Chapter 4 Safety of Invested Funds, MVF Style
The Roles We Play The Board of Directors establish policy, management implements policy and the committees advise the board on policy.
The role of the Board of Directors is to establish policy. The board has a duty to preserve, protect and enhance the assets of the Association. As a starting point the board needs to establish clear policy direction for effective facility maintenance, reporting and monitoring.
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Management implements policy. Management is defined as “the process by which individuals and group efforts are coordinated so as to achieve pre-determined goals”. Professional Community Managers coordinate as the efforts of association support staff, volunteers, committees, vendors and other professionals. A Professional community manager does not manage property, but preserves, maintains and protect property; does not manage an association but support it.
Committees advise the Board of Directors on policy, assists the board in developing, monitoring programs and activities to preserve and protect the property values within the community in accordance with each committee’s charter.
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The most successful community associations have a broad based volunteer
participation, communication and awareness programs. The most effective way to advise the board is through an effective committee organization structure. The positive force of community participation is the energy force of community vision, self esteem and community pride and a well maintained housing community.
The above is not easy to do, create when it doesn’t exist, correct when broken, deal with when its in place and working. From the view of a causal observer the Committee on the Environment can appear to be self-rightist and omnipresent in their pursuit of saving the world. Architectural Standards has characterized as rewarding those who neglect and punishes the ones protect their property. The Audit Committee is viewed as a partner in MVF questionable financial reporting practices not providing sufficient oversight of the Foundation’s finances.
Over the last two-years, EVP Dave Humpton and CFO Greg Snellings have made a concerted and deliberate effort to change the roles of the Board of Directors, Management and Committees in which the EVP, CFO and senior staff exercise more control, vis-à-vis the board of directors, and function similar to a municipal or county government. The Committee on the Environment’s influence and role has been marginalized, an Investment Committee has been established composed of the EVP, CFO, President of the Board and the Treasurer, which make all investment decisions affecting the $6,949,739 Reserve Fund. (2012 Audit). And the Audit Committee’s Charter is being changed to exclude “Investments” as a component of “financial affairs”. Article XII Committees Section 6 states The Audit Committee shall advise the Board regarding the financial affairs of the Foundation.
However, the most far reaching and significant change that will impact the Foundation’s Safety of Invested Funds before the Board of Directors for this evening meeting are “Consider recommendation of the Investment Committee to revise MVF Reserve Fund Investment Policy” Decision Item C, and “Consider Investment Committee recommendation to terminate Morgan Stanley as MVF investment advisors” Decision Item D.
Safety of Invested Funds, MVF Style
Investing Reserve Funds In a newsletter article Investing Association Reserve Funds Download PDF by Benjamin J. Hong, Esq., of the law firm of Epsten, Grinnell & Howell, states “The Board of Directors should primarily be concerned with the security of the funds and ensure that investing in government securities or long term certificate of deposit are usually low risk”.
Hong explained that Board of Directors has a fiduciary responsibility to allow all owners to make sure reserve funds are invested properly. Certain types are appropriate and others are not. Association leaders should develop an investment plan that provides continuity and relative financial safety.
The original MVF “Reserve Fund Investment Policy” dated October 27 1988 and was reaffirmed by MVF Board of Directors May 23 91 and April 94,Revised and Approved by MVF board Jan 1997, Oct 98 and Feb 09.
The following are eligible investments under the proposed MVF Reserve Fund Investment Policy, the italic investments would not classify as relatively safe under Hong’s definition. The italic and bold investments are un
A. Cash in federally insured bank accounts.
B. Fixed income securities.
1. US treasury bonds, notes, bills, and treasury inflation protected securities (TIP).
2. Federally insured certificate of deposits.
3. Investment grade corporate bonds.
C. Equity securities.
1. Common stock.
2. American depository receipts or ordinary shares of non-us corporations.
D. Mutual funds and exchange-traded funds are allowed provided they invest in securities deemed to be allowable above.
E. Diversification
1. No more than 10% of the portfolio combined may be in the securities of any one issuer with the exception with the exception of obligations of the US Government and its agencies and federally insured instruments.
