THE ATTORSEY GESERAL 

OF TEXAS 

P 

Honorable 0. H. "Ike** Harris Opinion No. JR-975 

Chairman 

Economic Development Committee Re: Whether public funds 

Texas State Senate may be invested in bankP. 0. Box 12068 oriented money market mutual 

Austin, Texas 78711 funds pursuant to article 

842a-2, V.T.C.S. (RQ-1345) 

Dear Senator Harris: 

Your letter requesting an opinion from this office 

reads in part: 

The 70th Legislature of Texas passed House 

Bill 1488 enacting The public Funds Investment Act of 1987, now codified in Article 

842a-2, Vernon's Annotated Texas Civil 

Statutes (the 'Act'), in order to grant 

public bodies an expansion of their investment authority. As a sponsor in the Senate 

of the companion bill to H.B. 1488 and as 

Chairman of the Committee on Economic Development which heard and passed such bill, I 

have received a number of inquiries from 

representatives of public bodies and financial institutions as to the proper interpretation of Section 2(b) of the Act which 

authorizes investment of bond proceeds in 

‘Common trust funds or COmDarable investment 

devices owned or administered bv banks 

domiciled in this State' (emphasis added) 

which consist solely of certain eligible 

obligations described in the Act ('Eligible 

Obligations'). (Emphasis in original.) 

. . . . 

In [Attorney General Opinion] JM-570, YOU 

held that traditional money-market mutual 

fund shares were not eligible for investment 

of city funds (even though the funds were 

restricted to holding federal securities) 

because no Texas statute authorized such 

P. 4960 
Honorable 0. H. "Ike" Harris - Page 2 (JM-975) 

investment. The question now is whether H.B. 

1488 succeeded in overcoming #at statutory 

deficiency if the mutual fund is an integral 

part of a Texas bank's management and investment services. Accordinalv. vour oninion is 

resnectfullv reauested as to whether a 

bank-oriented monev market mutual fund of the 

tvne described below constitutes a 'comnarable investment device owned or administered 

bv a bank domiciled in this State.' within 

the meanina of the Act. such that a DubliC 

bodv that otherwise comnlies with the recuirements of the Act mav lawfullv invest its 

bond nroceeds in such fund. (Emphasis 

added.) 

**Common trust funds . . . administered,by banks" refers 

to the classification of funds excluded from the definition 

of "investment company" by the Federal Investment Company 

Act of 3.940, referring to **any common trust fund or similar 

fund maintained by a bank exclusively for the collective 

investment and reinvestment of m‘oneys contributed thereto by 

the bank in its.capacity as a trustee, executor, administrator,~or guardian." 15 U.S.C. 5 8Oa-3(c)(3); ~99 Prop. Code 

§ 113.171; Shannon v. Frost Nat'1 Bank of San Antonio, 533 

S.W.Zd 389 (Tex. Civ. APP. - San Antonio 1975, writ ref'd 

n.r.e.). It is explained: 

Basically, the common trust funds maintained 

by banks are investment companies in purpose 

and mode of operation, and, without the exception in the 1940 Act, they would be regulated by the Act. 

T. Frankel, 1 The Regulation of Money Managers, ch. V(G) t 

5 10.2, at 422. 

As your letter requesting an opinion advises, the 

common trust fund typically sells units of participation in 

the fund, each representing an equal, undivided interest in 

its portfolio of securities, and, in the event of a dissolution of a common trust fund, the owners of units of participation will receive, pro rata, subject to the rights of 

creditors, the proceeds of such sale less the liabilities of 

the fund. As described, participation in such funds is 

similar to the participation of shareholders in corporations 

organized for private gain. In Presnall v. Stockyards Nat'1 

Bank the court said: 

It is generally agreed that shares in an 

incorporated company are the aliguot parts of 

P. 4961 
Honorable 0. H. "Ike" Harris - Page 3 (JM-975) 

the capital stock, and merely give to the 

owner a right to his share of the profits of 

the corporation while it is a going concern 

and to a share of the proceeds of its assets 

when sold for distribution in case of its 

dissolution and winding up. The shares do 

not give to their owners any right in the 

property itself of the company. That remains 

in the artificial body called the corporation. The right of the individual shareholder, according to the amount put into the 

fund of the corporation, is therefore of an 

incorporeal nature, though of value, not 

capable of manual delivery. 

