Friday Harbor, Washington
INVESTMENT POLICIES

The purpose of this policy is to establish guidelines for the efficient and prudent management and investment of Town of Friday Harbor funds. The goal of this policy is to allow the Town to obtain the highest possible yield on available Town cash based on prudent investment decisions and guidelines.

II. POLICY

It is the policy of the Town of Friday Harbor to invest public funds in a manner that will provide the highest investment return with the maximum security. The investment of the Town funds will meet the daily cash flow demands of the Town. All investments purchased will conform to all Federal, Washington State and Town of Friday Harbor statutes governing the investment of public funds.

III. SCOPE

The investment policy applies to the investment of financial assets of the Town of Friday Harbor under the direct management of the Town Treasurer.

The funds are accounted for in the Town's Comprehensive Annual Financial Report. These include the General Fund, Special Revenue Funds, Capital Project Funds, Enterprise Funds, Trust and Agency Funds, Bond Redemption and Reserve Funds and any new funds created by the Town Council.

IV. PRUDENCE

The standard of prudence to be applied by the investment officer shall be the "Prudent Person Rule". "Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income derived." This rule shall be applied in the context of managing an overall portfolio.

The investment officer, acting in accordance with written procedures and this Investment Policy and exercising due diligence, shall be relieved of personal responsibility for an individual security's credit risk or market price changes. Deviations from expectations shall be reported in a timely fashion and appropriate action will be taken to control adverse developments.

All participants in the investment process will seek to act responsibly as custodians of the public trust. The investment officer shall recognize that the investment portfolio is subject to public scrutiny and evaluation. In addition, the overall investment program shall be designed and administered with a degree of professionalism worthy of the public trust. The investment officer shall also refrain from any transaction that might knowingly impair public confidence in the Town's ability to govern effectively.

V. OBJECTIVE

Funds of the Town will be invested in conformance with the Constitution of the State of Washington, with the Revised Code of Washington (RCW), with the State Budgeting, Accounting, Reporting System (BARS) manual, Town Ordinances and Town Resolutions, as amended.

The primary objectives, in order of priority, of the Town of Friday Harbor investment activities are as follows:

Legality: The Town's investments will be with all statutes governing the investment of public funds.

Safety: Investments of the Town will be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from other investments.

Liquidity: The Town's investments will remain sufficiently liquid to enable the city to meet all operating requirements that might be reasonably anticipated.

Yield: The Town's investments will be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the Town's investment risk constraints and cash flow characteristics.

VI. DELEGATION OF AUTHORITY

The Town Treasurer is designated as the investment officer of the Town of Friday Harbor. The Treasurer shall establish written procedures for the operation of the investment program consistent with this investment policy and approval by the Town Administrator. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Treasurer and approval by the Town Administrator. The Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials.

VII. ETHICS AND CONFLICTS OF INTEREST

Officers and employees involved in the investment process shall refrain from personal business activity that may conflict with proper execution of the investment program or that be able to impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the Town Administrator any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the Town's portfolio. Employees and officers shall subordinate their personal investment transactions to those of the Town, particularly with regard to the time of purchased and sales.

VIII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS

The investment officer will maintain a list of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness who maintain an office in the State of Washington. These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1(uniform net capital rule). No public deposits shall be made except in qualified public depositories as provided in Chapter 39.58 RCW.

At the request of the Town, the firms performing investment services for the Town shall provide their most recent financial statements or consolidated report of condition for review.

IX AUTHORIZED INVESTMENTS

The Town of Friday Harbor is empowered to invest in certain types of securities as detailed in RCW 35.39.030 and RCW 39.59. Among the authorized investments are:

1. Investment deposits, including certificates of deposits, with qualified depositories as defined in Chapter 39.58 RCW.

2. Obligations of the U.S. Government, its agencies and instrumentalities. However, this authorization shall specifically exclude Collateralized Mortgage Obligations (CMOs), Real Estate Mortgage Investment Conduits (REMICs), and other Principal Only (POs) and Interest Only (IOs) obligations that are secured with mortgages issued by any federal agency, instrumentality or private firm.

3. Prime banker's acceptances purchased on the secondary market with rating of A1/P1.

4. Repurchase agreements for securities listed above, provided the transaction is structured so that the Town obtains control over the underlying securities and a Master Repurchase Agreement has been signed with the bank or dealer.

5. Mutual funds and money market funds for bond proceeds subject to the arbitrage provisions of Section 148 of the Federal Internal Revenue Code.

