the investment policy statement: a blueprint for

The Investment Policy Statement: A Blueprint for Successful Cash Investing

Jon Carlson, CFA Managing Director BofA Global Capital

Management

Walt Boileau Treasurer Polycom

Rue Jenkins Assistant Treasurer

Costco

Alex McDermott Assistant Treasurer

The Shaw Group

For Institutional use only. Not for distribution to the general public.

CA-32/154005-111 11/ARN203M1

For institutional use only. Not for distribution to the general public.

The Panel

Walt Boileau Polycom

Rue Jenkins Costco

Alex McDermott The Shaw Group

NASDAQ: PLCM NASDAQ: COST NYSE: SHAW

Revenue $1.4 billion $78 billion $7.0 billion

Cash $600 million $4.1 billion $1 billion

Debt $0 $2.1 billion $0

Investment Types

DDA Bank Balances DDA Bank Balances Onshore and Offshore Money Market Funds

Government/Agency & Corporate Notes

Government/Agency Bank Time Deposits

CP Fixed Income Portfolios

Fixed Income Portfolios Corporate Notes & Bonds


Investment policies are more than just allowable investments

Robust investment policies are more than just allowable investments — they specify the objectives, risk management practices, investments and monitoring requirements for the entire investment program.

Objectives Risk Management Investments Monitoring

Investment policy purpose and scope

Investment policy objectives

Maturity and duration limits

Credit quality requirements

Diversification requirements

Liquidity and cash overlay requirements

Allowable investments

Prohibited investments

Performance measurement and benchmarks

Accounting and reporting

Governance and compliance

Ongoing and annual review

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Your investment policy should cover all liquidity from all legal entities


Investment Policy

Purpose and Scope

Types of Liquidity Operating cash

Short-term cash

Reserve cash

Types of Cash In deposits/sweeps

Internally managed investments

Externally managed investments

Legal Entities Covered Parent company

Domestic subsidiaries

Offshore subsidiaries

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Clearly articulated investment policies help you meet your investment objectives and avoid risks

2. Maintain Liquidity

3. Deliver

Competitive Returns

1. Preserve Principal

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Credit Quality Establish minimum credit

ratings for all security types utilized

Focus on setting levels appropriate to not create concentration issues

Diversification Concentration limits

based on security type

Treasury/Agency = no limits

5% maximum per issuer (or less)

Maturity/Duration Stability of cash

Investment horizon

Company situation

Liquidity Liquidity required (percentage

or stated amount) Cash flow overlay Investments are liquid

Robust risk management focuses on four key components

Credit Quality Diversification

Maturity/ Duration Liquidity

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A policy should specify maximum maturity and duration for all allowable securities


Sample Language

Maturity Duration

The portfolio will be invested in issues with effective maturities of no more than 19/25/37/61 months.

The weighted-average maturity will be controlled +/- 50% of the stated 3-month/6-month/12-month/ 18-month duration benchmark.

The weighted-average maturity will not exceed 3 months/6 months/12 months/ 18 months.

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Credit quality is a key measure to manage risk

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Sample Language

Short-term Long-term Overall

Short-term instruments must be obligations of issuers rated A-1/P-1 or better, or the equivalent by one/two Nationally Recognized Statistical Rating Organizations (NRSROs).

Short-term municipal instruments must be obligations of issuers rated MIG1/VMIG1 or better, or the equivalent by one/two NRSROs.

Long-term instruments (both taxable and tax-exempt) must be obligations of issuers rated A3/A- or better, or the equivalent by one/two NRSROs.

The average weighted credit quality of the overall portfolio should be maintained at a credit quality of AA or higher.



Diversification language limits concentration issues and risks

Sample Language

Diversification

No more than 5% of the portfolio will be invested in any one issuer (excluding U.S. Treasury obligations and federal agency obligations including GSEs*).

No more than 50% of the portfolio will be invested in corporate obligations (commercial paper and commercial notes).

No more than 20% of the portfolio will be invested in asset-backed securities.

Money market funds must have a minimum asset size of $5 billion, and the company may not have a position of more than 5% of the total assets of the fund.

