Budget Process and Implementation
Budgeting for any fiscal period will not deviate materially from the mission, goals, and strategies of the Society; risk fiscal jeopardy; nor fail to show a generally acceptable level of foresight. Staff will present a draft of the annual budget to the Finance Committee for review and modifications prior to its being submitted to the board.

The SRNT board approves the annual operating budget for each calendar/fiscal year that will project income and expenses and will provide for programs and support services. The board will approve the annual budget prior to the start of the fiscal/calendar year.

The board authorizes the executive director to manage the organization in accordance with the approved annual operating budget. Unbudgeted programmatic or operational changes that may have a significant impact on the annual budget ($10,000 or more) must be reviewed by the board between budget cycles and may lead to a budget revision. The board, with input from the Finance Committee, will determine whether or not the budget should be revised mid-year.

Annual Audit
The finance committee will recommend to the board whether an audit, a review, or no external review will be undertaken in a given year. However, barring any such recommendation SRNT will undergo a review of finances in odd-numbered years and an audit in even numbered-years; however, if a particular funder requires an audit in order to continue funding, SRNT will have annual audits.

Any audit or review will be undertaken by an independent CPA firm that has a significant group of nonprofit clients. If the same audit firm conducts the audit for more than five consecutive years, the finance committee is authorized to review the firm’s services and decide if the firm or the audit partner needs to rotate.

The audit firm will not be hired to perform non–auditing services, except for tax preparation and Form 990 preparation and will not perform substantial services for any officer or director personally. The audit firm is engaged to present annual audit findings to the executive director, the finance committee, and the board. The finance committee will review the audit and make its recommendation to the board.

An authorized check signer will make disbursements only upon review and approval of the transaction. This will include review for the existence of proper supporting documentation, such as an invoice or receipts.

The secretary/treasurer, executive director, and the finance manager are authorized to sign checks.

All expenses and/or check requests must be approved by the executive director; payments greater than $5,000 require approval of the secretary treasurer.

The executive director is authorized to approve unbudgeted expenses up to $2,500.

The Secretary-Treasurer is authorized to approve unbudgeted expenses between $2,500 and $5,000.

The President is authorized to approve unbudgeted expenses between $5,000 and $10,000.

The Board must approve unbudgeted expenses greater than $10,000.

The executive director will ensure that filing of tax returns and any government-ordered payments or other filings are undertaken in a timely and accurate manner.

The executive director will sign and certify that the IRS Form 990 is accurate and complete.

The secretary/treasurer is authorized to review and approve the IRS Form 990 annual tax filing prior to submission, and the full board will receive a copy of the IRS Form 990 within 30 days of its submission.

Consistent with the requirements of §6104(d) of the Internal Revenue Code, copies of the organization’s Form 990 will be made available, upon request, in a timely manner, to any individuals who request it.

Asset Protection
The management company hired by SRNT will adequately protect and maintain from unnecessary risk SRNT’s records, other documentation and any assets, as well as staff assigned to SRNT. Accordingly, the management company will

• • Insure against theft and casualty losses of tangible personal property to at least 80 percent replacement value and against liability losses to board members, staff, or the organization itself at no less than minimally acceptable prudent levels
  • Have sufficient employee dishonesty insurance for personnel with access to material amounts of funds
  • Protect intellectual property, information, and files from loss or significant damage
  • Hold operating capital in secure instruments, such as insured checking accounts, bonds or other interest-bearing accounts in accordance with board-approved policies and/or direction from the finance committee
  • Protect the organization, its board, and staff from exposure leading to claims of liability
  • Not endanger the organization’s public image or credibility, particularly in ways that would hinder its accomplishment of mission, except when necessary to accomplish its mission

Insurance

SRNT will purchase necessary policies to insure the organization against risk. Types of insurance to be purchased should include

• • General liability (personal and property damage and punitive damage)
  • Nonprofit Officers’ and Directors’ Liability (also knows as association professional liability)
  • Annual Meeting Cancellation
  • In all cases, SRNT will be insured at the highest-possible levels.