6. State of Washington Local Government Investment Pool.

7. Bonds of the State of Washington and any local government in the State of Washington, which bonds have at the time of investment one of the three highest credit ratings of a nationally recognized rating agency.

8. Attached to this policy is the list of eligible investments for public funds as prescribed by the Office of the State Treasurer.

X. INVESTMENT POOLS AND MONEY MARKET MUTUAL FUNDS

Before investing in any governmental investment pool or money market mutual fund a through investigation of the pool or fund is required. A completed questionnaire from the pool or fund manager will be required. The pool or fund manager shall submit this questionnaire to the Town annually.

Attached to this policy is a sample questionnaire.

XI. COLLATERIZATION

Collateralization will be required on all repurchase agreements. So as to anticipate market changes and provide an adequate level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest. Collateral is limited to the types of securities authorized in section IX.

Collateral will always be held by an independent third party with which the Town has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the Town and retained.

XII SAFEKEEPING AND CUSTODY

To protect against potential fraud, embezzlement, or losses by collapse of individual securities dealers, all investment securities purchased by the Town, including collateral on repurchase agreements, shall be held by the Town or in safekeeping by the Town's custodian bank or a third party bank trust department. A bank shall act as agent for the Town under the terms of custody or trustee agreement executed by the bank and the Town. The primary agent shall issue safekeeping receipts to the Town listing the specific instrument, rate, maturity, and other pertinent information.

All securities transactions conducted by the custodian on behalf of the Town are to be on a delivery-verus-payment (DVP) only basis.

The investment officer and those employees involved in the investment activity of the Town shall be bonded to protect the Town against loss due to possible embezzlement and malfeasance.

XIII. DIVERSIFICATION

The investment officer shall try to diversify Town investments by security type and institution. With the exception of U.S. Treasury securities and the State of Washington Local Government Investment Pool, no more than twenty -five percent of the Town's total investment portfolio will be invested in a single security type or with a single financial institution

XIV. MATURITIES

The Town will match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the Town will not directly invest in securities maturing more than three (3) years from the date of purchase. However, the Town may collateralize its repurchase agreements using longer-dated investments.

Reserve or Capital Improvement Project monies may be invested in securities not to exceed five (5) years if the maturity of such investments is made to coincide as nearly as possible with the expected use of the funds.

XV. INTERNAL CONTROLS

The Town is subject to annual independent review of its internal controls by the Office of State Auditor. This review will provide internal control by assuring that policies and procedures are being complied with. Such review also may result in recommendations to change operating procedures to improve internal control. The controls shall be designed to prevent loss of public funds due to fraud, error, and misrepresentation by third parties, unanticipated market changes, or imprudent actions by employees or officials of the Town.

XVI. PERFORMANCE STANDARDS

The Investment Portfolio shall be designed to obtain a market average rate of return during budgetary and economic cycles, taking into account the Town's investment risk constraints and cash flow needs. The Town's investment strategy shall be passive. Given this strategy, the basis used by the investment officer to determine whether market yields are being achieved shall be the Washington State Local Government Investment Pool.

XVII. REPORTING

The Treasurer shall include a report on the Town's investment activity in the Treasurer's monthly financial report to the Mayor and Town Council.

The report will include interest earnings, interest rates, the number of trades and the type of investments.

XVIII. SAVINGS CLAUSE

In the event any state or federal legislation or regulation should further restrict instruments or institutions authorized by this policy, such restrictions shall be deemed to be immediately incorporated in this policy.

If new legislation or regulation should liberalize the permitted instruments or institutions, such changes shall be available and included in this policy only after written notification to the Town Council and their subsequent approval of said changes.

IXX. INVESTMENT POLICY ADOPTION

The Town of Friday Harbor investment policy shall be adopted by resolution of the Town Council. The policy shall be reviewed annually by the investment officer and Town Administrator and the Town Council must approve any modifications made thereto.

GLOSSARY

ACCRUED INTEREST: Interest earned but not yet paid on a security since the later of the security's issue date or last record date.

AGENCIES: Federal agency securities.

BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer.

BASIS POINT: A measurement of changes in prices or yields for fixed income securities. One basis point equals 1/100 of 1 percent.

BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid).

BOND: A long -term debt security, issued by a government or corporation. Generally pays a stated rate of interest, and returns the face value at maturity.

BOOK-ENTRY TRANSFER: A method of transferring securities through computerized entries which may eliminate the need for physical certificates.

BROKER: A broker brings buyers and sellers together for a commission.

CALL OPTION: The right to purchase a security at a predetermined price on or before a specified future date.

CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate.

COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.

CONFIRMATION: A document used to state and supplement in writing the terms of a transaction which have previously been agreed to verbally.

COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a payment date.

CUSIP NUMBER (COMMITTEE ON UNIFORM SECURITIES IDENTIFICATION PROCEDURES): An identifying number assigned to a publicly traded security. A nine digit code is permanently assigned to each issue and is generally printed on the face of the security if it is in physical form.

DEALER: A dealer, opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.

DELIVERY VERUS PAYMENT: (a) delivery verus payment is delivery of securities with an exchange of money for the securities. (b) delivery verus receipt is delivery of securities with an exchange of a signed receipt for the securities.

DEPOSITORY: An entity which accepts securities for deposit. A depository facilitates delivery and transfer between dealers by making account entries reflecting ownership instead of physically moving securities.

DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount.

DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns.

FACE VALUE: The par value of a security. Face value is not an indication of market value.

FARM CREDIT DISCOUNT NOTES AND BONDS: Secured joint obligations of Farm Credit Banks that are issued with a minimum face value of $50,000 with maturities ranging from 5 to 360 days.

FED BOOK-ENTRY: An electronic registration, transfer and settlement system for securities on the Federal Reserve system.

FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S&L's, small business firms, students, farmers, farm cooperatives, and exporters.

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit.

FEDERAL FUNDS RATES: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA/FANNIE MAE): Charted under the Federal National Mortgage Association Act in 1938, the FNMA is a federal corporation working under the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the US. Fannie Mae is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and second mortgages. Fannie Mae securities are highly liquid and are widely accepted. Fannie Mae assumes and guarantees that all security holders will receive timely payment of principal and interest.

FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The Committee sets Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money.

FEDERAL RESERVE SYSTEM: The central bank of the United States crated by congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA/GINNIE MAE): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Full faith and credit of the U.S. Government protect the Security holder. Ginnie Mae securities are backed by the FHA, VA or FMHM mortgages.

GOVERNMENT SECURITIES: Any debt obligation issued by the U.S. Government, its agencies or instrumentalities. Certain securities are backed by the government as to both principal and interest payments such as Treasury Bonds and Ginnie Maes. Other securities such as those issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) are backed by the issuing agency.

INTEREST: Compensation paid or to be paid for the use of money. Interest is generally expressed as an annual percentage rate.

INTEREST RATE: The face coupon rate of a security.

ISSUE DATE: The date on which a security is issued or originated.

ISSUER: An entity that issues and is obligated to pay amounts due on securities.

LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value.

LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment.

MARKET PRICE: For securities sold on an exchange, the last reported price at which the securities were sold.

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 future transactions between the parties to repurchase-reserve repurchase agreements that established each party's rights in the transaction. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.

MATURITY: The date upon which the principal or stated value of an investment becomes due and payable.

MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, banker's acceptances, etc.) are issued and traded.

ODD-LOT: A quantity of securities which is less than the accepted unit of trading.

OFFER: The price asked by a seller of securities.

OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool.

PAR: The face amount of a security.

PAYMENT DATE: The date that actual principal and interest payments are made to the registered holder of the security.

PORTFOLIO: Collection of securities held by an investor.
PRICE: The dollar amount to be paid for a security expressed as a percentage of its current face value.

PRIMARY 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 include Securities and Exchange Commission (SEC)-registered securities broker-dealers, banks, and a few unregulated firms.

PRINCIPAL: The face amount of a bond, exclusive of accrued interest and payable at maturity.

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-called legal list. 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 intelligence 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 or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits.

RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond the current income return.

RATINGS: Designations used by investor's services to give relative indications of credit quality.

REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security "buyer" in effect lends the "seller" money of the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their position. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank reserves.

REVERSE REPURCHASE AGREEMENTS ("REVERSE REPO"): An agreement of one party to purchase securities at a specified price from a second party and a simultaneous agreement by the first party to resell the securities at a specified price to the second party on demand or at a specified later date.

SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection.

SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution.

SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation.

SEC RULE 15C3-1: See Uniform Met Capital Rule.

TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to finance national debt. Most bills are issued to mature in three months, six months, or one year.

TREASURY BOND: Long-term U.S. Treasury securities having initial maturities of more than 10 years.

TREASURY NOTES: Intermediate term coupon bearing U.S. Treasury securities having initial maturities from one to ten years.

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 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one-reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash.

YIELD: The annual percentage return, as computed in accordance with standard industry practices, that is earned on a security.