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58 The Authority │ December • Track Credit Market Signals. Widening credit spreads (the extra yield investors demand to hold corporate versus Treasury debt) can signal rising risk aversion or systemic stress 4 . Investment managers watch broad-market spread indices and news of credit events among major issuers when considering credit issues for portfolios. • Conduct Scenario Analysis and Stress Testing. This means running variations of shocks – such as large rate hikes, deep spread increases, big redemptions, issuer defaults, or combinations thereof – to see the impact on portfolios. • Maintain Liquidity and Diversification. Ample liquidity allows the pool to handle redemptions or market dislocations without forced selling. An example of this is PLGIT seeking to follow GASB 79 standards of at least 10% of portfolio holdings in one-day liquidity and 30% of holdings in weekly liquidity. In addition, diversification – spreading holdings across sectors, issuers, and maturities – can further mitigate risk. Preparation through Diligence As we have articulated many times in our articles and presentations, PLGIT maintains professional guidance and diligent safety practices as its standard mode of daily operations. These standard practices serve to prepare the portfolios for times of uncertainty, and better help local governments weather challenging economic environments. Here are a few examples: Professional advice through PFMAM: PLGIT’s investment administrator is PFM Asset Management (PFMAM), which specializes in investments for local governmental entities around the country and in working with local government investment pools like PLGIT. PLGIT's investment advisor falls under the purview of several Securities and Exchange Commission (SEC) rules, relating to: • Fiduciary responsibilities. An SEC registered investment adviser is subject to the Investment Advisers Act of 1940 (“the Act”) 5 . Under judicial interpretation of The Act, advisers owe fiduciary duties to their clients such as PLGIT. This means that an adviser will act with a duty of good faith and independence in putting its clients’ interests above its own. • Formal policies and procedures. SEC Rule 206(4)-7 requires registered advisers to adopt and implement written policies and procedures designed to prevent violations of SEC rules 6 . It also requires review, at least annually, of the adequacy of policies and procedures and the effectiveness of their implementation. • Code of Ethics. The registered investment adviser must adhere to standards of conduct that include protection of nonpublic information, guidelines on handling personal securities trading, requirements for reporting violations, recordkeeping, and more. Strength article continued from page 43. 4 Moody’s. (n.d.). Municipal credit ratings and research. 5 United States Congress. Investment Advisers Act of 1940, U.S. Government Publishing Office, (1940), https://www.govinfo.gov/app/details/ COMPS-1878 6 Securities and Exchange Commission. Compliance procedures and practices. 17 CFR 275.206(4)-7, <https://www.ecfr.gov/current/title-17/chapter- II/part-275/section-275.206(4)-7>