151 S.W. 873, 076 (Tex. Civ. App. - Texarkana 1912), aff'd, 

194 S.W. 384 (Tex. 1917). 

Your specific question asks whether a bank-oriented 

money market mutual fund "of the type described below" constitutes a "comparable investment device" within the meaning 

of the public Funds Investment Act of 1987, and you draw 

several parallels between the particular fund you describe 

and a "common trust fund." If we assume the bank-oriented 

money market mutual fund to be "a comparable investment 

device," a question arises as to whether it is an "individual, association or corporation" to which political corporations and subdivisions are forbidden to lend credit or in 

which they cannot become stockholders. 

Article III, section 52(a), of the Texas Constitution 

reads: 

Sec. 52 (a) Except as otherwise provided 

by this section, the Legislature shall have 

no power to authorize any county, city, town 

or other political corporation or subdivision 

of the State to lend its credit or to grant 

public money or thing of value in aid of, or 

to any individual, association or corporation 

whatsoever, or to become a stockholder in 

such corporation, association or company. 

However, this section does not prohibit the 

use of public funds or credit for the payment 

of premiums on nonassessable life, health, or 

accident insurance policies and annuity contracts issued by a mutual insurance company 

authorized to do business in this State. 

P. 4962 
Honorable 0. H. "Ike" Harris - Page 4 (JM-975) 

None of the later-stated exceptions in section 52 embrace 

loans to, or investments in, private enterprises or their 

shares. 

If nunits of participation" in a mutual fund are the 

equivalent of shares of stock in a corporation, association 

or company within the contemplation of article III, section 

52, of the Texas Constitution, such investments cannot be 

authorized by the legislature. See Lewis v. Indeoendent 

School District of Austin, 161 S.W.2d 450, 452 (Tex. 1942). 

See also Citv of Tvler v. Texas EmDlOYerS' Ins. A ss'n, 288 

S.W. 409 (Tex. Comm'n App. 1926 judgment adopted), aff'd on 

rehearinq, 294 S.W. 195 (1927).1 

In Investment ComDanv Institute v. Camp, 401 U.S. 617 

(19711, the United States Supreme Court considered the plan 

of a national bank to go into the business of operating a 

mutual investment fund. As described by the court: 

Under the plan the bank customer tenders 

between $10,000 and 5500,000 to the bank, 

together with an authorization making the 

bank the customer's managing agent. The 

customer's investment is added to the fund, 

and a written evidence of participation is 

issued which exnresses in 'units of narticipation' the customer's DroDortionate interest 

in fund assets. Units of participation are 

freely redeemable, and transferable to anyone 

who has executed a managing agency agreement 

with the bank. The fund is registered as an 

1. Monies paid to banks for such investment purposes 

are not the equivalent of "deposits." In Lawson v. Baker, 

220 S.W. 260 (Tex. Civ. App. - Austin 1920, writ ref'd), the 

state depository statute was attacked on grounds that the 

placement of state funds on deposit with banks amounted to 

an unconstitutional loan or investment of public funds. The 

court concluded that deDOSitS authorized by the statute in 

question were not loans or investments. It reached that 

conclusion by reasoning with other jurisdictions that 

the general depositing of money in a bank 

depository, with or without interest, subject to tZ 

check or demand of the depositor, is not a loan or 

investment. 

u. at 269. 

P. 4963 
Honorable 0. H. "Ike" Harris - Page 5 (JM-975) 

investment company under the Investment 

Company Act of 1940. The bank is the underwriter of the fund's units of participation 

within the meaning of that Act. The fund has 

filed a registration statement pursuant to 

the Securities Act of 1933. The fund is 

supervised by a five-member committee elected 

annually by the participants pursuant to the 

Investment Company Act of 1940. The Securities and Exchange Commission has exempted the 

fund from the Investment Company Act to the 

extent that a majority of this committee 

be affiliated with the bank, 

may 

and it is 

expected that a majority always will be officers in the bank's trust and investment 

division. The actual custody and investment 

of fund assets is carried out by the bank as 

investment advisor pursuant to a management 

agreement. (Emphasis added.) 

