exchange Commission, which would help the SEC boost its staff to examine financial advisers.
The House bill also includes provisions that go beyond those in a similar bill passed by the Senate Banking Committee earlier this year. It would direct the SEC to inspect new advisers for the first year of operations, require inspections based on a series of risk factors, and call for follow-up inspections of troubled firms.
The bill also would require the SEC to survey for unregistered advisers and develop a plan to address the problem. A new rule would be included to correct any "pattern of misinterpretation" of how investment adviser is defined in current standards. The bill also would make it clear that investment advisers must determine whether the securities they recommend are suitable for particulars investors.
