CFA Institute Contingency Reserves Investment Policy Effective 8 February 2012

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1 CFA Institute Contingency Reserves Investment Policy Effective 8 February 2012 Purpose This policy statement provides guidance to CFA Institute management and Board regarding the CFA Institute Reserves in accordance with the investment goals and objectives established by the CFA Institute Board of Governors. Overview The CFA Institute Contingency Reserve portfolio is intended to support the financial stability of the organization in times of distress. During such periods of distress, the reserves are expected to contribute important contingency funds to cover operating costs to ensure our mission is sustained into the future. The Contingency Reserve can also serve to provide select business investment to support/enhance service to our mission. In this way, the reserves can also serve to advance business opportunities in support of strategic initiatives by contributing important assets to ensure our mission is sustained into the future. The investment goals and objectives of the Contingency Reserve recognizes these stated purposes and are described in this policy statement The CFA Institute Investment Committee (see Appendix A) oversees the application of this investment policy statement and the Audit and Risk Committee of the Board provides ultimate oversight responsibility for this Investment Policy Statement.

2 Contingency Reserve Portfolio: Investment Policy Statement Contingency Reserve Portfolio Overview The purpose of the CFA Institute Contingency Reserve portfolio (Contingency Reserve) is to provide funds to support continuing operations of CFA Institute in times of financial difficulty. Specific purposes of the Contingency Reserve are to provide funds to maintain planned benefits and service levels and to cover negative cash flows as needed. The reserves serve as an alternate income source for continuing operations and incorporate funding to cover the costs needed for marketing remediation in response to a significant organizational crisis. The Contingency Reserve will ensure CFA Institute s ability as a going concern and will necessarily grow in line with the growth of the organization. Organization growth may result in the need for Contingency Reserve portfolio growth faster than the return generated by the Contingency Reserve portfolio. In this event, periodic contributions from CFA Institute operating margins will be required. The reserves may also be used selectively to provide opportunities to enhance and promote the global value of the mission and purpose of CFA Institute. Specific purposes include providing investment in human and/or physical capital projects that will augment/enhance CFA Institute s mission including general CFA Institute operations and the corporate infrastructure. The adequacy of CFA Institute reserve levels in terms of contingency funds was analyzed through an assessment of unique business circumstances and consideration of various downside scenarios. CFA Institute is heavily reliant on one source of revenue (CFA Program candidates) and a product offered only two days a year (CFA Exam). This reliance on a single source of revenue also makes CFA Institute susceptible to dramatic declines in income under certain scenarios. In order to help mitigate the financial impact associated with an adverse business event, CFA Institute purchased insurance policies that would financially cover certain events. As of 2012, these are: an event cancellation policy of $20 million that would cover CFA Institute losses in the case of a regional disease outbreak, natural disaster, etc. and a data breach policy with coverage of $60 million that insures against test item exposure. The appropriateness of targeted reserve levels and portfolio asset allocation are determined through exhaustive business modeling and stress testing done in coordination with Business Planning and Reporting, the Investment Committee, and an outside consultant. A study to evaluate reserve levels and asset allocations will be conducted once every five years. The Contingency Reserve portfolio will be reviewed quarterly by the Investment Committee and at least annually by the Audit and Risk Committee. Investment Objectives Return The first and foremost goal of the Contingency Reserve is to provide a potentially significant contribution to operating funds in the event of a negative cash flow from operations. Secondary consideration is to maintain the purchasing power of the Contingency Reserve. While not a primary focus, final consideration is given to contributing to the growth of the Contingency Reserve through capital appreciation in order to reduce the annual contribution requirement from operating margin and to support select capital projects. It will be important to properly balance these needs. Risk The critical obligation of the Contingency Reserve is to support business needs in times of financial distress. Such stress could correlate closely to stress in the overall global economy. Thus, of primary importance is the preservation of capital and availability of liquidity. The combination of insurance policies with a properly diversified global portfolio should serve to manage and mitigate risk appropriately while offering the Page 2 of 7

