Investment Policy Certification
The Investment Policy Certification domain tests the written investment policy and the controls that make it operative: objectives, authority, permitted instruments, diversification, maturity and credit limits, custody, reporting, and review. The exam favors the statutory hierarchy-safety first, liquidity second, yield last-and asks you to spot violations in a portfolio description.
Required policy elements
- Scope and governing authority, with a statement of objectives that puts safety and liquidity ahead of return.
- Delegation of authority: who may trade, who may approve, and what limits apply, with trading separated from custody and accounting.
- Authorized investments and prohibitions, including credit-quality floors and maximum maturities.
- Diversification limits by issuer, instrument, and sector, plus concentration limits for deposits and repurchase agreements.
- Custody and safekeeping: delivery versus payment, third-party custody, and evidence of ownership.
- Reporting: periodic holdings and transaction reports to the governing body, with benchmarks.
- Ethics and conflicts, and a scheduled policy review.
- Bid requirements and written agreements for brokers and depositories.
Worked example
A policy permits commercial paper rated in the top short-term tier, maximum 25% per issuer, maximum maturity 270 days. A portfolio shows 35% in one issuer with 400 days to maturity. Reasoning: these are two independent breaches-concentration and maturity-regardless of the issuer’s quality. The administrator should stop new purchases, reduce the position to the limit within the time the policy allows, document the breach and remediation, and report it to the board. Yield does not justify a waiver; only a formal policy amendment can change the limit, and it cannot be applied retroactively to excuse the breach.
Policy review
Review annually and whenever statutes, market conditions, or the portfolio’s size change. A stale policy is itself a control weakness, because staff end up following practice that the governing body never approved.
Traps that cost marks
- Treating “should” as optional when the policy says “shall.”
- Assuming a broker’s statement is the same as third-party safekeeping.
- Missing look-through exposure in money market funds or pools.
- Refreshing credit ratings only once a year when the policy requires more.
- Applying a new, tighter limit retroactively to an old trade.