HomeMy WebLinkAboutRES NO 273-05
POLICY RESOLUTION NO.
273-05
A RESOLUTION OF THE COUNCIL OF THE
CITY OF BAKERSFIELD ADOPTING AN
INVESTMENT POLICY
WHEREAS, Section 53646 of the California Government Code requires the
Treasurer or Chief Fiscal Officer to render an annual statement of Investment
Policy to the legislative body of the local agency; and
WHEREAS, the City of Bakersfield desires to adopt an Investment Policy in
conformance with the California Government Code,
NOW, THEREFORE, BE IT RESOLVED, by the Council of the City of
Bakersfield as follows:
The Council of the City of Bakersfield hereby adopts the Investment Policy
as set forth in Exhibit "A" attached hereto and made a part hereof.
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I HEREBY CERTIFY that the foregoing Resolution was passed and adopted by
the Council of the City of Bakersfield at a regular meeting thereof held on
, by the following vote:
NOVS82005
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~ COUNC!LMEMBER CARSON, BENHAM, MAGG,~RD, COUCH, HMJSON, SULLIVAN, SCRIVNER
~: COUNCILMEMBER
AJSr"IN: COUNCILMEM8ER
ABSENT: COUNCILMEMBER
PAMELA A. McCARTHY, C C
CITY CLERK and Ex Officio CI k of the
Council of the City of Bakersfield
APPROVED
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By
APPROVED AS TO FORM:
VIRGINIA GENNARO
City Attnoney
BY~'~
ROBERT SHERFY
Deputy City Attorney
Exhibit "Au attached
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CITY OF BAKERSFIELD
INVESTMENT POLICY
I INTRODUCTION
This Investment Policy is intended to provide guidelines for the prudent investment of the City
of Bakersfield's temporary idle cash, and outline the policies for maximizing the efficiency of
the City's cash management system.
It is the policy of the City of Bakersfield to invest public funds in a marmer which will provide
safety of principal and at least a market rate of return while meeting the daily cash flow demands
of the City. Investments will conform to all statutes governing the investment of public funds.
The primary goals of this policy are:
· To assure compliance with all Federal, State and Local laws governing the investment of
public funds under the control of the City Treasurer.
· To maintain the principal value of financial assets and ensure ample liquidity to meet
operating expenditures.
· Within the constraints of safety and liquidity, and within the parameters of this
Investment Policy generate a market rate of return .
The ultimate goal is to enhance the economic status of the City of Bakersfield while protecting
the safety of its financial assets.
II SCOPE
This policy applies to the investment activities of the City of Bakersfield and related entities.
Idle cash in all funds is pooled for investment purposes except tax exempt bond proceeds, which
are separated for arbitrage record keeping as required by Federal tax law, and the Firemen's
Disability and Retirement Fund which is administered separately under the City of Bakersfield
Municipal Code Section 2.92.
Investments made on a pooled basis include monies of the City of Bakersfield, the
Redevelopment Agency and the Public Financing Authority. The pooled funds are accounted for
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in the City of Bakersfield's Comprehensive Annual Financial Report (CAFR) and include:
OXX General Funds
IXX Special Revenue Funds
2XX Debt Service Funds
3XX Capital Project Funds
4XX Enterprise Funds
5XX Internal Service Funds
6XX Fiduciary-Agency Funds
Any new fund created, unless specifically exempted.
All debt issue proceeds will be invested in accordance with the associated trust indenture, and in
such a marmer that facilitates arbitrage rebate calculations.
III PRUDENCE
Investments shall be made in the context of the "prudent person" standard:
Investments shall be made with judgement and care, under circumstance 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.
The prudent investment diversification for the City's temporary idle cash vs. the Firemen's
Disability and Retirement Fund (FDRF) is different. Up to 40% of the retirement fund may be
invested in securities of a single agency of the four triple A rated United States Government
Agencies authorized in this policy. This exception to investment diversification among the
highest quality securities is deemed prudent and necessary in order to increase the available
options for keeping retirement funds fully invested at or above the six percent actuarial rate of
return.
