Honorable

Executive June 7, 1966

Gordon ,H.Lloyd ODinion No. C-704 Secretary - Retirement System of Texas Re: Employees Capitol S~atlon Austin, Texas Whether the retirement funds of the EmployeesRetirement System may be invested in corporate stocks and bonds other than those ir which the Permanent University Fund of the University of Texas is invested. Dear Mr. Lloyd:

We are in receipt of your letter for an opinion in which the followingquestion isposed:

Is the Investment of Employees Retirement Fund in corporatebonds, preferred stocks and common stocks subject to the discretionof the Board of Trustees of the Employees Retirement System,within 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 investmentswithin its discretion,but only in the specific stocks and bonds which have been deemed,

proper investments for the Permanent University Fund by the Board of Regents of the University of Texas.

After carefully reviewing the Constitutionand statud~ tes of this state and previous Attorney General Opinions related to this question,we have come to the definite conclusion that the Investmentof the “p lcyees Retirement Funds, created by provisions of Section 62(a , Article XVI of the Texas Constitution, In such securities as corporate bonds and preferred and common stocks is subject to the discretionarydetermination of the Board of Trustees of the Employees Retirement System of Texas but within the same limitationsand restrictionsas are provided in Sectfon 11(a) of ArticleVII of the Texas Constitution. 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 investmentof its funds as is vested In the University of Texas Board of Regents in the investmentof the funds entrusted to that Board. It is our further conclusion that the Board of Trustees is in
no way limited in its d.nvestments to the specific stocks and bonds which the Board of Regents has determinedproper investments for the Permanent University Fund.

In reaching our above conclusions,we must first observe the unambiguousguidelinesprovided in Section 62(a) of Article XVI of the Constitutionof Texas, adopted in November, 1957,which reads in part as follows:

"All fundsprovided from the compensationof such person or by the State of Texas for such Retirement,Disability and Death Compensation Fund,
as are receivedby the Treasury of the St&e of Texas,,shallbe invested **in** bonds of the United States, or in bonds issuedby any agency of the United States Government, the payment of the orincical of and intereston which is guaranteed

to meet the immediatepayment of the amount likely to become due each year out of said Fund, such amount of funds to be kept on hand to be determinedby 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 shallnot be invalidby reason of its anticipatory character. As amendedNov. 4, 1958." (Emphasisadded)

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 Retirement System as the agency to make the investmentsand administer 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 subjects to the following limitations and restrictions:

All retirement funds as are receivedby 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 indebtednessof 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 obligations, of the State of Texas and any of its agencies; in bonds or other evidences of indebtednessof municipal corporationsor political subdivisionsof the State of Texas both general and special obligations, which have been approved as to legalityby,the Attorney General of the State of Texas; and in securities in which the State Permanent School Fund of the University of Texas may be investedunder present or hereafter enacted laws. The State Board of Trustees shall have fullpower by proper resolution to hold, pure ase se hny ass n of the securitiesand investments inwhich any of the funds credited herein shall have been invested,as well as the proceeds of said investmentsand any moneys belonging to said funds,provided that any money on hand shallbe subject to the State Depository Laws of Texas." (Emphasisadded.)

The delegation of such duties of trust and discretion In the investmentof the funds into certain corporate stocks and bonds (withinthe limitationsprovided by law) is thus clearly vested in the Board of Trustees of the Employees Retirement System. No such authority is given, and no such delegation of those discretionaryduti.8 of trust ismade, to the separateagency, the Board of Regents of the University of Texas.
By virtue of the provisions of Section 62(a) of Article XVI of the Constitutionof Texas, that limitation providedby law in the discretionary investmentof funds is set out in Section 11(a) of ArticleVII of the Constitutionof 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 Constitutionof the State of Texas, the PermanentUniversity Fund may be invested in first lien real estate mortgage securitiesguaranteed in any macner in whole by the.United SteWGovernment or any agency thereof and In such corporationbonds, preferred stocks and common stocks as the Board of Regents of the University of Texas may deem tobe proper investments’for said fund; and the interestand dividends accruing from the securities listed in Section 11 and Section lla, except the portion thereofwhich is appropriatedby the operation of Section 18 of ArticleVII for the payment of principal and Intereston bonds or notes issued thereunder, shall be subject to appropriationby 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 judgmentand
care under the circumstances thenprevailing which men of ordinaryprudence, discretion,and Intelligenceexercise in the management of their
own affairs not inky regard to speculationbut 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 fiftyper cent (50$) of said fund shallbe invested at any given time in corporate stocks and bonds, nor shall
more than one per cent (1s)of said fund be invested in securities issuedby any one (1) corporation, nor shallmore than fiveper cent (5%) of the voting stock of any one (1) corporationbe owned; and provided, further, that stocks eligible for purchase shallbe restricted to stocks of companies incorporatedwithin the United States which have paid dividends for ten (10)consecutive years or longer immediatelyprior to the date of purchase and which, except forbank stocks and Insurance stocks, are listedupon an exchange registeredwith the @curities and Exchange Commission or its successors. This amendment shall be self-enacting,and shallbecome effectiveupon its adoption, provided,however, that the Legislature shallprovide by law ,forfull disclosure of all details concerning the investments in corporate stocks and bonds and other investmentsauthorized herein. AdoptedNov. 6, 1956. (Emphasisadded.)
-3399-. .

