Government Investment Officers Association Statement 79—Certain External Investment Pools and Pool Participants The views expressed in this presentation are those of Mr. Bean. Official positions of the GASB on accounting matters are reached only after extensive due process and deliberation. 1

Background  Securities and Exchange Commission (SEC) -July 2014—Issued substantial amendments to 2010 SEC Rule 2a7 -April 2016—Effective date  Governmental Accounting Standards Board (GASB) -August 2014—added to pre-agenda research -December 2014—added to current technical agenda -January 2015—deliberations began -June 2015—Exposure Draft issued  Twenty-two responses -December 2015—Final Statement issued 2

Basic Principles  Application of fair value measurement to investments generally is preferable—no requirement to apply amortized costs to all pooled investments  Application of amortized cost to all pooled investments is allowed for qualifying external investment pools -Criteria focus on whether amortized cost of those investments closely approximates fair value  Bottom line—Statement 79 supersedes the accounting and financial reporting standards for 2a7-like external investment pools 3

What Did Not Change  Certain Statement 31 standards related to the application of cost-based measurements have not been modified by Statement 72 -Nonparticipating interest-earning investment contracts -Debt investments with remaining maturities of up to 90 days at the reporting date  Provided that the fair value of those investments is not significantly affected by the impairment of the credit standing of the issuer or by other factors 4

Criteria for Qualifying Pools  Transacts with its participants at a stable net asset value per share (for example, at $1.00 NAV per share)  Portfolio maturity  Portfolio quality  Portfolio diversification  Portfolio liquidity  Shadow pricing 5

Portfolio Maturity Requirements  Principle -Maintain the portfolio maturity consistent with a stable net asset value per share  Specific criteria -Should acquire a security or other investment only if the investment has a remaining maturity of 397 calendar days or less -Portfolio should maintain a weighted average maturity of 60 days or less (takes into account certain maturity shortening features) -Portfolio should maintain a weighted average life of 120 days or less (does not take in account maturity shortening features) -Demand features should be disregarded for the purpose of determining maturity if not being relied upon 6

Portfolio Maturity—Variable Interest Rates  The maturity of a U.S. government security and any certificates of deposit insured by the U.S. government should be the period remaining until the next readjustment of the interest rate  Maturity of an investment that is not a U.S. government security -Principal amount is due in 397 calendar days or less should be the shorter of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand -Principal amount is due in more than 397 calendar days should be the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand 7

Portfolio Maturity—Floating Interest Rates  Maturity of a U.S. government security and any certificates of deposit insured by the U.S. government should be one day  Maturity of an investment that is not a U.S. government security -Principal amount is due in 397 calendar days or less should be the shorter of the period remaining until the interest rate resets or the maturity date of the investment -Principal amount is due in more than 397 calendar days should be the period remaining until the principal amount can be recovered through demand 8

Portfolio Maturity—Repurchase Agreement  Maturity is the period: -Remaining until the date on which the repurchase (or return) of the underlying securities is scheduled to occur or -Duration of the notice period applicable to a demand for the repurchase (or return) of the securities, such as a put option 9

Portfolio Maturity—An Investment in a Money Market Fund or Another Pool  Period within which the fund or the pool is required to make a payment upon redemption -For example, the maturity of an investment in a money market fund that imposes a five-business-day redemption notice period should take into account that notice period. 10

Portfolio Quality Requirements  Principle -An investment should be acquired by a qualifying external investment pool only if it presents minimal credit risk 11

Portfolio Quality—Specific Criteria at Acquisition  A security that has been rated by a nationally recognized statistical rating organization (NRSRO) should be acquired only if the security: -Is denominated in U.S. dollars -Has a credit rating within the highest category of short-term credit ratings (or its long- term equivalent category)  The highest category of short-term credit ratings (or its long-term equivalent category) as established by an NRSRO may have multiple sub-categories or gradations indicating relative standing  A security that has not been rated by any NRSRO may be acquired only if the security is: -Denominated in U.S. dollars -Determined to be of comparable credit quality to securities that have been rated within the highest category of short-term credit ratings (or its long-term equivalent category) 12

Portfolio Quality—When a Pool is Aware that a Security has More Than One Rating  When the rating categories conflict, the following provisions apply: -If a security has two ratings, the security should be considered to be in the lower category -If a security has more than two ratings, the security should be considered to be in the highest category of ratings as determined by at least two ratings 13

Portfolio Quality—Continue to Hold Provisions  An acquired security experiences subsequent decline in credit quality—a pool should hold no more than three percent of total assets at the reporting date in the following: -Securities that have credit ratings within the second-highest category of short-term credit ratings (or its long-term equivalent category) -Securities that are not rated but are determined to be of comparable credit quality to securities that have been rated within the second-highest category of short-term credit ratings (or its long-term equivalent category).  At the reporting date, a pool should not hold any security that has a credit rating below the second-highest category of short-term credit ratings (or its long-term equivalent category) or is determined to be of comparable credit quality to a security that has been rated below the second-highest category of short-term credit ratings (or its long-term equivalent category) 14

Portfolio Quality—Guarantees  Guarantee—received a credit rating within the highest category of short-term credit ratings (or its long-term equivalent category) or, if no credit rating is available, is determined to be of comparable quality  Guarantor—obtained a credit rating within the highest category of short-term credit ratings (or its long-term equivalent category) or, if no credit rating is available, is determined to be of comparable quality  Guarantee should be disregarded for the purpose of determining quality if pool is not relying on that guarantee 15

Portfolio Quality—Conditional Demand Feature  Conditional demand feature has received a credit rating within the highest category of short-term credit ratings (or its long-term equivalent category) or, if no credit rating is available, is determined to be of comparable quality  Demand feature should be disregarded for the purpose of determining quality if the pool is not relying on that demand feature 16

