August 20, 1990
Ms. Helen Campbell Opinion No. JM-1210
Commissioner
Office of Firemenrs Re: Authority of the City of
Pension Commissioner Austin Fire Fighter's Relief
3910 South IH 35, Suite 235 and Retirement Fund to enter
Austin, Texas 78704 into "securities lending
agreements" with a corporate
borrower (RQ-1847)
Dear Ms. Campbell:
On behalf of the City of Austin Fire Fighters Relief
and Retirement Fund you pose questions about the authority
of the trustees of the fund to enter into "securities
lending agreements." You advise:
P
Securities lending contracts are usually made
between a corporate securities dealer, as
'borrower,' and a pension fund or other
investor, as 'lender,' and involve securities
already owned by the lender. Under the
lending agreement, the lender agrees to
deliver and transfer the securities to the
borrower (so as to register the securities in
the borrower's name as owner), and at the
same time the borrower delivers to the lender
collateral securities of equal or greater
value than the borrowed securities. During
the period of the 'loan,' these agreements
provide that, as between the borrower and the
lender, the lender remains the owner of the
'borrowed securities' (and the borrower
remains 'owner' of the 'collateral' secur-
ities) with the lender entitled to receive
(from the borrower) the amount of dividends,
interest, or earnings attributable to the
'borrowed' securities, and the borrower is
entitled to receive from the lender the
dividends or earnings attributable to the
'collateral' securities. However, it '
expressly provided in the agreement that tkz
P borrower is to be invested with the indicia
P. 6402
Ms. Helen Campbell - Page 2 (JM-1210)
of complete title to the borrowed securities,
and has the right to sell or transfer the
borrowed securities to others, so as to have,
as to all third parties, ownership of the
securities. At the conclusion of the period
of the lending agreement, the borrower is
required to 'return' the borrowed securities,
or more precisely, to deliver to the lender
the same amount and type of securities
borrowed, but not necessarily the same
certificates: and the lender is required to
redeliver to the borrower the 'collateral'
securities.
Briefs received in support of the power of the fund to
enter such agreements characterize them as similar to
"repurchase agreements." The only difference, it is said,
between a securities lending agreement and such a purchase/
sale agreement is that in a securi.ties lending agreement,
title to the securities does not pass to the borrower and
title to the collateral securities does not pass to the
board.
Such transactions do not involve investments by the
lender in the securities loaned or in the collateral
received: rather, they constitute investments in the
contractual obligations of the borrower (to deal with the
loaned property in a particular way). m Attorney General
Opinion JM-1201 (1990); JM-23 (1983).
Your first question reads:
Are the trustees of the Fund authorized
under subsection (g) of Section 10, or
other law to enter into "securities
lending agreements" with a corporate
borrower? [of article 6243e.1, V.T.C.S.]
Section 10, subsection (g), provides:
ts) When, in the opinion of the board of
trustees, there is on hand in the fire
fighter's relief and retirement fund of any
city under this Act a surplus over and above
a reasonable and safe amount to take care of
the current demands on the fund, the surplus,
or so much of it as in the judgment of the
board is deemed safe, may be invested in:
P. 6403
Ms. Helen Campbell - Page 3 (JM-1210)
(1) United States Treasury notes, bonds,
and bills;
(2) United States government agency obli-
gations;
(3) corporate bonds rated 'A' or better
by Moody's or Standard and Poor's bond
ratings:
(4) preferred corporate stocks:
(5) commercial paper rated 'P2' or better
by Standard and Poor's and 'A2' or better by
Moody's bond ratings:
(6) state, county, or municipal bonds;
(7) shares or share accounts of savings
and loan associations, if the shares or share
accounts are insured by the Federal Savings
and Loan Insurance Corporation:
(8) shares or share accounts of banks, if
the shares or share accounts are insured by
the Federal Deposit Insurance' Corporation:
(9) short-term investment funds, mutual
funds, or their equivalent, which may include
investments in bank certificates of deposit:
(10) notes and other evidence of debt
secured by mortgages insured or guaranteed by
the Federal Housing Administration under the
National Housing Act (12 U.S.C. Section 1701
et sea.):
(11) common stocks of companies incorpo-
rated within the United States that have paid
cash dividends for at least five consecutive
years immediately before the date of pur-
chase, are rated 'B' or better by Standard
and Poor's bond ratings or are equivalent,
and are listed on an exchange registered with
the Securities and Exchange Commission: and
(12) common stocks of foreign corpora-
tions that are designated in United States
dollars and are registered with the
Securities and Exchange Commission.
p. 6404
Ms. Helen Campbell - Page 4 (JM-1210)
The legislature did not include "securities lending
agreements" among the transactions the statute would
sanction. See Attorney General Opinion MN-506 (1982)
(firemen's relief fund may not be invested in local
partnership under statute). See aen ralJ,y Tex. Const. art.
XVI, § 67(a) (11, (a)(3) (investmentepolicy for retirement
systems and related programs).
In response to your first question, we advise that the
trustees of the fund are not authorized by subsection (g) of
section 10 of article 6243e.1, V.T.C.S., or any other law,
to enter into "securities lending agreements" with a corpo-
rate borrower. In view of this answer, we do not reach your
other questions.
SUMMARY
The trustees of the City of Austin Fire
Fighters Relief and Retirement Fund are not
authorized to enter into "securities lending
agreements" with a corporate borrower.
JIM MATTOX
Attorney General of Texas
MARY KELLER
First Assistant Attorney General
MU MCCRHARY
Executive Assistant Attorney General
JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General
RENEA HICKS
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Rick Gilpin
Assistant Attorney General
p. 6405