IV OBJECTIVE
Criteria for selecting investments and the order of priority are:
· Safety - Safety of principal is the foremost objective of the investment program. The
City only operates in those investments that are considered very safe. The City shall seek
to preserve principal by mitigating the two types of risk, credit risk and market risk.
· Credit Risk - Potential loss due to the failure of an issuer of a security.
· Market Risk - Potential decrease in the value of securities due to changes in the
general level of interest rates.
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· LiQuiditv - Liquidity refers to the "ability to easily sell" at any moment in time with a
minimal risk of losing some portion of principal and interest. Liquidity is an important
investment quality should the need for cash occur unexpectedly.
· Yield -Yield is the potential dollar earnings an investment can provide and is sometimes
described as the rate of return.
V DELEGATION OF AUTHORITY
In accordance with the City of Bakersfield Charter, Municipal Code and subsequent resolutions,
the City Treasurer is authorized to invest the City's funds in accordance with California
Government Code Section 53600 et seq. The City Treasurer shall be responsible for all
transactions undertaken and shall establish a system of controls to regulate the activities of
subordinate officials.
VI ETHICS AND CONFLICTS OF INTEREST
All officials involved with the City of Bakersfield's investment program shall exercise their
fiduciary responsibly as custodians ofthe public trust. The City Treasurer, or when appropriate
the Treasury Supervisor, shall avoid any transactions that might impair public confidence in the
City's ability to manage the investment of public funds in an effective manner. The City
Treasurer, Treasury Supervisor, or any other official charged with the responsibility of making
investment decisions, shall have no vested interest in any investment being made involving
public funds of the City, and shall gain no financial benefit from such investment decisions.
VII AUTHORIZED BROKER! DEALERS AND BANKS
All financial institutions that desire to do business with the City shall be evaluated by the City
Treasurer to determine if they are adequately capitalized, meet California Government Code
requirements and agree to abide by the conditions set forth in the City of Bakersfield Investment
Policy. Whenever reasonable and in keeping with Government Code, investments are placed
locally.
Broker/dealers are investigated to determine if there is pending legal action against the firm or
the individual broker who would be the City's contact and that the firm offers securities
appropriate to the City's needs. All broker/dealers, which may include "primary" dealers or
regional dealers that qualify under Securities & Exchange Commission Rule 15c3-1 (Uniform
Net Capital Rule), who desire to become authorized bidders for City investment transactions
must supply the City Treasurer with the following:
· Current audited financial statements
· Account authorization forms
· Proof of National Association of Securities Dealers certification
· Completed broker/dealer questionnaire
· Certification of having read and agreement to abide by the City of Bakersfield
Investment Policy
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All banks that desire to become authorized bidders for time certificates of deposit (TCD) must be
a qualified public depository as established by State Law and supply the City Treasurer with the
following:
· Current audited financial statements
. Depository contracts
· A copy of the latest FDIC call report
· Certification of having read and agreement to abide by the City of Bakersfield
Investment Policy
Broker/dealer account authorizations and depository contracts will be executed by the City of
Bakersfield Finance Director as required by City Charter. The City Treasurer will maintain a list
of authorized broker/dealers and banks that are approved to do business with the City. An
annual review of the financial condition of authorized financial institutions will be conducted by
the City Treasurer.
VIII AUTHORIZED & SUITABLE INVESTMENTS
The City of Bakersfield's investment program is governed by the California Government Code
Sections 53600 et seq. Within the context of these limitations, the following investments are
authorized, as further limited herein (Single Asterisk - denotes term or percentage imposed by
State statute; Double Asterisk - - denotes term or percentage utilized by the City of Bakersfield
which is more restrictive than statute):
A. United States Treasury Bills, Notes and Bonds
United State Treasury Bills, Notes and Bonds are securities which have the full
faith and credit of the United States pledged for payment of principal and interest.
Although there is no percentage limitation of the dollar amount that can be
invested in these categories, the "prudent person" standard shall apply. Maturities
are limited to five- years from settlement date.