Additional types of insurance needed to protect the organization must be approved by the board.

SRNT will maintain a Reserve Fund sufficient to cover the cost of running SRNT’s office/operations (management fees, phone, insurance, etc, required to maintain minimum operations) for one year, based on the average of the prior three years’ expenses plus $100,000 to offset any potential conference-related contractual obligations (F/B minimums, sleeping room blocks, etc).

Non-contractual costs associated with the Annual Meeting (speaker travel, A/V, printing, insurance, etc) and costs associated with the journal (editorial fees, member subscriptions, etc) will not be considered office/operational costs as long as those activities continue to generate more revenues than expenses.

GENERAL PRINCIPLES

The investment policy governs the investment of all financial assets of the Society for Research on Nicotine and Tobacco (SRNT).

Objectives

Investment of funds should be made solely for the purpose and in the best interest of the Society’s objectives.

The investment policy reflects objectives of meeting both short-term and long-term goals. Short-term goals involve meeting the operating expenses of the Society. Long-term goals include building a reserve fund (“rainy-day” fund) in case of future unforeseen needs along with building savings for future projects identified by the Board of Directors.

Fiduciary Responsibility and Limits of Fiduciary Responsibility

Members of the Finance Committee, other members of the Board of Directors, and officers of the SRNT management company have a fiduciary responsibility to regularly monitor the finances of the Society.

Members of the Finance Committee, other members of the Board of Directors, and officers of the SRNT management company, acting in accordance with written policies and procedures and exercising due diligence, shall not be held personally responsible for a specific investment’s credit risk or market price changes.

Members of the Finance Committee, other members of the Board of Directors, and officers of the SRNT management company must disclose any personal business activity or financial/investment positions that could be related to the performance of the investment portfolio or that could conflict with the proper execution and management of the investment program or that could impair their ability to make impartial decisions.

Role of Finance Committee

The SRNT Bylaws state that “the Finance Committee shall be responsible for recommendations regarding fiscal policy to the Board, including but not limited to proposals and recommendations regarding investment and management of Society reserves.”
The Finance Committee is responsible for adhering to the principles specified in this investment policy.
The Finance Committee is responsible for periodicly reporting on the status of the Society’s investments and finances to members and the Board of Directors.

The Finance Committee will be responsible for identifying and making changes to the investment portfolio when needed. Changes should only be undertaken to ensure that investments remain aligned with the guidance of this policy or to take appropriate urgent action to protect investments and to preserve principle (see also below).

Role of Board of Directors

The members of the Board of Directors will be responsible for reviewing the report of the Finance Committee at the Board of Directors meetings.

The Board of Directors will be responsible for approving changes in the investment portfolio. This may be done by voice vote at the Board of Directors meetings or by electronic vote at times other than Board of Directors meetings.

In situations that are considered particularly urgent, the Finance Committee may approve changes in the investment portfolio by a majority vote. In this case, the voting will be done by voice vote at the Finance Committee conference call or by electronic vote at times of other than Finance Committee conference calls. Such actions and the reasons for the urgency must be reported to the Board of Director’s at its next meeting.

Specific Investment Policies & Guiding Principles

The following section provides guiding principles for the Society’s investment holdings.

Guiding Principle 1: The Society will manage its investments in a manner that will not risk the public’s trust of the Society. Because of its commitment to impartial research on nicotine and tobacco, SRNT will not knowingly hold investments in companies whose primary business is related to nicotine, tobacco, nicotine replacement products and other aids to smoking cessation, or services related to smoking.