2. No more than 20% of the portfolio combined may be securities of a particular industry.
In a memorandum of October 12 2012 from the CFO to MVF Board of Directions dated October 12 2012, Subject Recommendation for Reserve & Operating Fund investments Greg Snellings writes,
The investment committee met on September 24 2012 to review a proposal from M&T Investment and with some modification, the committee approved 3 transactions, as follows:
The sale of $2,164,000 in reserve investments, resulted in over in $350,000 in accrued gains. The sale consisted of Treasury Strips with maturity dates of 2020-2025. The reinvestment of the aforementioned proceeds as follows:
1. $1,000,000 invested in securities allowed under Reserve Investment Policy sections b3-b5.
2. The balance $1,000,000 invested in securities allowed under MVF’s Reserve Investment Policy sections B 3 and B 5.
3. The balance of these proceeds will be invested in securities comparable to MVF’s current portfolio; however, with shorter duration so as to lower interest rate risk which will eventually impact these fixed income securities.
4. The investment of $1,000,000 in operating reserves subject to MVF Operating Investment Policy.
The above investments 2 and 4 MVF has never invested securities under sections B3 & B5 before in line with the Operating Investment Policy. If the community (Investment Committee) desires approval were supported by a full board vote, the investment detail are as follows:
Reserve Fund, $1,000,000 Invested in Vanguard Intermediate-term bond index fund.
Operating Fund, $1,000,000 invested in Wilmington Short Duration Government Bond Fund Institutional Shares fund.
Comments on Greg Snellings Memo of October 12 2012
1. The memo referred to two transactions for “high risk” investments that are not allowed under the current Revised MVF Reserve Fund Investment Policy dated Feb 2009.
2. M&T Bank has been approved as an Alternate Investment Advisor and by default will become the MVF Investment Advisor if the Investment Advisor who has served the Montgomery Village Foundation honorable for 25 years is terminated at tonight’s meeting.
3. The Recommendation to terminate Morgan Stanley as the MVF Investment Advisor states “Over the last year M&T Investments have been very helpful in explaining the current and expected future market conditions and likely impact on MVF’s current portfolio holdings, as well as assisting in developing an improve strategy and policy document. While Mr. Fell’s contributions to MVF ‘s investment success over the years have been much appreciated, staff and investment strategy and policy, the staff and the Investment Committee a change is appropriate at this time. The Revision to the MVF Reserve Investment Policy the Board is considering tonight is a toxic document and should not be approved.
4. The $1,000,000 Wilmington Short Duration Government Bond Fund Institutional Shares funds are designate as Operating Reserved subject to MVF Operating Investment Policy. These funds are Replacement Reserve fund and not Operating funds and MVF does not have an Operating Investment Policy.
5. It would be appropriate to ask the MVF General Counsel to advise the Board of Directors on the appropriateness of approving any Investment related recommendations tonight.
Board must make informed and prudent decisions where to purchase specific investments and who to hire for professional investment advice. Associations should consult a tax professional or CPA since taxes will have a direct bearing on the investment vehicles and investment strategy the Associations employs.
Reserve funds must be accounted for appropriately and accurately in the budget, financial statements, audit and other records of the Association according to strict industry standards. Accordingly, ordinary risk taking which recommended by an investment counselor not familiar with trust or Association reserve funds may not be appropriate in the context of Community Association investment options.
John Fell, Vice President of Morgan Stanley has been the Foundation’s portfolio manager for over 25 years. John and his customer support team serve over 300 local Condominium and Homeowner Associations in the Washington DC metropolitan area. He assisted the Foundation in drafted the initial resolution in 1988 and over the years has attended numerous joint Board of Directors-Audit Cte meetings. He has always available to assist, work with, MVF financial staff, treasurers and individual board members. John is active with the Community Association Institute (CAI) both locally and nationally in replacement reserve investment activities. I’ve known John Fell since 1982 working with him on CAI education programs, as a frequent speaker on investment for my firm’s manager and staff monthly training sessions and as the portfolio manager of over 25 of my Condominium Associations accounts with over investment portfolio exceeding $30 million.
