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Where did my assets go?

The pressures of the current low interest rate environment, the increasing credit risks that are present, the complexities of the investment instruments available and the rising incidence of abuses in the marketplace present a real, and not imagined, threat to the public investor.

The number of public jurisdictions that have experienced losses of principal and have been the subject of abuse is mounting. Abuses in dealer sales practices in the areas of price mark-up, suitability and churning have occurred in all parts of the country and in state and local governments of all sizes. In increasing numbers, unscrupulous or incompetent broker/dealers have been

calling upon public investors offering deals too good to be true, and, unfortunately, in increasing numbers government officials have fallen prey to their tactics.

In an effort to avoid these pitfalls, some public investors have turned to the use of an external investment management company, which also is not without peril, as recently to be the victims of a $100 million securities fraud perpetrated by an external money management firm. What the public investor expected to be a safe haven turned out to the the lion's lair. This incident has served as one more reminder that there can be no substitute for due diligence in selecting investments or investment firms and in establishing the control and custody of one's assets.

In conducting due diligence, public investors should exercise caution so as to ensure that they know with whom they are planning to do business. A careful review of the history of the firm, the organization, its management team, the complete employment records of the investment professionals coupled with thorough background checks, and reference inquiries to the firm's present and past clients are essential steps in the evaluation and selection process. Evaluating the firm's past performance record in conjunction with the applicable investment guidelines and the actual underlying portfolio holdings can make short work of claims of risk-free, unrealistically high rates of return. There is no free lunch.

The maintenance of control and custody of a government's assets is critical. The kinds of problems recently experienced by some public investors due to a securities fraud an be avoided by maintaining or establishing third-party custody of assets, adopting and adhering to investment guidelines and monitoring the independent reporting to ensure compliance.

GFOA's Committee on Cash Management has been deeply concerned with these issues and as a result has continued to focus on developing educational and informative materials to assist public investors in dealing with them. The subcommittee on external money management has recently published An Introduction to External Money Management for Public Cash Managers. This guide explores three common forms of external money management - local government investment pools, mutual funds and external portfolio managers. For each form, the guide explains the legal structure, services offered and fees charged, and its sets forth the recommended steps to thoroughly analyze, screen and evaluate them.

The committee is also in the process of developing a guideline for the evaluation and screening of broker/dealers, which includes a sample master agreement designed to formalize a relationship and set forth fair and reasonable contractual protections and undertakings of the parties. In addition, the GFOA is actively supporting the congressional passage of the Government Securities Act. As part of that effort, the association is actively pursuing the inclusion of sales practice rules that will promote fair trading and address the abuses which have become present in this marketplace.

The Cash Management Committee's undertakings also include a subcommittee on peer review, which will look at development standards and measurements to enable municipalities to assess the adequacy of their policies, procedures and internal controls. The Model Treasury Agreements Subcommittee is compiling a book of treasury agreements that will guide public cash managers entering into banking service agreements including wire transfer and lock box agreements, trust and escrow agreements, and safekeeping agreements. Model collateralization and master repurchase agreements already have been published and are available to GFOA members. The committee encourages all members to avail themselves of the GFOA's publications, educational sessions and research materials, as they offer a wealth of knowledge.

In these troubled times, it is incumbent upon us all to exercise caution, to be knowledgeable about those with whom we choose to deal as well as the instruments in which we choose to invest, and to establish and maintain the controls necessary to safeguard the public's assets. Please don't be the next public investor saying, "Where did my assets go?"

Sandra Davis chairs GFOA's Committee on Cash Management. She is treasurer/tax collector of Los Angeles County, California.
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Title Annotation:public investors' need for caution
Author:Davis, Sandra M.
Publication:Government Finance Review
Article Type:Editorial
Date:Apr 1, 1992
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