401 U.S. 617, at 622-623. 

A federal law provided that a national bank "shall not 

underwrite any issue of securities or stock.tl 12 U.S.C. 

§ 24. After observing that a bank which operates an investment fund has a particular investment to sell, the court 

held that the operation of the investment fund involved a 

bank in the underwriting, issuing, selling and distributing 

of securities in violation of the federal law as it then 

read. BK!R, 401 U.S. 617, at 639. 

In the course of reaching its decision, the court 

noted: 

A IiIUtUal fund is an ODen-end investment comw. The Investment Company Act of 1940 

defines an investment company as an 'issuer' 

of 'any security' which 'is or holds itself 

out as being engaged primarily in 

the business of investing . . . in' securi- * ' 

ties .' 

80a-3 (i) ' (i) . 

15 U.S.C. 55 80a-2(a) (21), 

An open-end company is one 

'which is offering for sale or has outstanding any redeemable security of which it 

is the issuer.' 

investment 

15 U.S.C. 5 80a-5(a)(l). An 

comnanv also includes a \unit 

investment trust': an investment comoany 

which. among other thinas. 'is oraanized 

under a . . . contract of . . . aaencv . . 

and . . . issues only redeemable securities: 

each of which renresents an .undivided 

P. 4964 
Honorable 0. H. *Ike" Harris - Page 6 (JM-975) 

? 

interest in a unit of snecified securities 

.' 

Added.) 

15 U.S.C. 5 80a-4(2). (Emphasis 

&j at 625 n. 11. 

The characterization of a "unit of participation" by 

the United States Supreme Court as a "proportionate interest 

in the fund assets" could be fairly used as a description, 

also, of a share of stock. m Presnall v. Stockvards Nat'1 

&&, sutxq. Section 52 of article III of the Texas Constitution prevents a county, city or other municipal corporation from becoming Ita stockholderl' in a "corporation, 

association or company." It has been suggested, however, 

that units of participation in bank-oriented money market 

mutual funds are not the functional equivalents of shares of 

stock in a profit-seeking enterprise, and that holders of 

certificates evidencing ownership of such participatory 

interests would not be V1stockholdersV* within the meaning of 

the constitution. 

The argument suggests that units of participation in a 

portfolio consisting of governmental obligations are not 

equivalent to shares of stock within the constitutional 

prohibition because they are not shares of bank stock, they 

are not interests in a portfolio of securities consistinq of 

stock in a private corporation, association or company, and 

the fund itself is not a corporation. However, it must be 

admitted that such funds, though not organized as corporations, are private enterprises operated for profit or gain, 

that money invested in such an enterprise is put at risk in 

a common venture, that the securities in the portfolio of 

the fund (whether consisting of stocks of private corporations or of government bonds) are merely the assets of the 

fund and not themselves the enterprise, and that return on 

the investment depends upon how those assets are~~used by 

fund managers. 

In Attorney General Opinion JM-570 (1986), to which 

you refer, we advised that money market mutual funds, 

including those that deal only in government securities, are 

private enterprises operated for private gain. We also 

said: 

While it may be true as an abstract matter 

that an investor in such a fund owns an 

undivided pro rata interest in the portfolio 

of short-term obligations owned by the fund, 

it is true only in the same sense that an 

investor in the stock of a manufacturing 

concern can be said to own an undivided pro 

--. 

P. 4965 
Honorable 0. H. **Ikell Harris - Page 7 (JM-975) 

rata interest in the machinery, buildings, 

and other assets of the manufacturer. The 

investor can exercise no personal control 

over the portfolio of the fund or its disposition, and has no right to reduce to possession any part of it for safekeeping or for 

any other purpose. 

Attorney General Opinion JM-570 (1986), at 5. It was also 

noted there that an investor in such a fund assumes risks as 

to the fidelity, accountability and expertise of the fund 

managers as well as the financial stability and responsibility of the entities whose obligations are represented in the 

portfolio of the fund. Cf. Attorney General Opinion JM-23 

(1983) (repurchase agreements). 