In December 2011 MVF’s EVP, CFO, treasurer and board president met with representatives of M&T Bank’s investment division and MTB recent acquisition Wilmington Trust, to discuss MVF long-term and short term investing objectives and determine if M&T would be a good candidate to add as an alternative investment advisor for MVF.
Hong states, An investment strategy in the Community Association context will be “risky” if has any significant risk of fluctuation over the life of the investment. You need to ensure that funds are investments in accounts that are both safe and available. Put another way, let the following principles guide you in order, first, preservation of principle, second liquidly and third return. Losses from investments in riskier or speculative securities could be personally charged to the individually Board members who authorized those investments”.
The original and current MV Reserve Fund Investment Policy II Investment Objective read,
The investment objectives of the Reserve Fund Investment policy are, in order of priority:
A. Preservation of capital,
B. Yield, and
C. Liquidity (ability to meet project needs)
In the proposed MVF Reserve Fund Investment Policy the italic text was deleted and replaced with.
A. Preservation of capital on a nominal basis.
B. Preservation of capital in real terms; protecting the portfolio from inflation and purchasing power erosion to ensure the Fund’s ability to meet the rising cost of future capital projects.
Using Hong’s definition Losses from investments in riskier or speculative securities could be personally charged to the individually Board members who authorized those investments”.
MVF, Inc. By-Laws Powers & Duties of the Board of Directors Article IX Section 2, It should be the Duty of the Board of Directors: (b) To supervise all officers, agents and employees of this Foundation. Section 3 shall adopt standards of Conduct, which in its desertion may include, standards of conflict of interest, receipt of personal benefits, fiduciary responsibility and performance of duties as board members and members of committees. It shall be the duty of each member of the Board of Directors to adhere to the standards of conduct.
It would be appropriate at this time to have the Foundation’s General Counsel, to be prepared at this evenings meeting to discuss if “Consider recommendation of the Investment Committee to revise MVF Reserve Fund Investment Policy” Decision Item C, and “Consider Investment Committee recommendation to terminate Morgan Stanley as MVF investment advisors” Decision Item D, would not constitute a violation of MVF, Inc. By-Laws Powers & Duties of the Board of Directors Article IX Section 2, It should be the Duty of the Board of Directors: (b) To supervise all officers, agents and employees of this Foundation?
It also my be advisable for the Foundation’s General Council to advise the Treasurer if there a violation of Article XI Officers and Their Duties Section 8.
Article XI Officers and Their Duties Section 8, The Treasurer shall oversee all accounting and treasury functions of the Association including the application and implementation of accounting polices and procedures to safeguard the assets of the Foundatio
Section 9, The treasurer shall make the investment decisions in accordance with the investment policies of the Foundation. The treasurer shall present the annual audited financial statement and budget to the membership at the annual meeting.
Article XII Committees Section 6 The Audit Committee shall advise the Board regarding the financial affairs of the Foundation. In addition it shall review recommendations for approval of the annual budget and annual audited financial statements, and recommend an accounting firm to perform the annual audit of the Foundation’s books and records. The treasurer shall be on ex officio member of the Audit Committee.
The Audit Cte has had a two-year battle with the staff and Board of the Montgomery Village Foundation. The Audit Committee resisted all attempts to including revised the Reserve Investment Policy without John Fell’s good counsel or approve high risk investments. The Board of Directors the established an Investment Committee and excluded the Investment Policy matters from “the financial affairs” Audit Cte Charter.
Conclusion of Chapter 4- Safety of Invested Funds, MVF Style
Since the first of January 2013 MVF has purchased $790,027 Corporate Bonds from Willington Trust. The PDFS version of Safety of Invested Funds, MVF Style includes a schedule of MVF investment activity per the 2010, 2011 & 2012 Audits as we as the investment portfolio as of April 30 2013. Hopefully there is still time for you to stop by the meeting that starts at 7 PM.
