Where did my assets go?

• Author: Davis, Sandra M.
• Position: Public investors' need for caution - Editorial

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...