.CORPO~~~'~~:~:'i~~~~~ADCASTING901 E Street, NWWashington, OC 20004-2037(202) 879-9600

TO:

FROM:

RE:

DATE:

Memorandum

CPB Board of Directors

Richard W. Carlson ~~Recommended CPB Short-term Investment Policy

January 11, 1995

Management has requested that KPMG Peat Marwick review CPB'scurrent investment guidelines, compare these guidelines tothose of a representative sample of other not-for-profitorganizations, and make any recommendations deemed appropriateto improve our investment performance without assumingsubstantial additional portfolio risk. A copy of their reportdated December 12, 1994 is attached.

Management has reviewed this report and believes that adoptionof its recommendations will provide significant additionalinvestment options and flexibility. This increased flexibilityshould allow us to improve investment yield while maintaininga prudent and conservative investment policy.

Accordingly, we recommend that the Board approve investment ofCPB funds by the cpa Treasurer in the following:

1. u.s. Treasury Bills.

2. u.s. Treasury Notes maturing within two years.

Obligations of u.S. Government Agencies maturingwithin two years.

3.

4. Bankers acceptances of u.S. banks rated "B" or higherby Bankwatch.

5. Repurchase agreements collateralized by u.S.Government securities or u.s. Government Agencysecurities.

6. Negotiable certificates of deposit and time depositsof u.s. banks maturingwithin two years and rated "B"or higher by Bankwatch.

7. Commercial paper of domestic corporations rated both"A1" by Standard and Poors and "P1" by Moody's.

CPB Board of DirectorsJanuary 11, 1995Page 2

In addition, we recommend that the following limits be appliedto the investment of CPB funds:

1. No limit is imposed on purchases of U.S. TreasuryBills, U.S. Treasury Notes or obligations of U.s.Government Agencies.

2. No more than 10% of the portfolio is to be investedin securities issued by anyone bank.

3. No more than 10% of the portfolio is to be investedin securities issued by anyone corporation.

4. No more than 40% of the portfolio is to be investedin commercial paper.

Finally, we recommend that the authority vested in the CPBTreasurer may be delegated to the Director of FinancialManagement or (in his absence) to the Deputy Director ofFinancial Management, and that the Treasurer be authorized toopen accounts to deposit CPB funds and close such accounts, inaccordance with this investment policy.

KPMG Peat Marwick will discuss their recommendations with theBoard and are prepared to answer any questions relatedthereto.

., Peat Marwick LLP

345 Park Avenue

New York. NY 10154

Telephone 2127589700Telex428038

Telefax 212 758 9819

December 12, 1994

Board of Directors

Corporation for Public Broadcasting901 E Street, NWWashington, D.C. 20004-2037

To: CPB Board of Directors

At the request of CPB management, we have been asked to evaluate your current investmentguidelines to see if they are appropriate for achieving the objectives of the fund. We havecompared your portfolio yield to similar style external investment managers over the past fivefiscal years ending in 1993 and made suggestions as to how you might improve your investmentperformance without taking on substantial additional portfolio risk. Attached to this letter is asample of how similar corporations invest their operating portfolios and a draft recommended

. investment policy and guidelinesfor the CPB portfolio...

Comparison with External Investment ManagersWe have compared CPB yields with a sample of three large, high quality, external investmentmanagers and found that your internal investment performance, given your current veryconservative guidelines, has been reasonable. Since investment management fees would averagebetween ten and twenty basis points, we believe that you should continue to manage this portfoliointernally until such time as you can expand your guidelines to invest not only in other types ofshort tenn securities, but also to move further out on the yield curve to allow the investmentmanager discretion to add incrementalvalue.

Review of Investment Guidelines

Our review of the investment guidelines shows that they are indeed very conservative, even for amoney market type investment style. At this point we would recommend the followingadjustments to the current guidelines:

Bankers Acceptances/ Negotiable Certificates of DepositThe current guidelines state that the CPB can invest in BA's and CD's of the ten largest banks inthe United States. We believe that the ten largest should be changed to only banks that maintainaminimum rating of "B" by Bankwatch. This change would guarantee a minimum quality ratingrather than just selecting a bank based on its size.

One of the other issues concerning bankers acceptances is the fact that there are not many banksthat are issuing them and the market for these instruments is shrinking. Banks have found othermethods of financing over the past several years and it is unclear whether this market will ever beas large as it used to be.

IIII Membe"',mofKfynve'" p.a, Ma<wd Goo,dele'

-Peat Marwick LLP

Board of DirectorsDecember 12, 1994Page 2

Commercial PaperCommercial paper is an unsecured promissory note issued for a specific amount and maturing ona specific day. It is issued by large industrial, manufacturing and financial companies with goodcredit ratings as a source of funds. The maximummaturity of commercial paper is 270 days, butthe majority of paper sold matures in six months or less. Commercial paper with anS&P/Moody's rating of AIIPI is the highest qualityavailable.

The AIIPI highly rated commercialpaper market is large and liquid with $520 billionoutstandingas of September, 1993. Commercialpaper yields at least 20 basis points more than 90-Day U.S.Treasury Bills over a market cycle.