Although we concluded in Attorney General Opinion 

JM-570 (1986) that statutes advanced there by proponents to 

support investment of public funds in the securities (including participatory **units@') of private entities did not 

provide that support, we did not suggest that statutes 

purporting to do so, if enacted, would face no constitutional hurdles. Attorney General Opinions 

(1988): JM-832 (198F; JM-545 (1986); JM-23 (1983)' 

x4-932 

- 

(1980) (constitutional issue not addressed). The ente$iii 

represented by a mutual fund such as you describe is one of 

individuals or entities 

private gain. 

associated for the purpose of 

Although the fund is not incorporated, it is 

an "association" or "company" within the meaning of the 

Texas Constitution. Mills v. State, 23 Tex. 295 (1859). 

In Mills v. State, m, the Texas Supreme Court had 

occasion to examine a provision of the 1845 Texas Constitution that provided, "No cornorate bodv shall hereafter be 

created, renewed, or extended, 

privileges." 

with banking or discounting 

(Emphasis added.) Tex. Const., art. VII, 5 30 

(1845). In 1840, the legislature enacted a law declaring 

"[t]hat any Cornoration. Comnanv. or Asssociation of 

individuals who shall use or exercise banking or discounting 

privileges in this State, . . . shall be deemed guilty." 

(Emphasis added.) An Act to Suppress Illegal Banking, Acts 

1840, ch. 156, g 1, at 234. The court said: 

We think that the statute of 1040, to 

suppress illegal banking, was enacted for the 

purpose of carrying into effect this 30th 

section of the General Provisions of the 

Constitution. And inasmuch as the exercise 

of bankina and discountina orivileses. by 

comnanies and associations of individuals. was a violation of the snirit of the 

P. 4966 
Honorable 0. H. "Ike" Harris - Page 0 (JM-975) 

constitution, iust as much as the exercise of 

the like nrivileaes bv a cornoration. the 

cornorate bodies. but also to comnanies, 

and associations of individum. (Emphasis 

added.) 

Id. at 302-303. The court said the word, Vompany,'* as 

used, applied to persons acting together for the prosecution 

of enterprises, and that the word, "association," was used 

as a synonym for Vompany." Those words signified, the 

court concluded, persons acting together, through officers 

or agents, in the prosecution of important enterprises. Id. 

at 303-304. 

Scarcely fifteen years later, using words given meaning 

by the Mills court, section 52 of article III of the 1876 

Constitution was written to deprive the legislature of power 

to authorize any political subdivision to become a "stockholder" in a *'corporation, association or company." In that 

era, nstock'* broadly referred to the capital of an enterprise. The 1859 edition of Bouvier's Law Dictionary defined 

"stock" as: 

The capital of a merchant, tradesman, or 

other person, including his merchandise, 

money and credits. In a narrower sense it 

signifies only the goods and wares he has for 

sale and traffic. The capital of corporations is also called stock: this is usually 

divided into shares of a definite value, as 

one hundred dollars, fifty dollars per share. 

2 Bouvier's Law Dictionary (8th ed. 1859), at 550. 

In the light of Mills v. State, the reference placed in 

the new constitution to ustockholders'O in associations -and 

companies (as well as to stockholders in corporations), 

exhibited a plain determination that its prohibition should 

reach participation in non-corporate, private enterprises of 

aggregated capital. That is the construction given the 

provision by the Texas courts. Lewis v. Indenendent School 

District of Austin, sunrq; WcCaleb v. Continental Casualty 

Co., 116 S.W.Zd 679 (Tex. 1938); Southern Casualty Co. v. 

Moruan, 12 S.W.2d 200 (Tex. Comm'n App. 1929, judgment 

adopted): Citv of Tvler v. Texas EmDlovers' Ins. Ass'n, 

sunra. 

The leading case, Lewis v. Indenendent School District 

of Austin m, was decided by the Supreme Court of 

Texas in i942 before the current final sentence was added to 

-, 

P. 4967 
Honorable 0. H. *'Ike" Harris - Page 9 (JM-975) 

article III, section 52(a) by amendment (November 4, 1986, 

allowing the purchase of certain mutual policies with 

public funds), but it did not break new ground. It followed 

a well marked furrow. 