Guiding Principle 2: The Finance Committee may retain the services of a licensed financial advisor or actively manage the Society’s investments, at its discretion and based on the expertise of the Finance Committee members. In general, if an advisor is enlisted, the costs associated with their services should be minimized to the greatest extent possible, allowing more of the Society’s principal to remain invested to meet its goals. The Finance Committee will be aware of the two most-common methods for how advisors’ charge consulting fees (i.e., [1] as a percentage of SRNT’s overall portfolio value or [2] on a fee-for-[hourly]-service basis) if SRNT chooses to employ an advisor who assesses fees as a proportion of the total portfolio (in 2017 the industry standard was 1%).

Continuity over time is preferred, allowing the people responsible for managing the Society’s holdings to remain familiar with SRNT’s investments and strategies..

Guiding Principle 3: Investments which are widely viewed as having a high degree of volatility and risk are not permitted. No investment product should be purchased which has the potential to risk more than the amount invested. Such investments include, but are not limited to: venture capital, private equity, hedge funds, margin accounts, options, and futures.

Guiding principle 4: Ideally, investments will be bought with a “buy-and-hold” strategy in order to maximize return. The Society will seek investments that will grow in value over time, rather than attempt to buy and sell in anticipation of short-term changes in market value. However, investments may be sold in shorter time frames in the following instances:
• A security with declining credit may be sold early to minimize potential loss of principal.
• A change in securities which would improve the quality, yield or target duration of the portfolio.
• Liquidity needs of the organization require the investment to be sold.
• Changes in management or strategy at an existing fund that make past performance data irrelevant.

Guiding principle 5: SRNT should strive to hold as few investment products (e.g., mutual funds or exchange-traded funds [ETFs]) as possible to achieve all of its goals, simplifying the overall investment portfolio. Holding fewer funds simplifies investment reviews for the Board, the Finance Committee, and SRNT’s membership and simplifies and reduces burden when considering the need to rebalance investment holdings. Ideally, SRNT will hold a single mutual (index) fund or ETF within each asset class but may hold two (2) or more of the same type of asset class per its discretion. Asset classes include: large-capitalization funds, mid-capitalization funds, small-capitalization funds, international/global funds, and bond funds. SRNT should strive to limit the overall number of mutual funds/ETFs held to ten (10) or fewer, excluding short-term reserves (e.g., checking accounts, short-term CDs, etc.), but may hold more per its discretion.

Guiding principle 6: SRNT should tend to invest in “index” funds (instead of “actively managed” funds) in the asset classes it holds, except where suitable low-cost index funds are not available. Index funds generally have much lower costs (generally ranging from: 0.01-0.40%) and are broadly diversified within an asset class, because they purchase ALL available investments within the asset class.
Guiding principle 7: Similar to guiding principle 6, operating expenses (fees) associated with mutual funds/ETFs should be minimized to the greatest extent possible. The Finance Committee will be aware of the significant variation in mutual fund operating expenses (in 2017, the funds held in SRNT’s portfolio ranged from 0.22% to 1.59%).

Guiding principle 8: Fund performance should be monitored regularly, but at least annually. To identify and monitor specific investments, historic performance in terms of total return and volatility will be considered. Also, comparison of funds’ performance to peer funds’ and appropriate market indices’ performance may be undertaken. Specific investments will be sought that have high performance over a 3-year, 5-year, and 10-year period relative to peer funds’ performance and appropriate market sector indices. Volatility, as measured by the annualized standard deviation of quarterly returns, should be similar to the market index or sector average over the same 3-year, 5-year, and 10-year rolling periods. Specific investments should have performance data available for at least 5 years, but may be considered if they are younger than 5 years old. Benchmarks such as Morningstar, Inc. ratings may be used to identify specific investments.