3 opportunity for future growth of the overall reserve portfolio. Portfolio objectives can thus best be accomplished with a diversified portfolio primarily committed to relatively moderate volatility, highly liquid, and high quality assets. Investment Constraints Liquidity The Contingency Reserve must maintain sufficient liquidity through the choice of investment vehicles, asset allocation, and business insurance to be able to meet CFA Institute obligations by funding expenses in the event of a shortfall in cash inflows over cash outflows. Liquidity needs are therefore minimal under ongoing (normal) conditions, but are high in an unanticipated, significant event surrounding a distress situation. Time Horizon The portfolio has a long time horizon, because its purpose is to support the ongoing, perpetual operations of the organization. Taxes CFA Institute is a 501 (c)(6) non-profit organization and the Reserve portfolios are not subject to taxes under U.S. tax laws. Unique Circumstances Because CFA Institute is a global organization with a geographically diverse membership, the Contingency Reserve seeks to be neutral with respect to investment style and geographic region, and thus primarily follows a passive investment approach where possible from the standpoint of security selection. Selection of an investment manager will be based on availability of suitable passive products, cost, and service. Because CFA Institute does not have a dedicated investment staff, ease of implementation will be a criterion for adopting an investment strategy and selecting a manager. Finally, certain asset classes are deemed inappropriate at this time. For example, private equity possesses insufficient liquidity, requires relatively high funding commitments to gain access to top tier managers, and requires knowledge specific to the asset class to be successful. Asset Allocation The overall asset allocation targets will be guided by the results of the asset-liability study and according to the investment objectives and constraints outlined in this policy statement. Additionally, the asset allocation will recognize the following factors: A commitment to global investments as a source of enhanced return and diversification, A commitment to equities as a source of long-term capital appreciation, A commitment to high-quality fixed-income securities as a source of low volatility, A commitment to inflation-protected securities as a source of inflation protection, A commitment to diversifying asset classes such as commodities, emerging market debt and real estate investment trusts (REITs) as a source of diversification of equity risk, and additional risk premiums. May include an opportunity fund allowing for the flexibility to opportunistically add asset classes otherwise not included in the asset mix (e.g., high yield bonds) Allow for modest intermediate term (dynamic) asset allocation in accordance with fundamentally driven market risk premium valuations, and The investment vehicle for each asset class should represent its respective market. The globally-oriented nature of CFA Institute's investment program results in exposure to currencies other than the U.S. dollar. The asset allocation investment strategy may include the Page 3 of 7

4 use of currency hedging, by means of an overall hedging program at the total fund level, or conducted by the investment managers relating to their respective portfolios. Currency hedging may be static or dynamic (active) in nature, and its use, if any, may vary by asset class. The overall decision of whether and how to employ currency hedging will be dependent on the current outlook for various currencies, the volatility of currencies and the underlying investments, and the cost of various hedging alternatives, among other factors. The purpose of currency hedging activities will be the reduction of portfolio currency risk exposure, although the amount of risk reduction, if any, that will be sought at any particular time will be dependent on outlook and cost. At no time will CFA Institute employ a hedging program with positions that are larger than the underlying portfolio currency exposures; that is, currency exposure will not be leveraged. The overall target asset allocation is (see Table 1 for detail): 65% allocation to relatively risky assets 35% allocation to relatively safe assets Investment Management Strategy Passive mutual funds, or commingled funds, should be used where possible as an economical and effective method of achieving the Contingency Reserve objective as stated above. Asset class target ranges are allowed to deviate modestly within preset ranges to allow for intermediate term (dynamic) asset allocation within allowable ranges. Asset allocation policy also includes a modest opportunity fund allowing for the flexibility to opportunistically add asset classes otherwise not included in the asset mix (e.g., high yield bonds). See Table 1 for asset allocation details. Responsibilities The Audit and Risk Committee is responsible for overseeing the invested assets and the investment process of the Contingency Reserve. The Audit and Risk Committee will rely on the Investment Committee, CFA Institute staff, and/or external investment service providers for the ongoing management and oversight of the portfolio. The Investment Committee and CFA Institute Treasury staff will have the ongoing responsibility for implementing the portfolio as set forth in this policy statement. Review Schedule Audit and Risk Committee The Contingency Reserve will be evaluated quarterly by the Investment Committee and at least annually by the Audit and Risk Committee. The Audit and Risk Committee review, in part, will seek to determine if the targeted reserve levels and allocations remain appropriate given the business environment. Investment Committee and CFA Institute Staff The Investment Committee will meet at least quarterly. Minutes of this meeting will be regularly submitted to the Audit & Risk Committee for review. A formal annual presentation will occur for the Audit & Risk Committee. The Investment Committee and CFA Institute Treasury staff will be responsible for implementing the portfolio according to the following practices: Cash balances will be evaluated at least quarterly and invested according to policy when deemed appropriate, The portfolio will be reviewed quarterly and rebalanced as needed, Performance of the mutual funds will be reviewed relative to their benchmarks quarterly, The portfolio will be implemented as per Table 1. Page 4 of 7

