1.0 Policy Purpose
The purpose of this policy is to provide the standardized framework for investing the Working Capital of the University.
2.0 To Whom the Policy Applies
This policy applies to the Chief Financial Officer (CFO), Treasury Department staff, and any employee or individual with responsibility (direct or delegated) for the investment of operating liquidity.
This policy does not apply to any investments handled by the Investment Office (e.g., investments related to the endowment and funds invested alongside the endowment).
3.0 Policy Statement
The primary focus of investing Working Capital is to ensure the safety and preservation of the principal, while maintaining adequate liquidity to meet the operating needs of the University. Yield consideration is secondary to the primary goal of capital preservation.
3.1 Custody of Investments
The University will not take physical possession of investment securities. All investments are to be held in the name of the University with reputable third-party financial institutions. Assets managed in separate accounts must be held in the University’s name with a reputable third-party custodian.
3.2 Controls
All operating procedures must contain adequate controls over funds transferring between the banking platforms and/or custody account(s) and the operating account. Monthly reconciliations of statements to the general ledger will be prepared and reviewed. In addition, a periodic review of investments against the policy statement shall be performed by the Treasury team and presented to the CFO.
3.3 Investment Tiers
When appropriate, Working Capital investments will be set up in a tiered fashion to allow for higher yield while not compromising University’s liquidity needs and the primary goal of capital preservation.
- Tier 1 investments are the safest and are readily available.
- Tier 2 investments allow for higher yield and are not immediately available (i.e., slightly lower liquidity).
- Tier 3 investments provide the highest yield and are the least liquid.
The tiers will be managed in conjunction with the University cash-forecasting process to ensure availability of appropriate operating liquidity.
3.3.1 Permitted Investments
3.3.1.1 Tier 1
- Money Market (Mutual) Funds, rated AAA/Aaa, that adhere to SEC rule 2a-7
- Federally Insured Cash Accounts (example: FICA, CDARS)
- Interest bearing accounts at reputable financial institutions with credit rating of A- or better
- Commercial Paper (CP) rated A1/P1 with maturities up to 90 days
- Direct investment in US Treasury securities with maturities up to 90 days
3.3.1.2 Tier 2
Investments in the following asset classes are permitted in Tier 2 with the intent of holding said investments to maturity. The CFO must be notified in writing (e.g., email) if the need arises to sell before maturity.
- All investments allowable in Tier 1 with increased maturity from 90 days to 1 year
- Bonds issued and/or guaranteed by Federal Government Agencies with maturities up to one year
- Ultra-Short Bond Funds
- Certificates of Deposit (CDs) issued by a reputable financial institution with a credit rating of A- or better with maturities up to one year
3.3.1.3 Tier 3
With additional signoff by the CFO, investments with longer maturities are allowed.
- If invested by the Treasury Department, all asset types in Tier 1 and 2 with maturities over one year are acceptable for Tier 3. In these situations, the intent of the longer maturity is to lock in higher yields for liquidity that is not immediately needed and/or match future cash needs. The intent is to hold these investments until maturity. Senior management of the Finance Division must be notified in writing if the need arises to sell before maturity.
- Investments by the Investment Office of the University in or alongside the endowment or other investment vehicles in accordance with the Investment Policy of the Investment Office.
- Investments in a separately managed account by an outside investment manager. The outside investment manager must invest in accordance with the Investment Office’s policies and procedures prior to use and a separate policy, investment guidelines and procedure must be established for this type of investing.
3.3.2 Diversification of Investments
The limitations established by this policy will apply at the time of purchase and will be based on the then-current valuation. Should a subsequent event cause a security or the investment portfolio to no longer meet the guidelines set forth in this policy, an appropriate course of action will be determined and approved by the CFO. There is no requirement that an investment be sold prior to maturity if it no longer meets the criteria set forth in this policy. Further, any security held by the University at the time this policy was adopted may be held to its maturity.
In the event the total operating liquidity of the University falls below the Minimum Working Capital balance set by the CFO, the established limits may need to be reassessed. For example, it may be necessary to maintain over 50% of operating funds in the primary operating account of the University.
The limitations below are evaluated against the combined market value of Working Capital funds, excluding those managed by the Investment Office or held in separately managed accounts.
Issuer limitations are based solely on direct investments and are not calculated by looking through to the holdings in Money Market Funds.