Guiding principle 9: SRNT should strive to stay within +/-5% of the general allocation strategy (75% equities and 25% bonds for the Reserve Fund) by rebalancing the overall portfolio as needed. Rebalancing when a portfolio is +/-5% of the general allocation strategy is consistent with evidence-based approaches for rebalancing to reduce volatility and maximize returns (http://www.vanguard.com/pdf/icrpr.pdf). Further, this rebalancing strategy (+/- 5%) can be employed within each asset type. The Finance Committee will evaluate the need to rebalance annually but reserves the right to rebalance more or less often per its discretion.
Guiding principle 10: SRNT will invest all money with consideration for the investment timeframe (before distributions begin) and the length of investment disbursement (i.e., the number of months/years over which disbursements occur). See the Appendix for examples.
Guiding principle 11: SRNT will invest its money in a manner that optimizes the two major types of investment risk. The level and types of risks vary across classes. The first type of risk is short-term (e.g., <3 years) loss of investment principal due to asset class volatility (i.e., “type-1 risk”). A second type of risk is loss of principal investment purchasing power, due to inflation (i.e., “type-2 risk”). For the first and second class (described in Principle 12), type-1 risk should be minimized by holding investments with low volatility, and accepting greater type-2 risk. For the third class, type-1 risk is acceptable commensurate with a long-term investment perspective, guarding against type-2 risk.

Guiding principle 12: SRNT will consider its needs for a designated pot of money and invest the money into the appropriate asset class. Assets held by SRNT will be divided into three classes. The objectives, level (and type) of acceptable risk, degree of and required liquidity, asset allocation parameters, and asset quality requirements differ across the three classes. The three classes of assets are primarily defined by anticipated cash flow requirements.

a) The first class has as its objective to meet immediate cash-flow needs. The first class will typically be held in cash or CDs (and must be immediately convertible to cash).
b) The second class’s objective is the preservation of special funds (e.g., grants and contributions) that are earmarked for specific purposes. The second class must be convertible to cash within the timeframe of the specific need.
c) The third class’s objective is building a reserve fund and saving for future goals. The third class must be held in investments that can be converted to cash. However, a major purpose of investment funds in the third class is to build a reserve fund and savings for SRNT, so funds allocated to this third class should be viewed as long-term investments that will rarely need to be liquidated to meet immediate cash needs.

Asset allocation parameters in each class of assets – The asset allocation parameters vary across classes of assets. In general, assets in all three classes should be diversified. However, the degree of diversification need is greatest for the third class of assets. Assets in the first and second classes that are held in cash may have limited diversification taking into consideration the need to have efficient accounting of cash transactions and ready access to these funds.

Asset quality in each class of assets – Assets in all three classes should be held in high-quality investments with the caveat that a portion of funds in the third class may be invested in lower-grade corporate bonds if the degree of income is judged to reasonably offset the degree of risk. The exposure to such lower-grade funds should be limited.

The following table summarize the attributes and objectives of the three asset classes and additional details on each class follow in the next section.

ADDITIONAL DETAILS ON CLASSES OF ASSETS

ADDITIONAL POLICIES REGARDING THE FIRST ASSET CLASS: THOSE NEEDED TO MEET IMMEDIATE CASH-FLOW REQUIREMENTS (I.E., <1 YEAR)

Objectives of this class of assets – The first class of assets differs from the other classes of funds in that it has as its primary objectives are to: 1) meet immediate cash-flow needs 2) maintain sufficient assets to meet operating expenses of SRNT and 3) generate income to the degree practical.

Level of risk acceptable for this class of assets – For the first class, there should be a very low level of type-1 risk and a very high level of principal stability, with consideration for reducing type-2 risk.
Liquidity in this class of assets – The first class of assets must be immediately convertible to cash.

Asset allocation parameters in this class of assets – Assets in the first class may have limited diversification given the low risk of cash held in U.S. banks and cash-equivalents held in U.S. security firms. There is also a need to have ready access to these funds and efficient accounting of cash transactions. For example, one checking account is preferable to multiple checking accounts. However, SRNT may limit funds held at any one institution to $250,000, or whatever the Federal Deposit Insurance Corporation (FDIC) limit is at the time, at SRNT’s discretion. SRNT will make every effort to ensure the safety of funds held in this asset class.

