Where did all the money go? – Protecting the Funds – MVF Style Part 2 Chapter 1 Background
Background The board of directors has a fiduciary responsibility to all owners to make sure reserve funds are invested properly. Certain types are appropriate and others are not. The board establishes an Investment policy resolution to insure 1st funds are safe, 2nd available when needed, and 3rd grow over time. “An investment strategy for Investing in Reserve Funds Download PDF * is considered “risky” if there is any significant risk of fluctuation over the life of the investment. Losses from investments in riskier or speculative securities could be personally charged to the individual Board members who authorized those investments”. * Article B.J. Hong Esq. Download PDF
Investments should be free from loss or risk, price fluctuations and should be marketable securities so that funds can be available when needed. Board of Directors should understand and accept the fact that if securities are sold before maturity a loss of principal could result.
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The Audit Committee advises the Board regarding the financial affairs of the Foundation including the annual budget, annual audited financial statements, the selection an auditing firm to perform the annual audit as well as investment matters.
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 board “formalized” the Investment Committee at the April 25 2013, composed of the EVP, CFO, president and vice president of the board and the treasurer, which make all investment decisions. The board at its May 23 2013 meeting approved Humpton and Snellings recommendation that the audit committee’s guidelines be changed to exclude “Investments” as a component of “financial affairs”.
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MVF By-Laws states,
The treasurer shall oversee all accounting and treasury functions of the Foundation including application and implementation of accounting policies and procedures to properly safeguard the assets of the Foundation.
The treasurer shall make the investment decisions in accordance with the policies of the Foundation.
The board shall supervise all officers, agents & employees of the Foundation and that their duties are properly preformed.
The creation of an investment committee composed of voting members other than the treasurer and members of the board is not allowed under the by-laws.
September 24 2012 the investment committee (Board president, Bob Hydorn, Board member, Mark Firley, EVP Dave Humpton, CFO Greg Snellings and Treasurer Beth-Ellen Berry) met to review a proposal from M&T Investment and with some modification, the committee approved 3 transactions,
1. The sale of $2,164,000 Treasury Strips with maturity dates of 2020-2025. The reinvestment proceeds to be invested in,
2. $1,000,000 in Vanguard Intermediate-term bond index fund into the reserve fund and
3. $1,00,000 in Wilmington Short Duration Government Bond Fund Institutional Shares fund in the operating fund subject to MVF operating investment policy with the balance invested in Franklin U.S. Government Security fund.
Investment Policy & Guidelines The board of directors approved the initial “Investment Policy” resolution on October 27 1988. The current Investment Policy Resolution and guidelines were approved in February 2009 and states,
Purpose Establish objectives, guidelines, measurement and procedures for the investment and reporting cash, undesignated reserve funds, and funds designated by the board as restricted for the future Repair and Replacement of MVF assets.
Investment Objectives The investment objectives of the Operating Fund investment policy are, in order of priority 1st Preservation of Capital, 2nd Liquidity, and 3rd Yield.
Authorized Investments include operating funds invested in depository accounts (checking, money markets), certificates of deposits and debt securities.
Depository accounts 1) deposits at financial institution insured by the Federal Deposit Insurance Corporation (FDIC), 2) the Federal Savings and Loan Insurance Corporation (FSLIC).
Debt securities 1) Securities issued by the United States Government, its agencies, and instrumentalities. 2) Repurchase agreements backed by securities issued by US Treasury Securities, US Government Agency Securities or Municipal Bonds.
Term of individual operating fund investments shall be limited to one year or less (Liquidity objective)
Prohibited Investments include Corporate Bonds, Equity Securities 1) Common Stock 2) American depository receipts or ordinary shares of non-us corporation 3) Mutual Funds.
June 27 2013 board meeting agenda included,
Consider recommendation of the Investment Committee to revise MVF Reserve Fund Investment Policy that included unsafe and risky market based equities, corporate bonds, mutual funds and bond index funds investments.
The revised Investment Policy would allow Corporate Bonds, Common Stock, Mutual Funds that are considered speculative securities and expose the MVF to significant risk of fluctuation over the life of the investment.
The Financial Advisor 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”. * Article B.J. Hong, Esq. Download PDF
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.
June 27 2013 board meeting agenda included,
Consider Investment Committee recommendation to terminate Morgan Stanley as MVF investment advisors.
July 9 2012 A special meeting of the audit committee was held to consider Greg Snellings proposed changes to the Investment Policy and adding MTB Investments as an alternate investment advisor. The Audit committee felt the existing investment policy was appropriate for the long haul. Audit committee Jim Deye commended that with MTB proposal “there could contain significant risks, the treasurer would have discretionary authority to invest MVF assets and the board should be part of the process”. The committee voted unanimously to recommend to the board not to change the Reserve Investment policy.
Where did all the money go? – Protecting the Funds – MVF Style Summary Status of MVF Reserve Investments Chapter 2
Unauthorized MVF Investments The following are unauthorized and considered unsafe and prohibited equity investments under the current version of the MVF Reserve Investment Policy Resolution dated February 26 2009 Including Corporate Bonds, Common Stock, American depository receipts or ordinary shares of non-us corporation and or Mutual Funds. Investments should be free from loss or risk, price fluctuations and should be marketable securities so that funds can be available when needed. Board of Directors should understand and accept the fact that if securities are sold before maturity a loss of principal and interest could result.
Vanguard Intermediate Term Bond Index Fund This index fund invests about 50% of assets in corporate bonds and 50% in U.S. government bonds within that maturity range. It lost -2.19% of its value in the last year. This fund, purchased in September 2012 for $1,002,223 was sold in January 2013 for $998,551, a loss of $3,672. There was no balance as of June 30 2013. Investment in this fund was not safe had a negative return and was prohibited under the reserve investment policy.
Wilmington Short Term Duration Government Bond Fund The fund normally invests substantially all, of debt obligations issued by the U.S. government or its agencies including mortgage backed securities, asset backed securities, variable and floating rate securities, zero coupon securities, and in repurchase agreements. It lost value equal to -0.24% in the last year. In January 2013 $963,391 of this fund was purchased. As of June 30 2012 the market value was $958,574 a loss of $4,817. Investment in this fund is not safe has a negative return and is prohibited under the reserve investment policy.
Franklin US Government Securities The Fund invests at least 80% of its net assets in U.S. government securities. The fund presently invests substantially all of its assets in Government National Mortgage Association securities. Franklin lost -6.10% of its value in the last year and has a sales charge up to 2.25% for purchases. The Franklin fund lost $5,082 from December 31 2012 $175,858 to $170,776 as of June 30 2013. . Investment in this fund is not safe has a negative return and is prohibited under the reserve investment policy.
CB Corporate Bonds are a longer-term debt instruments, also known as commercial paper, issued by a corporation to raise money with maturity dates a year or longer. In January 2013 MVF had $790,027 in 15 corporate bonds with maturity average of 1.8 years from 2014 to 2017. Investment in this fund is not safe because the base principal can fluctuate and is prohibited under the reserve investment policy and will not be available when needed.
That’s all for now. Coming soon, Chapter 3 Where did all the Money Go- Paying for Capital Repairs & Replacement-MVF Style.
