Sample agreements help protect funds.

• Author: Larson, M. Corinne
• Position: Money Management Matters

The need for information and guidance on safeguarding public funds has been and will continue to be the focus of GFOA's Committee on Cash Management. Over the years, the committee has developed numerous sample agreements and publications addressing various cash management practices. The committee's most recent sample agreements include an investment advisory agreement and security agreements for the collateralization of public deposits, which were developed by the Subcommittee on Investments and Money Management.

Investment Advisory Agreement

Newspaper accounts of reported losses by government entities investing their funds nationwide through a contractual investment adviser and a statewide investment pool in Iowa highlighted the need for guidance on the use of investment advisers. In 1992, the committee approved a recommended practice on the use of investment advisers, urging governments to exercise caution in their selection and to implement an ongoing risk control management program. The recommended practice further advises governments to carefully review the credentials, procedures, and controls of firms offering advisory services. Precautionary measures that should be taken include the use of delivery-versus-payment (DVP) procedures with third-party custody arrangements for investment transactions. Using the DVP procedure, cash (or securities) do not leave the entity's account until securities (or cash) are delivered by the other party to an independent third-party custodian for safekeeping. Other measures include prohibitions against self-dealing, audits, and timely reconciliations.

The subcommittee began collecting and analyzing investment adviser agreements in use by various jurisdictions. Once the best parts of each agreement were identified and important contract language defined, the sample agreement was produced and received approval by the full committee in June 1995. The essential components of a sound investment adviser agreement include:

* appointment of the adviser, describing the services to be performed;

* definition of the account(s) and custody of the account assets with instructions to conduct investment transactions on a DVP basis to an independent third-party custodian selected by the governmental entity for safekeeping;

* standard of care required of the adviser as a prudent investment expert;

* investment objectives and restrictions, which may be listed in the body of the agreement or attached as an exhibit;

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