Hon. Gordon Lloyd,page 5 (c-704)

This same Section 11(a) of Article 'VIIof the Constltut%on of Texas likewise sets forth the following investment limitationsand restrictionsapplicable to corporate securitieswhich must b,eobservedby the Board of Trustees:

1. In making such investments said Board of Trustees "Shall exercise the judgmentand care under the circumstances thenprevailing which men of ordinaryprudence, discretion,and intelligence exercise in the management of their own affairs not in regard to speculationbut in rggard to the permanent disposition of their funds. (Prudent man's rule)

2. The Board of Trusteesmust 'consider the probable income therefrom as well as the probable safety of their capital".

3. It is provided further for the Board of Trustees "thatnot more than fiftyper 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 "shallbe invested at any given time in corporate stocks and bonds, nor shallmore than one securitiei

er cent (1%)of said.fundbe invested in issued by any one corporation".

5. The Board of Trustees is required to invest in such corporate securitiesand shallnot

~~~~~ rre than fiveper cent,(5$) of the voting

f any one corporationbe owned".

6. The Board of Trustees Is restricted to "stocks eligible for purchase shallbe restricted to stock of companies incorporatedwithin the, 'UnitedStates".

7. A further restriction on the Board of Trustees reouires that stocks cannot be purchased "unless the stockspurchased have paid dividends for ten consecutiveyears or longer ‘immediately

prior 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 Commissionor 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 Constitution of Texas and in the enabling legislationas provided in Article 6228(a) is legally sufficientand Intended to constitute the entire legal criteriaand guidelines governing the discretionary investmentof the Employees aetirement Funds in corporatebonds and stocks. Furthermore,we are unable to findwithin either the Constitution or statute any intent that the Board of Regents' judgmentand discretion in making investments for the PermanentUniversity Fundwas to substitute for or govern over that judgmentand discretiongranted separately to the Board of Trustees in the investmentof the Employees Retirement Funds as contemplatedby the Texas Constitution 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 Employees Retirement System of Texas is subject to the identical limitationsand restrictions in the investmentof the funds entrusted to it as apply to the University of Texas Board of Regents in carrying out their separate and distinct investment functionsand duties of trust under Section 11(a) of Article VII of the Constitutionof Texas.

InAttorney General'sOpinion WW 548(195p), it was held that Section 11(a) of Article VII of the Texas Constitution is to be applied to the investmentof the Permanent University Funds in corporate stocks and bonds; and the Board of Regentsmsyinvest the funds in such securitiesas the Board may deem to be proper investments for said fund. That Opinion further concluded that this language extended to and was controlling in the investmentof EmployeesRetirement Funds. That language,however, does not fallwithin the limitations and restrictionsprovided in Section 11(a) of .Irticle VII of the Constitutionof Texas but merely provides that the Board of Regentsmay exercise its discretion in selecting the securities,provided they meet the requirementsof Section 11(a) of ArticleVII of the Texas Constitution. It is our opinion that the Board of Trustees of the EmployeesRetirement System has this same discretion. To apply such meaning to ,Section 11s or ArticleVII of the Constitutionof Texas as reasoned inOpInion WW 548 would, in effect,be substitutingthe judgment and discretionof 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 University of Texas has the right to exercise its judglaent in what it %ay deem to be proper investments for said Iundbut only for the fund over'which it has the right to exercise col?trol. -3401-Hon. 

### GordonLloyd,‘page7 (C-704)

We thereforeoverrule Attorney Oeneral Opinions WW 548(1959) and ~*971(1960) to the extent that they are In conflictwith this opinion.

SUl4MRY.

The 

### investment,

of 

### .theEmployees Retirement Funds in corporate securities’ is subject to the discretion 

### and.judgmene of the Board of Trustees of the EmployeesRetirement System of Texas, and not that of 

### theBoard of Regents of the University of Texas.4subject,however, to the limitation **and** restrictions Imposedby Section 11(a) **of** Article VII of the Constitution of Texas. The Board of Trustees and the Board of Regents, as separateagencies, have the right to exercise independentdiscretion and judgment In the investment **of** their respective trust funds and are subject ti,the same limitation and restrictions governing their investments.

Attorney ffeneral



### Opinionsww 548(m) and WW 971(1960) are overruled to the extent that they conflictwith this opinion.



### Yoursvery truly,

WAGGONER CARR Attorpq General of Texas

JBB:mh 

### By:

AssistantAttorney General

APPROVED: OPIBIOR COMKITTEE

W. V. Geppert, Chairman



### Job Reeves 

### J. C.Davis MalcolmQuick Roy Johnson

APPROVED 

### FORTHE ATTORNEY QBNBRAL By: T. B. Wright 

### -3402-