Treasury Bills (T-Bills) are short-term debt obligations ofthe
United States Government, issued weekly with maturities up to one
year. T-Bills are considered to have virtually no credit risk and to
be the most liquid short -term fixed income instrument. Prices on
T -Bills are quoted on a discount basis. The difference between the
discount price and the full face value paid at maturity equals the
total return.
Treasury Note (T -Notes) are initially issued by the auction
process with two, five and ten year maturities. T -Notes like Bills
have virtually no credit risk and have liquidity through an active
secondary market. T-Notes are issued at Par ($1,000) with a
coupon or fixed rate of interest. The price or market value will
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fluctuate above or below par depending on the coupon rate and
whether interest rates are rising or falling. T-Notes mature at par.
Treasury Bonds (T-Bonds) are initially issued by the auction
process with thirty year maturities and have characteristics similar
to T-Notes.
B. United States Government Agencies
United States Government agencies include the Federal Farm Credit Bank System
(FFCB), the Federal Home Loan Bank (FHLB), the Federal Home Loan
Mortgage Corporation (FHLMC), and the Federal National Mortgage Association
(FNMA). Government agencies issue debt in the form of discount notes, much
like T-Bills, and notes and bonds similar to T-Notes and T-Bonds. While agency
debt is not a direct obligation of the U.S. government, it is rated AAA, the highest
rating. At the time of purchase no more than 20%** of the portfolio may be
invested in any single agency name. Maturities are limited to five* years from
settlement date.
C. Bankers Acceptance
Bankers Acceptance (BA) is a time draft or bill of exchange, issued from a letter
of credit, and is normally used to finance international trade. When the accepting
bank stamps "accepted" on the draft the bank guarantees payment of the draft at a
specified future date and thereby creates an acceptance. BA's are considered
extremely safe in that there has never been a default on a BA. BA's trade on a
discount basis and may not exceed 180* days to maturity. No more than 10%**
ofthe portfolio may be invested in SA's issued by anyone bank. No more than
40%* of the portfolio may be invested in this category. Eligible BA's are those
issued by banks with a short term debt rating of at least A-I** by Standard and
Poor's Corporation or P-I* * by Moody's Investors Service, Inc.,
D. Commercial Paper
Commercial Paper (CP) is a short-term promissory note. CP is sold on a discount
basis. The maximum maturity is 270 days with most issued in the 30-50 day
maturity range. Eligible CP is "prime" quality ranked A-I by Standard and
Poor's Corporation or P-I by Moody's Investors Service, Inc. CP is issued by
domestic corporations having assets in excess of$500 million and having an A or
higher rating on its debt, other than CP, as provided by Standard and Poor's or
Moody's. Purchases of eligible CP may not exceed 270* days to maturity. No
more than 10%* of the portfolio may be invested in CP issued by anyone
corporation. No more than 25%* of the portfolio may be invested in this
category .
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E. Repurchase Agreements
Repurchase Agreements, commonly called Repos, consist of two simultaneous
transactions. One is the purchase of securities by an investor (City of Bakersfield)
from a bank or dealer. The other is the commitment by the bank or dealer to
repurchase the securities at the same price plus interest at some mutually agreed
future date. Normally the securities are U.S. Treasury notes or bonds and are held
by a Federal Reserve Bank. Repos can be done with banks or dealers with which
the City has entered into a master repurchase contract that specifies terms and
conditions of repurchase agreements. The maturity of Repos shall not exceed
90** days. No more than 30%** ofthe portfolio may be invested in this
category .
F. Local Agency Investment Fund
Local Agency Investment Fund (LAIF) is a State of California managed
investment pool for local agencies within the State. Investments may be up to the
maximum permitted by State Law or 40%** of the portfolio whichever is less.
Due diligence will be exercised in monitoring the performance of LAIF on a
continual basis.
G. Time Certificates of Deposit
Time Certificates of Deposit (TCD's) are similar to a savings certificate that
anyone can purchase at a bank where there is a fixed rate of interest and a
specified maturity date. In the public funds area, TCD's are collateralized in
accordance with California Government Code and are non-negotiable. At the
time of purchase no more than 10%** of the portfolio may be in TCD's of any
one institution. Maturity is limited to five* years. No more than 40%** of the
portfolio may be invested in this category. Section 53652 of the California
Government Code also specifies that the City will have a deposit contract with
each depository.
