Untitled Texas Attorney General Opinion ( 1966 )

June 7, 1966 Honorable Gordon ,H. Lloyd ODinion No. C-704 Executive Secretary - Employees Retirement System of Texas Re: Whether the retire- Capitol S~atlon ment funds of the Austin, Texas Employees Retire- ment System may be invested in corpor- ate stocks and bonds other than those ir which the Permanent University Fund of the University of Dear Mr. Lloyd: Texas is invested. We are in receipt of your letter for an opinion in which the following question is posed: Is the Investment of Employees Retirement Fund in corporate bonds, preferred stocks and common stocks subject to the discretion of the Board of Trustees of the Employees Retirement System, with- in those limits set out in Section lla of Article VII of the Constitution for guidance of the Board of Regents of the University, or may the Board of Trustees of the Employees Retirement System make such investments within its discretion, but only in the specific stocks and bonds which have been deemed,proper investments for the Permanent Univ- ersity Fund by the Board of Regents of the Univer- sity of Texas. After carefully reviewing the Constitution and statud~ tes of this state and previous Attorney General Opinions re- lated to this question, we have come to the definite conclusion that the Investment of the lcyees Retirement Funds, created by provisions of Section 62(a “p , Article XVI of the Texas Con- stitution, In such securities as corporate bonds and preferred and common stocks is subject to the discretionary determination of the Board of Trustees of the Employees Retirement System of Texas but within the same limitations and restrictions as are provided in Sectfon 11(a) of Article VII of the Texas Constitu- tion. In this connection, we hold that the Board of Trustees -3396- Hon. Gordon Lloyd, page 2 (C-704) is vested with the same discretion in the investment of its funds as is vested In the University of Texas Board of Re- gents in the investment of the funds entrusted to that Board. It is our further conclusion that the Board of Trustees is in no way limited in its d.nvestmentsto the specific stocks and bonds which the Board of Regents has determined proper invest- ments for the Permanent University Fund. In reaching our above conclusions, we must first observe the unambiguous guidelines provided in Section 62(a) of Article XVI of the Constitution of Texas, adopted in November, 1957, which reads in part as follows: "All funds provided from the compensation of such person or by the State of Texas for such Re- tirement, Disability and Death Compensation Fund, as are received by the Treasury of the St&e of Texas,,shall be invested in bonds of the United States, or in bonds issued by any agency of the United States Government, the payment of the orincical of and interest on which is guaranteed to meet the immediate payment of the amount likely to become due each year out of said Fund, such amount of funds to be kept on hand to be determined by the agency which may be provided by law to administer said Fund. Should the Legislature enact enabling laws in anticipation of the adoption of the Amendment, such legislation shall not be invalid by reason of its anticipatory character. As amended Nov. 4, 1958." (Emphasis added) Pursuant to the passage of the above constitutional amendment, the Legislature, by Article 6228(a), Vernon's Civil Statutes, named the Board of Trustees of the Employees Retire- ment System as the agency to make the investments and adminis- ter the funds. Said Article 6228(a) provides, in part, the following: -3397- , - Hon. Gordon Lloyd, page 3 (c-704) "Sec. 7.A. The State Board of Trustees ahall be the Trustees of the several funds as herein created by this Act.and shall have full power to invest and reinvest such funds subjectsto the following limita- tions and restrictions: All retirement funds as are received by the Treasury of the State of Texas as deposits from coMbutions of members or employer as herein provided, may be invested only in bonds and other evidences of indebtedness of the United States, and all other bonds or evidences of indebtedness which are guaranteed as to principal and interest by the United States; in bonds and other evidences of indebtedness, both general and special obliga- tions, of the State of Texas and any of its agencies; in bonds or other evidences of indebtedness of muni- cipal corporations or political subdivisions of the State of Texas both general and special obligations, which have been approved as to legality by,the Attor- ney General of the State of Texas; and in securities in which the State Permanent School Fund of the Univ- ersity of Texas may be invested under present