We would recommend that you add commercialpaper rated Al by Standard & Poor's and PI byMoodys to the pool of available investments for the CPB portfolio. Although this debt isunsecured, when issued by the highest quality issuers, there is very little risk of default and thebenefit of additional yield. I spoke with several investment managers and no one had ever heardof an AIIPI commercialpaper issue ever defaulting.

These changes in the investment policy should help address the liquidity issues and addincremental yield without addingundue risk.

I look forward to getting your feedback on these issues.

Very truly yours,

KPMG Peat Marwick, LLP

M~d--Beth Ripstr ----

Manager

11ma:ktUnA:::P1l8

STATEMENT OF INVESTMENT POLICY AND GUIDELINES FOR THECORPORATION FOR PUBLIC BROADCASTING

This statement is intended to specifythe basic investment policyand objectives of the Corporationfor Public Broadcasting's (CPB) pool of assets and to establish direction for the management ofthis portfolio.

This statement also identifies the broad investment strategy to be followed in the investmentof theassets. The investment policy reflects CPB's objective of maximizingshort term returns while.assuminga zero loss tolerance. This policy is intended to permit investments only in high qualityinstrumentswith a diversificationof issuers.

The portfolio will be invested in money market instruments with the objective of earning acompetitive return while providing sufficientliquidityto meet projected cash flow needs.

The portfolio will be managed internallyby the Director of FinancialManagement (DFM) and willhave the investment objective of maximizingreturn with no loss of principal. The performancebenchmarkwill be the 90 Day US. Treasury Bills. The allowableinvestments will be as follows:

. u.S. Treasury Bills and Notes. Obligationsof U.S. Government Agencies

. Bankers Acceptances of U.S. banks with a minimumqualityrating of "B" by Bankwatch

. Repurchase agreements collateralized by U.S. Government securities or U.S. GovernmentAgency securities. Negotiable certificates of deposit £romU.S. banks with a minimum quality rating of "B" byBankwatch

. CommercialPaper of domestic corporations rated A1/P1 by Standard & Poors and Moody's

Within these investments, there will be limits put on the amounts of each type of issue in theportfolio as follow:

. No more than 10% of the portfolio is to be invested in securitiesissued by anyone bank

. No more than 10% of the portfolio is to be invested in securitiesof anyone corporation. No more than 40% of the portfolio is to be invested in commercialpaper

The portfolio will have no issue with a maturity greater than two years and will generallyhave anaverage maturity between three and nine months based on the DFM's projection of cash flowneeds and forecast of interest rate movements.

Survey oCNot-Cor-Profit Organization Investment Guidelines

We surveyed eight major non-profit organizations with a variety of operations (among theminternational unions, museums, universities and national trade groups) to compare how theseorganizations manage their liquid investmentportfolios.

Most of the organizations had policies which segregated their investments into at least twoclasses: a long-term portfolio and a current or operating portfolio. Given CPB's liquidityrequirements, we focused on short-term investmentguidelines. Specifically,we compared board-approved guidelines for objectives of the fund, restrictions on the types of investments that couldbe held, minimumratings, and other qualitativebenchmarks for securities.

The limited survey group had a fairlywide array of investment vehicles in their current portfolios.The page that follows is a partial composite listing of the types of investments permitted in thecurrent portfolios of the organizations we surveyed.

In almost all cases, policies surveyed permitted investment options in all three of the generalclasses outlined on the next page. Typically, the surveyed organizations placed limits on thepercentage of the portfolio that could be invested in certain types of the investments. Also, anysingle issue was often limited to some percentage of the total portfolio. When there was enoughdiscretion over the types of issues and the maturity of the portfolio, the level of outsideinvolvement (investment advisors) increased.

Based on our experience with non-profits organizations nationally, this limited survey groupappears representative of the investment philosophiesof large institutions in general.

SURVEY OF PERMITTED LIQUID INVESTMENTSBY LARGE NON-PROFIT ORGANIZATIONS

(partial List)

United States(;()vernment Securities Bank Issued Securities

U.S. Treasury Bills Bankers Acceptances of U.S.banks with a minimumqualityrating of "B" by Bankwatch

U.S. Treasury Notes &Bonds with a maturity ofup to one year

Certificates of deposit ofBanks rated "B" or higherby Bankwatch

U.S. Government &Agency obligations

Time deposit notes ofbanks rated "B" or higherby Bankwatch andmaturing in less than twoyears

Repurchase agreementscollateralized byGovernment securities or

Government agencies Issues of foreign financialinstitutions (Yankee issues)denominated in dollarsand rated "B" or higherby Bankwatch

U.S. Treasury Notesand Bonds with a maturity:£fomone to seven years

Eurodollar time depositsand CD's ranked "B" orhigher by Bankwatch

BR:DBa:sccurityr-Rev. llnl94

Comorate Securities

Commercialpaper ratedAl/Pl

Master notes ofcorporations whosecommercialpaper is ratedAl/Pl

Corporate bonds rated "B"or higher and maturingwithin sevenyears