H. Public Agency Savings Account - Demand Deposits
Public Agency Savings Account - Demand Deposits are similar to a savings
account that anyone can open at a bank. The interest rate is specified at the time
of deposit, but is subject to change. All funds can be withdrawn on demand. Like
public TCD's, public agency savings accounts are collateralized in accordance
with California Government Code requirements. No more than 30%** of the
portfolio may be invested in this category.
I. Mutual Funds
Mutual Funds are money market funds meeting criteria prescribed in California
Government Code Section 53601 and related legislation. Investment in this
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category is limited to funds that invest in U.S. Government Securities and
maintain a net asset value of one (daily liquidity). The purchase price of shares
shall not include any commission that these companies may charge. No more
than 10%* of the portfolio may be invested in the shares of anyone mutual fund.
No more than 20%* of the portfolio may be invested in this category. Mutual
funds are used for the investment of bond proceeds subject to arbitrage reporting.
Due diligence will be exercised in the selection and performance monitoring of
mutual funds on a continual basis.
City of Bakersfield
Summary Of Maximum Percent and Term Limitations
By Investment Type:
Percent
U.S. Treasury Bills, Notes and Bonds
U.S. Government Agency Obligations
Bankers Acceptances(l)
Commercial Paper(3)
Repurchase Agreements
Local Agency Investment Fund
Time Certificates of Deposit
Public Agency Demand Accounts
Mutual Funds
o to 100%
20% per agency
40%(2)
25%(2)
30%
40%
40%(2)
30%
20%(2)
Term
5 Years
5 Years
180 Days
270 Days
90 Days
N/A
5 Years
N/A
N/A
(I) Short-term debt rating of at least A-I Standard and Poor's Corporation or P-I Moody's
Investors Service, Inc.
(2) No more than 10% of the portfolio may be invested in anyone entity from these categories.
(3) A-I Standard and Poor's Corporation rating or P-I Moody's Investors Service, Inc. rating.
Should any investment percentage and portfolio limitation be exceeded due to the unexpected
fluctuation in portfolio size, the affected securities may be held to avoid losses. When market
values are such that no loss is indicated, the City Treasurer shall consider restructuring the
portfolio basing the decision in part on the expected length of time the portfolio will be
imbalanced.
Any State of California legislative action that further restricts allowable maturities, investment
type or percentage allocations, will be incorporated into this Investment Policy and supersede
any and all previous applicable language.
IX UNAUTHORIZED INVESTMENTS
Ineligible investments are those that are not described herein, including but not limited to,
negotiable time certificates of deposit, non-government agency medium term corporate notes and
reverse repurchase agreements.
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X COLLATERALIZATION
Collateralization will be required on two types of investments, time certificates of deposit and
repurchase agreements. Investment in time certificates of deposit shall be insured up to
$100,000 by the Federal Deposit Insurance Corporation (FDIC). Investments in time certificates
of deposit in excess of $1 00,000 shall be properly collateralized. When a depository pledges
government securities as collateral, section 53652 of the California Government Code requires
the securities to have a market value of at least 10% in excess of the City's deposit or 50% in
excess of the City's deposit when mortgages are pledged as collateral. Repo collateralization
wilJ be at least 102% of market value of principal and accrued interest.
XI SAFEKEEPING AND CUSTODY
All security transactions entered into by the City of Bakersfield shall be conducted on a delivery-
versus-payment (DVP) basis. Securities shall be delivered to the City by book entry, physical
delivery or by third party custodial agreement.
XII DIVERSIFICATION
To reduce credit and market risk in the overall portfolio, the City will diversify its investments
by security type, maturity date and issuer. With the exception of U.S. Treasury securities,
diversification is also achieved by the portfolio percentages and maturity limitations indicated in
the Authorized & Suitable Investments section of this policy.
