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
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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:
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, -
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.)
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. .
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.
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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
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Untitled Texas Attorney General Opinion
Combined Opinion