October 8, 1990
Mr. Charles D. Travis Opinion No. J-M-1231
Executive Director
Employees Retirement System Re: Authority of the Employees
of Texas Retirement System of Texas to
P. 0. Box 13207 operate a securities lending
Austin, Texas 78711-3207 Program (RQ-1908)
Dear Mr. Travis:
You ask two questions regarding the participation of
the Employees Retirement System of Texas (hereinafter ERS)
in a securities lending program. The ERS is a statewide
retirement system established pursuant to constitutional
mandate. Tex. Const. art. XVI, 5 67(b)(2). The constitu-
tional provision requires the statutes governing each
statewide system to provide for a board of trustees to
administer the system and to invest the system's funds 'I
in
such securities as the board may consider prudent invest-
ments .. XL I 67(a)(3)-
Chapter 815 of the Government Code (hereinafter the
code) specifies the powers and duties of the ERS board and
provides for the management and operation of the system.
Sections 815.207, 815.301, 815.302, and 815.303 of the code
authorize the ERS to select one or more commercial banks,
depository trust companies, or other entities to serve as
custodian of all or part of the retirement system's assets.
Section 815.303(a) grants express authority to the EFG
to select one or more commercial institutions to serve as
custodians of the system's securities and to lend the
securities as the board of trustees determines. Section
815.303(b) prescr ibes the requirements for the entities
selected to engage in securities lending:
(a) The retirement system may. in the
exercise of its constitutional discretion to
manage the assets of the retirement system,
select, one or more commercial &I&, de-
pository trust comnanies, x other entities
to serve as custodian or custodians of
the system's securities and to lend the
p. 6548
ktr. Charles D. Travim - Pago 2~ (JM-1231)
m under rules adopted by the board
of trustees and as required by this section.
(b) To be eligible to lend securities
under this section, a bank or brokerage firm
must :
(1) be experienced in the operation
of a fully secured securities loan pro-
gram ;
(2) maintain adequate capital in the
prudent judgment of the retirement system
to assure the safety of the securities:
(3) execute an indemnification
agreement satisfactory in form and content
to the retirement system fully indem-
nifying the retirement system against loss
resulting from its operation of a secu-
rities loan program for the system's
securities: and
(4) reguiz; a;: securities broker or
dealer to lends securities
belonging to the retirement system to
deliver to and maintain with the custodian
collateral in the form of cash or United
States government securities in an amount
equal to not less than 100 percent of the
market value, from time to time, of the
loaned securities. (Emphasis added.)
Securities lending is a form of investment. A 1986
opinion issued by the attorney general of the state of
Washington described securities lending agreements as
follows:
Under the terms of a securities lending
agreement, securities are presently paid out
in exchange for the right to receive re-
payment of the securities, plus interest,
at some future date. Securities lending
agreements, as income-producing loans, are
therefore an investment of funds and may be
constitutionally entered on behalf of the
permanent common school fund, public pension
or retirement funds, and industrial insurance
funds.
p. 6549
Wr. Charles D. Travis - Page 3 '(JM-1231)
Gp. Wash. Att'y Gen. No. 5 (1986). See aenerally Attorney
General opinion JW-1210 (1990).
You first ask whether the ERS may operate an in-house
securities lending program using its own personnel when its
securities are held under a custodial agreement. Section
815.303 of the code authorizes securities lending through
eligible third party custodians, not by the ERS itself.
Further, the ERS could not satisfy the reguirements that a
bank or brokerage fund must satisfy in order to lend EPS's
securities. Gov't Code 0 815.303(b). The ERS, of course,
is to adopt rules governing the lending of its securities.
& 5 815.303(a).
Next you ask whether the ERS has the authority to
contract with an entity other than an existing custodian
for the purpose of operating a lending program for the
systemVs securities. Section 815.303(a) allows the ERS to
designate more than one entity to "serve as custodian or
custodians of the system’s securities and to lend the
securities." Consequently, we see no impediment to the
ERS*s naming an additional custodian to engage in securities
lending. Indeed, if existing custodians did not satisfy the
requirements of subsection (b) of section 815.303, the ERS
would have to appoint a new custodian in order to have its
securities lent.
There is no statutory authority for the
ERS to operate an in-house securities lending
progr- The ERS may select an eligible
institution other than an existing custodian
to operate a lending program for its
securities.
fJ ban%
Very truly y s,
A‘,
JIW WATTOX
Attorney General of Texas
WARY XELUS
First Assistant Attorney General
mu WccmARY
Executive Assistant Attorney General
JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General
p. 6550
Mr; Charles 0. Travfs~m+Page 4 (m-1231)
RENEA HICKS
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Karen C. Gladney
Assistant Attorney General
p. 6551