*Government Sponsored Enterprise Securities

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Your policy should include investments that align with your investment objectives


Investment Objectives

Provide high degree of liquidity

Create investment diversification

Provide high credit quality

Reduce tax liabilities

Provide attractive yields

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Allowable investments should reflect your organization’s unique objectives and risk tolerance

Taxable Investments

Obligations of the U.S. Treasury

Obligations guaranteed by the U.S. government other than U.S. Treasuries

Obligations of U.S. federal agencies and government-sponsored enterprises

Repurchase agreements

Certificates of deposit

Bankers’ acceptances

Bank notes and time deposits

Taxable money market funds

Commercial paper

Corporate bonds, notes and floating rate notes

Taxable variable-rate demand notes

Taxable municipal notes and bonds

Asset-backed securities (as appropriate)

Agency-backed collateralized mortgage obligations (as appropriate)

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Allowable investments should include tax-advantaged security types when appropriate

Tax-Exempt Investments

Tax-exempt money market funds

Tax-exempt commercial paper

Tax-exempt variable-rate demand notes

Municipal notes and bonds

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Prohibited investment types should be stated to clarify that they are not acceptable investments

Commonly Prohibited Security Types

Variable net asset funds

Auction rate securities

Mortgage-backed securities (as appropriate)

Equity securities

Complex derivative securities (e.g., inverse floaters, range notes, swaps and options)

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Performance measurement benchmarks should be included to measure risk and return

Performance Management Objectives

Establish baseline to measure asset performance and alpha generated.

Establish baseline to measure risk.

Provide static pool of fixed-income securities to evaluate market dynamics.

Reflect liquidity needs and level of risk aversion.

Allow monitoring of internal and external portfolios.

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Benchmarking performance is critical for both internally and externally managed investments

Common Liquidity Investment Benchmarks

iMoneyNet Money Market Fund Averages (Government, Prime and Tax-Free National)

BofAML 3-Month T-Bill Index

BofAML 6-Month T-Bill Index

Citigroup 1-Year T-Bill Index

BofAML 6–12 Month Municipal Index


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Accounting and Reporting requirements communicate your organization’s specific needs

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Sample Language for Reporting Requirements

The investment provider/manager will provide detailed statements monthly, showing positions as of a portfolio date, securities bought and sold since the last report, and other agreed upon metrics.

Gain/Loss Limits Security Accounting

Zero

Specified amount

Subject to approval

Hold to maturity

Available for sale

Other



Governance and compliance language communicates your firm’s specific requirements

Sample Language

Company must certify on a quarterly basis that the portfolio has remained in compliance with the stated investment policy.

Company must meet quarterly with the investment providers/managers to review the current portfolio structure, asset allocation and investment performance results.

Company must obtain SSAE-16* Type II documentation from its investment providers/managers on an annual basis.

Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization, was finalized by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) in January 2010. Essentially, a SSAE‐16 audit offers the service providers’ customers third party validation that the service provider has effective internal controls in place.

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Investment Policy Recommendations

Annual Review and Approval

Implementation and Ongoing Monitoring

Investment Policy

Annual reviews ensure that risks are appropriate to your organization’s evolving business objectives and risk tolerance

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Benchmarks

The iMoneyNet Money Market Fund Averages. iMoneyNet, Inc. is an independent mutual fund performance monitor. The iMoneyNet, Inc. averages are not intended to represent the past performance of the funds, but do represent the past performance of funds managed in a similar manner, and having similar investment objectives and policies. The iMoneyNet Government Category Average includes all retail and institutional funds: Treasury, Treasury & Repo, Government and Government Agencies. The iMoneyNet Prime Category Average includes all Prime Retail and Prime Institutional funds. The iMoneyNet Tax-Free National Category Average includes all retail and institutional national tax-free and municipal money funds.

The BofAML 3-Month T-Bill Index comprises of a single issue purchased at the beginning of the month and held for a full month. At the end of the month, that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to, but not beyond three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the rebalancing (month-end) date. While the index will often hold the Treasury Bill issued at the most recent or prior three-month auction, it is also possible for a seasoned 6-month or 1-Year Bill to be selected. As of 01/01/2009, Merrill Lynch & Co., Inc. is a wholly owned subsidiary of Bank of America Corporation and an affiliate of BofA Advisors, LLC. Effective September 25, 2009, the name of the index changed from the Merrill Lynch 3-Month T-Bill Index to the BofAML 3-Month T-Bill Index. The index is provided for comparative purposes only and is not a projection, prediction or guarantee of performance.