Portfolio Quality—Custodial Credit Risk  Securities held should not be exposed to custodial credit risk as described in Statement 40 17

Portfolio Quality—Deposits  Deposits should be evaluated in terms of either the credit quality of the depository institution or the exposure of the deposit to custodial credit risk. -Held by a depository institution with a credit rating within the highest category of short- term credit ratings (or its long-term equivalent category) or determined to be of comparable quality. -Insured or collateralized such that it is not exposed to custodial credit risk 18

Portfolio Quality—Repurchase Agreements  Repurchase agreements should be evaluated in terms of the credit quality of the counterparty or its parent and in terms of the credit quality of the underlying collateral.  Counterparty or its parent should meet one of the following criteria: -Be a primary dealer as defined by the Federal Reserve Bank of New York -Have a credit rating within the highest category of short-term credit ratings (or its long- term equivalent category) or be determined to be of comparable quality  Collateralized fully by meeting both of the following criteria: -Fair value of the securities collateralizing the repurchase agreement (including loss of interest that the qualifying external investment pool reasonably could expect to incur if the counterparty defaults) is at least equal to the resale price provided in the repurchase agreement -Securities collateralizing the repurchase agreement are not exposed to custodial credit risk 19

Portfolio Diversity Requirements  Principle -Should acquire a security or other investment only if, after acquisition, the external investment pool would hold no more than five percent of its total assets in investments of any one issuer of securities 20

Portfolio Diversity—Specific Criteria  Credit support—guarantees or demand features -No more than 10 percent related to any one provider  Securities with credit ratings in the second highest category -No more than one-half of one percent in total assets related to any one issuer -No more than 2.5 percent of its total assets related to any one provider of credit support  Exception for US government securities 21

Portfolio Diversity—Additional Considerations  Two or more issuers of securities should be considered to be a single issuer if one issuer controls the other or the two issuers are under common control -Control is assumed to be present if one entity owns more than 50 percent of the issuer’s voting securities  Acquisition of a repurchase agreement should be considered to be the acquisition of the underlying securities if the repurchase obligation is collateralized fully without regard to maturity date  Acquisition of a refunded security should be considered to be the acquisition of the escrowed securities  Conduit debt obligation should be considered to be issued by the entity responsible for the payments related to the obligation  Asset-backed securities should be considered to be issued by the entity that issued the security with limited exceptions 22

Portfolio Liquidity Requirements  Principle -Pool should hold liquid assets sufficient to meet reasonably foreseeable redemptions -Reasonably foreseeable redemptions may be based on the pool’s knowledge of the expected cash needs of its participants 23

Portfolio Liquidity—Specific Criteria  Should acquire an illiquid investment only if, after acquisition, the pool would hold no more than 5 percent of its total assets in illiquid investments -An illiquid investment is an investment that cannot be sold or disposed of in the ordinary course of operations at its amortized cost value within five business days  Should acquire a security or other investment only if, after acquisition, the pool would hold at least 10 percent of its total assets in daily liquid assets  Should acquire a security or other investment only if, after acquisition, the pool would hold at least 30 percent of its total assets in weekly liquid assets  Money market fund or another external investment pool should be evaluated consistent with any redemption gates or other limitations  Demand feature or guarantee should be disregarded for the purpose of determining liquidity if the qualifying external pool is not relying on that demand feature or guarantee 24

Shadow Pricing Requirements  The shadow price is the net asset value per share of a qualifying external investment pool, calculated using total investments measured at fair value at the calculation date  A pool should calculate its shadow price at a minimum on a monthly basis -The monthly calculation of the shadow price should occur no earlier than five business days prior to and no later than the end of the month -At each calculation date, that shadow price should not deviate by more than one half of one percent from the net asset value per share calculated using total investments measured at amortized cost 25

Non-Compliance—Professional Judgment  Significant noncompliance with any of the criteria—cannot apply amortized cost measurement to all its investments -Pool should apply the provisions in paragraph 16 of Statement 31, as amended  Factors that may indicate significant noncompliance include, but are not limited to: -Noncompliance was not promptly identified -Noncompliance was due, at least in part, to factors within the control of the external investment pool’s management -Noncompliance was not an isolated incident -Necessary corrective or remedial action was not promptly taken 26

Back In The Fold  A pool may make an election to change from fair value measurement to amortized cost-based measurement in the subsequent reporting period, only if: -Meets all the criteria in paragraph 4 and -Justifies a change in accounting principle as prescribed in paragraphs 73 and 74 of Statement 62  The presumption that a pool should not change an accounting principle may be overcome only if the pool justifies the use of an alternative acceptable accounting principle on the basis that it is preferable. 27

Pool Participants Reporting  If a pool meets the criteria and measures all of its investments at amortized cost, then the pool’s participants also should measure their investment in the pool at amortized cost  If a pool does not meet the criteria, the pool’s participants should measure their investments in that pool at fair value 28

Note Disclosures  Pools -Disclosures required for fair value measurements in paragraphs 80−82 of Statement 72 -Presence of any limitations or restrictions on participant withdrawals  For example, redemption notice periods, maximum transaction amounts, and the pool’s authority to impose liquidity fees or redemption gates)  Pool Participants -Presence of any limitations or restrictions on withdrawals 29

Effective Date and Transition  Effective date -Reporting periods beginning after June 15, 2015, except for the provisions related to:  Portfolio quality requirements related to ratings or comparable credit quality  Portfolio quality requirements related to custodial credit risk  Shadow pricing requirements -Those provisions are effective for reporting periods beginning after December 15, Earlier application is encouraged  Transition -In the period that Statement 79 is first applied, changes made to comply with this Statement should be applied on a prospective basis 30