or hereafter enacted laws. The State Board of Trustees shall have full power by proper resolution to hold, hny ase se pure ass n of the securities and investments in which any of the funds credited herein shall have been invested, as well as the proceeds of said investments and any moneys belonging to said funds, provided that any money on hand shall be subject to the State Deposi- tory Laws of Texas." (Emphasis added.) The delegation of such duties of trust and discretion In the investment of the funds into certain corporate stocks and bonds (within the limitations provided by law) is thus clearly vested in the Board of Trustees of the Employees Retire- ment System. No such authority is given, and no such dele- gation of those discretionary duti.8 of trust is made, to the separate agency, the Board of Regents of the University of Texas. By virtue of the provisions of Section 62(a) of Article XVI of the Constitution of Texas, that limitation provided by law in the discretionary investment of funds is set out in Section 11(a) of Article VII of the Constitution of Texas and reads as follows: -3398- Hon. Gordon Lloyd, pc,ge4 (c-704) “In addition to the bonds now enumerated in Section 11 of Article VII of the Constitution of the State of Texas, the Permanent University Fund may be invested in first lien real estate mort- gage securities guaranteed in any macner in whole by the.United SteWGovernment or any agency there- of and In such corporation bonds, preferred stocks and common stocks as the Board of Regents of the University of Texas may deem to be proper invest- ments’ for said fund; and the interest and divi- dends accruing from the securities listed in Section 11 and Section lla, except the portion thereof which is appropriated by the operation of Section 18 of Article VII for the payment of prin- cipal and Interest on bonds or notes issued there- under, shall be subject to appropriation by the Legislature to accomplish the purposes declared in Section 10 of Article VII of this Constitution. In making each and all of such investments said Board of Regents shall exercise the judgment and care under the circumstances then prevailing which men of ordinary prudence, discretion, and Intelligence exercise in the management of their own affairs not inkyregard to speculation but in regard to the permanent disposition of their funds, considering the probable income therefrom as well as the probable safety of their capital; provided, however, that not more than fifty per cent (50$) of said fund shall be invested at any given time in corporate stocks and bonds, nor shall more than one per cent (1s) of said fund be invest- ed in securities issued by any one (1) corpor- ation, nor shall more than five per cent (5%) of the voting stock of any one (1) corporation be owned; and provided, further, that stocks eligi- ble for purchase shall be restricted to stocks of companies incorporated within the United States which have paid dividends for ten (10) consecu- tive years or longer immediately prior to the date of purchase and which, except for bank stocks and Insurance stocks, are listed upon an exchange registered with the @curities and Exchange Com- mission or its successors. This amendment shall be self-enacting, and shall become effective up- on its adoption, provided, however, that the Legis- lature shall provide by law ,forfull disclosure of all details concerning the investments in cor- porate stocks and bonds and other investments auth- orized herein. Adopted Nov. 6, 1956. (Emphasis added.) -3399- . . Hon. Gordon Lloyd, page 5 (c-704) This same Section 11(a) of Article 'VII of the Con- stltut%on of Texas likewise sets forth the following invest- ment limitations and restrictions applicable to corporate securities which must b,eobserved by the Board of Trustees: 1. In making such investments said Board of Trustees "Shall exercise the judgment and care under the circumstances then prevailing which men of ordinary prudence, discretion, and intelligence exercise in the management of their own affairs not in regard to speculation but in rggard to the permanent disposition of their funds. (Prudent man's rule) 2. The Board of Trustees must 'consider the probable income therefrom as well as the probable safety of their capital". 3. It is provided further for the Board of Trustees "that not more than fifty per cent (5&l of said fund shall be invested at any given time in corporate stocks and bonds". 4. The Board of Trustees also is required to see that funds invested in corporate securities "shall be invested at any given time in corporate stocks and bonds, nor shall more than one er cent (1%) of said.fund be invested in securitiei issued by any one corporation". 