In 1916, the Texas Supreme Court, in Middleton v. Texas 

Power & Liaht Co., 185 S.W. 556 (Tex. 1916), said that the 

Texas Employers Insurance Association (legislatively created 

in conjunction with the enactment of the Workmens' Compensation Law) was not a private corporation but, instead, was 

only an agency for proper administration of the law notwithstanding its designation by the legislature as a "corporation." Id. at 562. (It issued no stock or certificates of 

ownership and, in fact, was not l'ownedl* by anyone in the 

usual sense, but its "subscribers" aggregated their capital 

to operate it as a vehicle for their common advantage, 

sharing in its success to the extent it relieved them of 

obligations.) A decade later, the Commission of Appeals 

held in Citv of Tvler v. Texas EmDlOVSrS’ Ins. Ass'n, suora, 

that the ~~stockholder~~ provision of article III, section 52, 

prohibited the legislature from permitting political subdivisions to become members of the association. The court 

said the organization was 'a corporation engaged in the 

insurance business on the mutual plan, whose subscribers are 

stockholders in such corporation.' Id: at 412. For that 

reason, the court said, the constitution forbade cities and 

towns from "becoming stockholders therein." Id. 

On rehearing, the Commission of Appeals denied that it 

had overruled the Middleton case. The court said the point 

in the Middleton case was that the association was not a 

corporation within the meaning of the general law authorizing corporations, but that it did not follow that the 

association did not have elements of a private corporation, 

concluding: 

We have merely indicated ours opinion that the 

nature of such association, whether 'technicallv a cornoration or not,' is such that 

municipal corporations cannot become subscribers thereto without violating constitutional limitations. (Emphasis added.) 

CitV of Tvler v. Texas EmDlovers8 Ins. Ass'n, 294 S.W. 195, 

196. 

Later, in Southern Casualty Co. v. Moraan, sunra, the 

Commission of Appeals read the City of Tvler court to have 

held: 

p. 4968 
Honorable 0. H. aIke*' Harris - Page 10 (JM-975) 

[T]he Legislature is without power (section 

52, art. 3, Constitution) to authorize a 

municipal corporation of the kind involved~to 

become, in effect, a 'stockholder' in the 

Texas Employers' Insurance Association (substantially a 'mutual‘ company), and thus to 

'lend its credit,' etc., or to make the 'appropriation of public money' (held to be a 

gratuity) necessary to affecting insurance. 

(Emphasis added.) 

12 S.W.Zd 200. Later still, the Texas Supreme Court explained the Citv of Tvler holding. The court said in 

McCaleb v. Continental Casualty Co: 

It was also held that by virtue of section 52 

of article 3 of our Constitution, Vernon's 

Ann. St. Const. art. 3, 5 52, municipal 

corporations could not take out a policy of 

insurance in a mutual insurance- company which 

would require a city to become a member of or 

stockholder in such insurance company. 

(Emphasis added.) 

116 S.W.2d 679, 680 (Tex. 1938). 

Nevertheless, when the Lewis case came before the Court 

of Civil Appeals in 1941, the intermediate court was persuaded that the Citv of Tvler and Southern Casualty Co. 

holdings were merely "obiter" to be dismissed as not controlling. Lewis v. Indenendent School District, 147 S.W.2d 

298, 303 (Tex. Civ. App. - Beaumont 1941), rev'd, 161 S.W.Zd 

450 (Tex. 1942). The appeals court concluded that the 

school district in the Lewis case made ~g loan of its credit 

to the mutual insurance company from which it purchased 

workmen*9 compensation coverage, that the school district 

did nnf; become a stockholder in the insurance company or a 

subscriber to its capital stock by its purchase of the 

insurance policy, and it quoted from a North Carolina case 

to the effect that a YstockholdeY is the owner of shares in 

a corporation having capital stock represented by shares, 

and that a mutual company is without "stock" or "stockholders" . && at 302. 

When the Lewis case reached the Texas Supreme Court, 

the court characterized the question as whether the legislature could constitutionally authorize the school district, a 

political corporation, to purchase a policy of mutual insurance. Citing the Citv of Tvlel: case, among others, it said: 

P- 4969 
Honorable 0. H. "Ike" Harris - Page 11 (JM-975) 

This Court has held that Section 52 of 

Article 3 of our Constitution prohibits 

cities from becoming members of a mutual 

insurance association whose subscribers are 

stockholders in such company. 