Assets held in the Working Capital portfolio will be diversified to mitigate risk of loss resulting from the concentration of assets of a specific maturity, issuer, fund, or class of securities. There are no limits to the amount of Constant Net Asset Value (CNAV) Money Market Funds, U.S. Government, Agency and Government-guaranteed securities.
Limitations:
- No more than 10% of the market value may be invested with any single issuer of Commercial Paper.
- No more than 50% of the total market value may be invested in combined market value of CDs, CP or interest-bearing accounts of a single financial institution.
- Total investments in Floating Net Asset Value (FNAV)Money Market Funds may not exceed 20% of market value and must be split between at least two different issuers. The University’s assets must not represent more than 10% of a fund’s total assets.
4.0 Definitions
For the purpose of this policy, the terms below have the following definitions:
Certificate of Deposit (CD): A product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time. Terms of each CD are set by the individual bank.
Commercial Paper (CP): A form of unsecured, short-term debt commonly issued by companies to finance short-term liabilities. Maturities on most Commercial Paper ranges from a few weeks to months, with an average of around 30 days.
Government Guaranteed Bonds: A debt security that offers a secondary guarantee that interest and principal payments will be made by a third party, should the issuer default due to reasons such as insolvency or bankruptcy. Examples of Government Guaranteed Bonds include US Government Bonds and GNMA bonds.
Federally Insured Cash Accounts (FICA): Investment in a financial product that spreads large deposits between banks in amounts below the federal deposit insurance. This type of product supports small community banks and minority owned banks. Examples of providers include Stonecastle and IntraFi Network.
Minimum Working Capital: The least amount of cash available to the University to meet its operating needs as set by the CFO and Executive Leadership. Currently this is set at $200 million.
Money Market (Mutual) Fund: A kind of mutual fund that invests in highly liquid, near-term instruments. These instruments include cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity (such as U.S. Treasuries). Money Market Funds are intended to offer investors high liquidity with a very low level of risk. CNAV Money Market Funds guarantee principal value of the investment and therefore eliminate unrealized/realized gains and losses. FNAV Money Market Funds fluctuate in price and can lose principal value. FNAV funds are also subject to gates and fees during times of large outflows.
Ratings: Minimum of two ratings are required. S&P and Moody’s ratings should be used whenever possible. In case of split ratings, the lower of the two shall apply.
Ultra-Short Bond Funds: Invests only in fixed-income instruments with maturities of less than one year. These funds offer minimal interest-rate sensitivity and higher yields than money market instruments.
Working Capital: Unrestricted liquidity available to the University to meet its operating/capital expenditure needs and held in accounts managed by the Finance Division.
5.0 Responsibilities
All individuals to whom this policy applies are responsible for becoming familiar with and following this policy. University supervisors and employees with student oversight duties are responsible for promoting the understanding of this policy and for taking appropriate steps to help ensure and enforce compliance with it.
Chief Financial Officer (CFO): The Corporation has delegated the responsibility for prudent investing of operating liquidity of the University to the CFO. The CFO, in turn, has further delegated the responsibility of managing, investing and reporting on Working Capital to the staff within the Treasury Department.
Treasury Department Staff: Responsible for managing, investing and reporting on Working Capital, as delegated by the CFO. Responsible for preparing general ledger reconciliations every month and submitting to the Controller’s Office before the monthly close.
Controller’s Office: Conduct monthly reviews of all general ledger reconciliations prepared by the Treasury staff.
6.0 Consequences for Violating this Policy
Failure to comply with this and related policies is subject to disciplinary action, up to and including suspension without pay, or termination of employment or association with the University, in accordance with applicable (e.g., staff, faculty, student) disciplinary procedures.
7.0 Related Information
Brown University is a community in which individuals are encouraged to share concerns with University leadership. Additionally, Brown’s Anonymous Reporting Hotline allows anonymous and confidential reporting on matters of concern online or by phone (877-318-9184).
The following information complements and supplements this document. The information is intended to help explain this policy and is not an all-inclusive list of policies, procedures, laws and requirements.
7.1 Related Policies
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7.2 Related Procedures
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7.3 Related Forms
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7.4 Frequently Asked Questions
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7.5 Other Related Information
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Policy Owner and Contact(s)
Policy Owner: Vice President for Finance and Administrative Services & Chief Financial Officer
Policy Approved by: Vice President for Finance and Administrative Services & Chief Financial Officer
Contact Information:
Policy History
Policy Issue Date:
Policy Effective Date:
Policy Update/Review Summary:
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