5. The Board of Trustees is required to in- vest in such corporate securities and shall not ````~ rre than five per cent,(5$) of the voting f any one corporation be owned". 6. The Board of Trustees Is restricted to "stocks eligible for purchase shall be restricted to stock of companies incorporated within the, 'UnitedStates". 7. A further restriction on the Board of Trustees reouires that stocks cannot be pur- chased "unless the stocks purchased have paid dividends for ten consecutive years or longer ‘immediatelyprior to the date of purchase and which, except for bank stocks and insurame stocks, are li t d upon an exchange registered -he Securities and Exchange Commission or its successorsn. -3400- . . Bon. Gordon Lloyd, page 6 (C-704) It is, therefore, the opinion of this office that the language in Section 62(a) of Article XVI of the Constitu- tion of Texas and in the enabling legislation as provided in Article 6228(a) is legally sufficient and Intended to con- stitute the entire legal criteria and guidelinesgoverning the discretionary investment of the Employees aetirement Funds in corporate bonds and stocks. Furthermore, we are unable to find within either the Constitution or statute any intent that the Board of Regents' judgment and discretion in making in- vestments for the Permanent University Fund was to substitute for or govern over that judgment and discretion granted sepa- rately to the Board of Trustees in the investment of the Em- ployees Retirement Funds as contemplated by the Texas Con- stitution in Section 62(a) of Article XVI. On the contrary, we hold that the exercise of the duties of trust, judgment, care, and discretion of the Board of Trustees of the Employ- ees Retirement System of Texas is subject to the identical limitations and restrictions in the investment of the funds entrusted to it as apply to the University of Texas Board of Regents in carrying out their separate and distinct in- vestment functions and duties of trust under Section 11(a) of Article VII of the Constitution of Texas. In Attorney General's Opinion WW 548(195p), it was held that Section 11(a) of Article VII of the Texas Constitu- tion is to be applied to the investment of the Permanent Univ- ersity Funds in corporate stocks and bonds; and the Board of Regents msyinvest the funds in such securities as the Board may deem to be proper investments for said fund. That Opinion further concluded that this language extended to and was con- trolling in the investmentof Employees Retirement Funds. That language, however, does not fall within the limitations and restrictions provided in Section 11(a) of .IrticleVII of the Constitution of Texas but merely provides that the Board of Regents may exercise its discretion in selecting the secu- rities, provided they meet the requirements of Section 11(a) of Article VII of the Texas Constitution. It is our opinion that the Board of Trustees of the Employees Retirement System has this same discretion. To apply such meaning to ,Section 11s or Article VII of the Constitution of Texas as reasoned inOpInion WW 548 would, in effect, be substituting the judg- ment and discretion of the Board of Regents of the University of Texas for that of the Trustees of the Employees Retirement Fund. We understand that the Board of Regents of the Univ- ersity of Texas has the right to exercise its judglaentin what it %ay deem to be proper investments for said Iund- but only for the fund over'which it has the right to exercise col?trol. -3401- Hon. Gordon Lloyd, ‘page 7 (C-704) We therefore overrule Attorney Oeneral Opinions WW 548(1959) and ~*971(1960) to the extent that they are In conflict with this opinion. SUl4MRY. The investment,of .the Employees Retire- ment Funds in corporate securities’is subject to the discretion and.judgmeneof the Board of Trustees of the Employees Retirement System of Texas, and not that of the Board of Regents of the University of Texas.4subject, however, to the limitation and restrictions Imposed by Section 11(a) of Article VII of the Constitution of Texas. The Board of Trustees and the Board of Regents, as separate agencies, have the right to exercise independent discretion and judgment In the investment of their respective trust funds and are subject ti,the same limitation and restrictions governing their investments. Attorney ffeneralOpinions ww 548(m) and WW 971(1960) are overruled to the extent that they conflict with this opinion. Yours very truly, WAGGONER CARR Attorpq General of Texas By: JBB:mh Assistant Attorney General APPROVED : OPIBIOR COMKITTEE W. V. Geppert, Chairman Job Reeves J. C. Davis Malcolm Quick Roy Johnson APPROVED FOR THE ATTORNEY QBNBRAL By: T. B. Wright -3402-