The BofAML 6-Month T-Bill Index is an unmanaged index tracking 6-month U.S. government securities. As of January 1, 2009, Merrill Lynch & Co., Inc. is a wholly owned subsidiary of Bank of America Corporation and an affiliate of BofA Advisors, LLC. Effective September 25, 2009, the name of the index changed from the Merrill Lynch 6-Month T-Bill Index to the BofAML 6-Month T-Bill Index. The index is provided for comparative purposes only and is not a projection, prediction or guarantee of performance.

The Citigroup 1-Year T-Bill Index represents monthly return equivalents of yield averages that are not marked to market. The Citigroup 1-Year T-Bill Index is an average of the last three, 1-year Treasury issues. The index was temporarily changed from the 1-year U.S. Treasury Bill to the 6 Month Treasury Bill during 2002, due to the treasury’s discontinuation of the One Year Treasury Bill and until a new index could be identified. The Citigroup 1-Year T-Bill Index was selected as the appropriate replacement to the 1 Year Treasury Bill during 2002. The index is provided for comparative purposes only and is not a projection, prediction or guarantee of performance.

The BofAML 6–12 Month Municipal Index is an unmanaged index that tracks the performance of USD denominated investment grade tax-exempt debt publicly issued by a US municipality in the US domestic market. Qualifying securities must have at least 6 months and less than 12 months remaining term to final maturity, a fixed coupon schedule and an investment grade rating (based on an average of Moody’s, S&P and Fitch). As of 01/01/2009, Merrill Lynch & Co., Inc. is a wholly owned subsidiary of Bank of America Corporation and an affiliate of BofA Advisors, LLC. Effective September 25, 2009, the name of the index changed from the Merrill Lynch 6–12 Month Municipal Index to the BofAML 6–12 Month Municipal Index. The index is provided for comparative purposes only and is not a projection, prediction or guarantee of performance.

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Disclosures

Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a prospectus, which contains this and other important information about the fund, contact your BofA Global Capital Management representative or financial advisor or go to www.bofacapital.com. An investment in money market mutual funds is not a bank deposit and is not insured or guaranteed by Bank of America, N.A. or any of its affiliates or by the Federal Deposit Insurance Corporation or any other government agency. Although money market mutual funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market mutual funds. Please see the prospectuses for a complete discussion of the risks of investing in money market mutual funds. The credit quality ratings represent those of Standard & Poor’s Corporation (“S&P”) or Moody’s Investors Service, Inc. (“Moody’s”) . The ratings represent

their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The security’s credit

quality does not eliminate risk. Breakdown reflects information from Standard & Poor’s and Moody’s Ratings. For additional information on ratings, please

see www.standardandpoors.com and www.moodys.com.

Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will

come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of BofA Global Capital

Management, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other BofA Global Capital

Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or

construed as a recommendation of any security or sector.

This information does not constitute investment advice and is issued without regard to specific investment objectives or the financial situation of any

particular recipient.

BofA™ Global Capital Management Group, LLC (BofA Global Capital Management) is an asset management division of Bank of America Corporation. BofA Global Capital

Management entities furnish investment management services and products for institutional and individual investors. BofA Funds are distributed by BofA Distributors, Inc.,

member FINRA and SIPC. BofA Distributors, Inc. is part of BofA Global Capital Management and an affiliate of Bank of America Corporation.

BofA Advisors, LLC is an SEC-registered investment advisor and indirect, wholly owned subsidiary of Bank of America Corporation and is part of BofA Global Capital

Management.

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Disclosures, cont.

Investment Risks:

For investments in ABS, MBS, and CMOs generally, when interest rates decline, prepayments accelerate beyond the initial pricing assumptions, which could cause the average life and expected maturity of the securities to shorten. Conversely, when interest rates rise, prepayments slow down beyond the initial pricing assumptions, and could cause the average life and expected maturity of the securities to extend, and the market value to decline.

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

Tax-exempt investing offers current tax-exempt income, but it also involves special risks. The value of the fund will be affected by interest rate changes and the creditworthiness of issues held in the fund. When interest rates go up, bond prices generally drop and vice versa. Interest income from certain tax-exempt bonds may be subject to certain state and local taxes and, if applicable, the alternative minimum tax. Any capital gains distributed are taxable to the investor.

Treasury bills are less volatile than longer term fixed-income securities and are guaranteed as to timely payment of principal and interest by the U.S. Government.

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