5 Table 1 Asset Allocation Policy Asset Class Benchmark Target Asset Allocation Allowable Range Global Equity: MSCI-AC Standard 41% 36-46% US Equity/Non-US MSCI U.S. Broad Market Equity Index/MSCI All-Country Commodities REITs Emerging Market Debt Opportunity Fund Total Risk Assets Nominal Global Fixed Income U.S. TIPS Total Safe Assets Total Reserves World Ex-U.S. Index Dow Jones-UBS Commodity Index Weighted sum of MSCI U.S. REIT Index and S&P Global ex-u.s. Property Index at monthly actual market weights JP Morgan EMBI Global Diversified - Local currency Weighted sum of underlying strategy benchmarks at monthly actual strategy weights Weighted sum of Risk Assets component benchmarks at target asset allocation weights Barclays Capital Global Aggregate Bond Index Barclays Capital U.S. TIPS Index Weighted sum of Safe Assets component benchmarks at target asset allocation weights Weighted sum of asset class benchmarks at target asset allocation weights 8% 5-11% 8% 5-11% 8% 5-11% 0% 0-5% 65% 60-70% 23% 18-28% 12% 9-15% 35% 30-40% 100% -- EVALUATION AND MONITORING OF INVESTMENT MANAGERS Pre-Selection Criteria will be established for any investment manager search undertaken, whether for passive investment strategies (index funds) or actively-managed strategies, and will be tailored to the specific needs of such a search. At a basic level, any active manager hired should exhibit skill. From a qualitative standpoint skill includes, but is not limited to, uniqueness in the strategy or the ability of the manager, their process or philosophy, and their ability to analyze and process information. Managers of passive strategies are evaluated on their ability to closely track the returns of a designated benchmark index. Page 5 of 7

6 Investments selected shall have a reasonable fee level within their peer group. Past performance should be evaluated with the right perspective. Past performance should be analyzed relative to the risk undertaken and should be geared at evaluating the manager s potential to add value on a risk-adjusted basis, or track the returns of the benchmark index, net of all fees. Investment management should be a focus of the organization and should be evidenced by the allocation of resources towards the area. The organizational structure should ensure that the manager s interests are aligned closely with those of investors. The firm and its people should be reputable and firms with outstanding litigation should be subject to more thorough due-diligence if being considered. In general, the due diligence process for an investment manager s selection shall include, but not be limited to: Regulatory oversight: Each investment manager should be a regulated bank, an insurance company, a mutual fund organization, or a registered investment advisor. Assets under management: The product should have a sufficient and appropriate asset base. Performance relative to assumed risk: Competitive returns of investment options as compared to appropriate benchmark data at an acceptable level of volatility. Consistency of holdings with style: History of reasonable adherence to investment objectives. Stability of the organization: Established investment firm (experience and reputation of reliability). Professional Standards & Ethics: Investment firm should be able to demonstrate a commitment to professional standards and ethics by employing Chartered Financial Analysts and by adhering to either the CFA Institute Asset Manager Code or a reasonably similar set of corporate standards. Post-Selection Review of Investment Managers The Investment Committee of CFA Institute will monitor each manager, while retaining a longterm focus. Monitoring the performance relative to benchmarks will be an ongoing activity. The focus of the ongoing evaluation may include, but not be limited to: Material changes to investment policy and objectives Performance relative to investment strategy Stability of the organization and personnel turnover Performance relative to peer group(s) Termination CFA Institute retains the discretion to terminate an investment manager for any reason. Grounds for investment manager termination may include, but are not limited to: Failure to comply with stated guidelines. Significant deviation from the manager s stated investment philosophy and/or process. Loss of key personnel. Evidence of illegal or unethical behavior by the investment management firm. Loss of confidence in the investment manager. Failure to achieve performance objectives specified in the manager s guidelines over reasonable measurement periods. A change in asset allocation policy that necessitates a shift of assets to a different investment style. Note: Currency hedging language added and reviewed by the Audit and Risk Committee on 6 June 2012 Page 6 of 7

7 Appendix A CFA Institute Investment Committee The Investment Committee of CFA Institute oversees the application of this Investment Policy Statement (IPS). The specific responsibilities of the Investment Committee are described within the IPS. The Investment Committee will be comprised of the following individuals from CFA Institute: - President and Chief Executive Officer - Chief Financial Officer - Head, Finance and Risk Management - Treasurer - A selection of CFA Institute Staff advisors who are CFA Charterholders, past practitioners, and who bring international representation to the Investment Committee Page 7 of 7

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