Generation of income to the degree practical – SRNT may at its discretion, choose to have all income and revenue deposited into a savings account to generate interest income. SRNT’s expenses can be paid directly from this account when possible (or money could be transferred to a separate checking account for expense payment, at SRNT’s discretion). Further, SRNT may invest money in short-term (<1 year) CDs, treasuries, and municipal bonds per its discretion when the timeframe of need is commensurate with the length of maturity of these types of investments. The Finance Committee will be aware of variation in interest generation from checking/savings/money-market/CDs/other accounts and advise SRNT accordingly.

Given these investment principles, allowable investments for this class of assets include and are limited to cash and cash equivalents. These may include:
• Checking accounts
• Savings accounts
• Money market funds
• Short-term certificates of deposit (<1 year)
• Short-term treasuries (<1 year)
• Short-term municipal bonds (<1 year)
Choices among these options should also be based on ease of accounting and access, along with maximizing interest rates.

POLICIES REGARDING THE SECOND CLASS OF ASSETS – SPECIAL FUNDS RAISED FOR SPECIFIC PURPOSES

The purpose of this second class of assets is to segregate those funds that are generated outside of the usual sources of income and that have a specific purpose identified. These assets include those that are generated from grants and contributions that are earmarked for a specific purpose (e.g., a contribution to support a special award or a grant to support an upcoming meeting). These assets are usually received by SRNT and held for some period of time until relevant expenses accrue. For accounting purposes, there may be benefits to segregating these assets from the general operating funds of SRNT. This is particularly true if the granting organization requires accounting of expenditures related to these funds or if the holding period extends beyond a year.

Objectives of this class of assets – The second class’s primary objective is the preservation of special funds (e.g., grants and contributions) earmarked for specific purposes. Secondary objectives include: 1) maintenance of sufficient funds to meet the specific requirements specified by the grants or contributions that generated these funds 2) preservation of capital with a commensurate level of risk for the investment timeframe 3) maintenance of sufficient liquidity to meet the time horizon of these funds and 4) generation of income to the degree practical.

Level of risk acceptable for this class of assets – There should be a level of risk commensurate with the timeframe the money will be invested and disbursed (see the Appendix for examples). Monies received for this asset class should be invested in asset class 1 investments upon receipt (e.g., SRNT’s savings account). An investment plan should be described to and reviewed with the grantor and/or gift giver (as applicable) prior to implementing an investment plan using asset class-3 investments (i.e., longer-term bonds and/or equities).

Liquidity in this class of assets – These assets must be convertible to cash within the timeframe of the specific need.

Asset allocation parameters in this class of assets – In general, assets should be diversified. However, assets in the second class may have limited diversification taking into consideration the need to have efficient accounting of cash transactions and easy access to these funds.

Given these investment principles, allowable investments for this class of assets include and are limited to cash and cash equivalents (with some exceptions when an investment plan is devised, per SRNT’s discretion). These may include:
• Checking accounts
• Savings accounts
• Money market funds
• U.S. government treasury bills
• U.S Government funds
• Certificates of deposit
• High quality corporate bond funds can be used when the expected holding period is more than one year

Type-3 investments may be utilized when a specific investment plan is generated by the Finance Committee (and approved by the Board) for the earmarked funds, typically when the timeframe of investment and disbursement exceeds 3 years. Choices among these options should be based on ease of accounting and access, along with maximizing interest and return rates.

POLICIES REGARDING THE THIRD CLASS OF ASSETS – THOSE NEEDED TO BUILD A RESERVE FUND AND SAVE FOR FUTURE GOALS

Objectives of this class of assets – The third class has as its objective building a reserve fund and saving for future goals. Assets not currently needed for cash-flow requirements (the first class of assets) or earmarked for specific purposes (the second class of assets) may be allocated to this third class of assets.

Level of risk acceptable for this class of assets – Type-1 risk, related to short-term volatility, is acceptable commensurate with a long-term investment perspective. Type-2 risk (i.e., loss of purchasing power due to inflation) should be minimized to the greatest extent.