XIII MAXIMUM MATURITIES
To the extent possible, and within the five year maximum maturity required by California
Government Code, the City of Bakersfield will attempt to match investment maturities with
anticipated cash flow requirements.
As required by California Government Code Section 53601, any investment term longer than
five years requires express authority by the City Council to make that investment. This authority
must be granted no less than three months prior to making the investment. Investments with
terms longer than five years will be limited to the lesser of$IO million or 10% ofthe portfolio at
the time the investment is made.
XIV INTERNAL CONTROL
Investment transactions are reviewed by the City's external auditor as part of the annual audit.
This review verifies compliance with the City of Bakersfield Investment Policy and the
California Government Code.
XV PERFORMANCE STANDARDS
The cash management system is designed to accurately monitor and forecast expenditures and
revenues, thus ensuring the investment of monies to the fullest extent possible, including the
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estimated float for the Active Account and the Payroll Account. The City attempts to obtain the
highest interest yields possible as long as investments meet the criteria required for safety and
liquidity, do not exceed a term of five years (unless otherwise authorized by the City Council)
and are within portfolio percentage limitations.
The City strives to maintain the level of investment of all funds as near 100% as possible through
daily and projected cash flow determinations. The basic premise underlying the City of
Bakersfield Investment Policy is, and will continue to be, to ensure that the money is always safe
and available when needed.
Because the investment portfolio is designed to operate on a "hold-to-maturity" premise (or
passive investment style) and because of the safety, liquidity, and yield priorities, the benchmark
that will be used by the City Treasurer to determine whether market yields are being achieved
shall be the yield on the U.S. Treasury Bill or Note maturing closest to the weighted average
maturity of the City's overall portfolio.
XVI REPORTING
The City Treasurer shall provide the City Council monthly investment reports which provide a
clear picture of the status of the current investment portfolio. The Monthly Investment Report
shall include the following:
· A listing of individual securities held at the end of the reporting period by
authorized investment category
· Final maturity of all investments listed
· Coupon, discount or earnings rate
· Par value and market value
· Transactions completed during the month
· Percentage of the portfolio represented by each investment category
XVII INVESTMENT POLICY ADOPTION
The City of Bakersfield Investment Policy shall be reviewed annually by City staff and adopted
by Resolution ofthe City Council.
XVIII INDEMNIFICATION OF INVESTMENT OFFICIALS
The standard of care to be used by investment officials shall be the "prudent person" standard
and shall be applied in the context of managing the overall portfolio. The City Treasurer and his
designees' acting in accordance with established procedures and the City of Bakersfield
Investment Policy and exercising due diligence shall be relieved of personal responsibility for an
individual security's credit risk or market price changes, provided deviations from expectations
are reported in a timely fashion and appropriate action is taken to control adverse developments.
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GLOSSARY
ACCRUED INTEREST: Interest earned but not yet received.
ACTIVE ACCOUNTS: Funds which are immediately available for disbursement.
AGENCIES: U.S. Government-authorized enterprises that issue debt securities commonly
called "agencies".
ARBITRAGE: In the public finance arena, arbitrage is interest earnings on invested bond
proceeds that exceeds interest payments to the bondholders. The ] 986 Tax Act requires arbitrage
earnings to be rebated (pai d) to the federal government.
AUTHORIZED INVESTMENTS: A list of permitted investments by investment type
maintained as a component to an investment policy. AIIowable investment listing will generaIJy
include descriptions or parameters for investment diversification ratios, terms of maturity, and
quality ratings.
BENCHMARK: A segment of the securities market with characteristics similar to the subject
portfoJio. It is used to compare portfolio performance to the performance of the appropriate
segment of the market.
BOND: A finandal obligation for which the issuer promises to pay the bondholder a specified
strearn of future cash flows, including periodic interest payments and a principal repayment.
BROKER: A broker brings buyers and sellers together for a commission.