Lewis, 161 S.W.Zd 450, 452. 

It held the school district to be prohibited by the Texas 

Constitution from taking a policy in the mutual company, 

saying: 

The lancuase used in the Constitution is 

clear and unambiauous. It soecificallv nrohibits the School District from becomina a 

stockholder in a corooration, association. or 

comnanv. Whether the public policy announced 

in the Constitution is wise or unwise is not 

for this Court to decide. As said by Judge 

Speer, in the case of City of Tyler v. Texas 

Employers Ins. Ass'n., Tex.Com.App., 294 S.W. 

195, 197: 

'It is not a question of expediency, for 

upon that point we might all agree, but expediency cannot substitute the judgment of the 

municipality for that of the judgment of the 

framers of the Constitution. public policy 

cannot be contrary to the express provisions 

of the Constitution. When that instrument 

speaks, the matter is indelibly settled, and 

its wisdom cannot be questioned.' (Emphasis 

added.) 

Id. at 452-453. 

We are persuaded that %nits of participationI' in a 

mutual fund operated as a private enterprise, whether 

"bank-oriented" or not, are the 

shares of stock within the 

functional equivalents of 

meaning of article III, section 

52 of the Texas Constitution. As a consequence, it is not 

within the power of the Texas Legislature to permit municipalities to invest public funds therein and to thereby 

become nstockholdersV' in an association or company within 

the meaning of that provision. 

In 1986, subsection (a) of article III, section 52 w.as 

amended to add a final sentence to the general prohibition: 

However, this section does not prohibit the 

use of public funds or credit for the payment 

P. 4970 
Honorable 0. H. "Ike" Harris - Page 12 (JM-975) 

of premiums on nonassessable life, health or 

accident insurance policies and annuity 

contracts issued by a mutual insurance 

company authorized to do business in this 

state. 

Although the 1986 amendment added a sentence which now 

expressly allows the use of public funds to purchase certain 

mutual policies, the amendment did not otherwise alter the 

scope of the constitutional prohibition, and we believe it 

continues to prohibit the investment of public funds in 

other private enterprises of aggregated capital, whatever 

might be their nomenclature. 

In recent years, the courts of other states have accorded a similar reading to prohibitory provisions found in 

their own constitutions. See In re J.iOn CaDital GrOUD 49 

Bankr. 163 (S.D.N.Y. 1985): Board of Trustees of the P;blic 

EmDlOVees' Retirement Fund of Indiana v. Pearson, 459 N.E.2d 

715 (Ind. 1984); Public Housina Administration v. Housinq 

Authoritv of Boaalusa, 137 So.Zd 315 (La. 1961). a. 

Louisiana State EmDlOVeSS’ Retirement Svstem v. State, 423 

So.2d 73 (La. Ct. App. - [let Cir.] 1982), writ denied, 427 

So.2d 1206 (1983). ,~. 

In our opinion, insofar as the Public Funds Investment 

Act of 1987 (article 842a-2, V.T.C.S.) purports to authorize 

political corporations and political subdivisions to invest 

public funds in bank-oriented money market mutual funds or 

securities of private entities, it conflicts with the constitutional provision. 

SUMMARY 

Insofar as article 842a-2, the Public 

Funds Investment Act of 1987, purports to 

authorize political corporations and political subdivisions to invest public funds in 

bank-oriented money market mutual funds or 

other securities of private entities, it 

conflicts with article III, section 52, of 

the Texas Constitution. 

I 

Attorney General of Texas ? 

P- 4971 
i. 

Honorable 0. H. "Ike" Harris - Page 13 (JM-975) 

MARY KELLER 

First Assistant Attorney General 

mu MCCREARY 

Executive Assistant Attorney General 

JUDGE ZOLLIE STEAKLEY 

Special Assistant Attorney General 

RICK GILPIN 

Chairman, Opinion Committee 

Prepared by Bruce Youngblood 

Assistant Attorney General 

P. 4972