Liquidity in this class of assets – The third class must be held in investments that can be converted to cash. However, the purpose of these funds is to build a reserve fund and savings for SRNT, so funds allocated to this third class should be viewed as long-term investments that will rarely need to be liquidated to meet immediate cash needs. The time horizon for investments should be at least 3 years.
Asset allocation parameters in this class of assets – Assets should be diversified. Diversification is an accepted approach to minimizing risk when funds are invested in non-cash equivalents. Assets will be diversified across asset types (e.g., fixed income [bond funds] and equities [stock mutual funds or ETFs]) and within each asset type. Further diversification is easily attained by investing in mutual funds or ETFs. For this reason, mutual funds or ETFs will be the preferred form of investment in fixed-income and equities.

Asset quality in this class of assets – Assets may be invested in lower grade corporate bond funds if the degree of income is judged to reasonably offset the degree of risk. The exposure to such lower-grade bond funds should be limited.

Given the parameters described above, the specific investment principles for this class of assets are:
• To increase the real (inflation-adjusted) value of the assets over the long term
• Maximization of yield on the portfolio and prudent participation in growth with a 3-year (or greater) horizon

Given these investment principles, allowable investments for this class of funds include and are limited to:
• Fixed income
o Government bond funds
o Corporate bond funds
o International bond funds
• Equities
o U.S. equity funds
o International equity funds
•Cash or cash-equivalents (a minimum amount of funds may be held in cash, but this should not be normally viewed as an investment vehicle that meets the objectives stated above).

Asset allocation

Asset allocation for class-3 assets will approximate a 0% cash, 25% fixed income, and 75% equity allocation. However, asset allocation is permitted to fall within the following ranges, per SRNT’s discretion:
• Cash-equivalents 0% to 10%
• Fixed income (bond funds) 15% to 50%
• Equities (stocks) 50% to 85%

The objectives of this class of assets suggest that the investments should include maximization of yield and prudent participation in growth. Ideally SRNT will invest in “balanced” index funds (that contain growth and value companies in proportion to their market capitalization); however, SRNT may purchase growth, value, or balanced funds (i.e., contains both growth and value companies) per its discretion.

To balance risk, equity funds should be diversified among large cap (i.e., a fund containing companies valued at >$10 billion), medium cap (i.e., a fund containing companies valued between $2 and $10 billion), and small cap funds (i.e., a fund containing companies valued between $300 million and $2 billion). Ideally SRNT will invest in large-, mid-, and small-cap funds in proportion to their market capitalization. However, SRNT may purchase large-, mid-, and small-cap funds per its discretion.

To decrease risk to any one geographic market, equity funds should be diversified across domestic and international funds. Investment in international markets may include international funds, world funds, foreign funds, or global funds. International funds should be broadly based and should not be limited to a specific geographic region. The portion invested in international funds should approximate 25% of the total market value of the equity funds. Regarding the amount invested in international funds, the portion invested in emerging market funds should approximate 10% of the total market value of equity funds. SRNT may invest in international and emerging funds per its discretion.

Fixed income funds may include government bond funds or corporate bond funds. Emerging market debt securities should not exceed 10% of the total market value of fixed income funds.

A summary of these asset allocation principles is listed in the table below. The proportions outlined below will guide the asset allocation of the funds in this third class of investments.

Appendix: Investment Timeline Examples

Two examples of allocation strategy (i.e., stocks-to-bonds-to-short-term-reserves ratio) are provided. These examples assume an aggressive risk tolerance and vary according to the time remaining until distributions begin and the length of time remaining once distributions start. These examples were created by Vanguard advisory services. These are examples of how an advisor may recommend that SRNT invest its money, based on these three variables (i.e., risk tolerance, length of investment, and length of distributions once initiated).

Example 1:                                         

Example 2:   

1. These short-term cost savings from minimizing advisors’ fees have the added benefit of yielding additional investment returns in the long-term.