COLLATERAL: Evidence of deposit or other property, such as securtities, wlrich a borrower
pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure
deposits of public monies.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official arumal
report for a municipality. It includes combined statements for each individual fund and account
group prepared in conformity with generally accepted accounting principals (GAAP). It also
includes supporting schedules necessary to demonstrate compliance with finance-reJated Jegal
and contractua1 provisions, extensive introductory material, and a detailed statistical section,
COUPO:"ì: The annual rate of interest that a bond's issuer promises to pay the bondholder on
the bond's face value.
CUSTODY: A banking service that provides safekeeping for the individual securities in a
customer's investment portfolio under a written agreement which also calls for the bank to collecl
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and payout income, to buy, sell, receive and deliver securities when ordered to do so by the
principaL
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, b1Jying and
selJing for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery
versus payment and delivery versus receipt. Delivery versus payment is delivery of securities
with an exchange of money for the securities. Delivery versus receipt is delivery of securities
with an exchange of a signed receipt for the securities.
DISCOUNT: The difference between the cost price of a security and its maturity amount
when quoted at lower than face value. A security seIling below original offering price shortly
after being issued also is considered to be at a discount
DISCO UNT SECURITIES: Non-interest bearing money market instruments that are issued
at a discount (less than face value expressed as the discount rate). and redeemed at maturity for
full face value, e.g., U.S. Treasury BiBs.
DIVERSIFICA nON: Dividing investment funds among a variety of securities offering
independent returns, to reduce risk inherent in particular securities.
FEDERAL DEPOSIT INSURA.I'KE CORPORA nON (FDIC): Insurance provided to
customers of a subscribing bank which guarantees deposits to a set Emit (currently $] 00,000) per
account.
MARKET VALUE: The price at which a security is trading and could presumably be
purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all futllre
transactions between the parties- establishes each party's rights in the transactions. A master
agreemen1 will specify, among other things, the right of the buyer-lender to liquidate the
underJying securities in the event of default by the seller-borrower.
MA TURITY: The date upon which the principal or stated value of an investment becomes due
and payable.
MONEY MARKET: The market In which shor1-tenn debt instruments (such as T-Bills,
commercial paper and bankers acceptances) arc issued and traded.
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NOTE: A written promise to pay a specified amount to a certain entity on demand or on a
specified date.
PORTFOLIO: Collection of securities held by an investor.
PRIMARV DEALER: A group of government securities dealers who submit daily reports of
market activity and positions and monthly financial statements to the Federal Reserve Bank of
New York and are subject to its informal oversight. Primary dealers inc1ude Securities and
Exchange Commission (SEC)-registered securities broker-dealers, banks, and a few unregulated
firms.
PRUDENT PERSON RULE: An investment standard. In some states the law requires that a
fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody
state-the so-cal1ed 1egallist. In other states the trustee may invest in a security if it is one which
would be bought by a prudent person of discretion and inte11igence who is seeking a reasonable
income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sales and compensating use or ad valorem taxes under the
laws oftills state, which has segregated for the benefit of the commission e1igible collateral
having a value of not less than its maximum liability and which has been approved by the pub1ic
Deposit Protection Commission to hold public deposits.
SAFEKEEPING: A service to customers rendered by bank trust departments for a fee
whereby securities and valuables of a11 types and descriptions are held in the bank's vaults for
protection.
SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect
investors in securities transactions by administering securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital Rule.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that
member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of
indebtedness to liquid capital of 15 to I: also called net capita] rule and net capital ratio.
Indebtedness covers aU money owed to a firm, including margin loans and commitments to
purchase securities, one reason new public issues are spread among members ofunderwriting
syndicates. Liquid capita] incJudes cash and assets easily converted into cash.
WEIGHTED AVERAGE :\-fA TURITY (W AM): The average maturity of aJJ the securities
that comprise a portfolio that is typically expressed in days or years
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YIELD: The rate of annua1 income return on an investment, expressed as a percentage. (a)
INCOME YIELD is obtained by dividing the current dollar income by the CUITent market price
for the security. (b) J'ŒT YIELD Dr YIELD TO MATURITY is the current income yield
minus any premium above par or p1us any discount from par in purchase price, with the
adjustment spread over the period from the date of purchase to the date of maturity of the bond.
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