June 21, 1990
Richard A. Duncan, Director
Division of Banking
105 South Euclid
Pierre, South Dakota 57501
OFFICIAL OPINION NO. 90-23
Investment of public funds in Massachusetts business trust
Dear Mr. Duncan:
You have requested an official opinion from this office in regard to the following factual situation:
FACTS:
The trust department of a South Dakota financial institution is concerned as to whether it may invest public funds of a governmental subdivision in a mutual fund or a Massachusetts public trust whose assets are restricted to securities issued or directly or indirectly guaranteed by the United States government and repurchase agreements fully collateralized by such securities. A Massachusetts business trust by definition provides that property is conveyed to trustees and managed for the benefit of the owners who own the property in tenancy in common and hold certificates of ownership. The mutual funds would be no load funds administered by an investment company registered under the Federal Investment Company Act of 1940 and whose shares are registered under the Federal Securities Act of 1933.
Based upon the above facts, you have asked the following question:
May public funds of a governmental subdivision be invested in Massachusetts business trusts and mutual funds whose assets are restricted to securities issued or directly or indirectly guaranteed by the United States government, or repurchase agreements fully collateralized by such securities?
In AGR 87-06, I opined that under SDCL 4-5-6 as it then appeared, local governmental subdivisions could invest public funds only in securities issued by, or directly or indirectly guaranteed by, the United States government, in which they received an actual ownership interest. In that opinion I determined that political subdivisions could not invest in mutual funds or other types of equity funds where the entity did not acquire an actual ownership interest in the underlying qualified security.
In apparent response to this opinion, the Legislature in 1988 amended SDCL 4-5-6, to read:
Any public funds which will not be needed for current operating expenses may be invested in: (a) securities of the United States and securities guaranteed by the United States government either directly or indirectly including, without limitation, United States treasury bills, notes, bonds and other obligations issued or directly or indirectly guaranteed by the United States government, or otherwise directly or indirectly backed by the full faith and credit of the United States government; provided that, for other than permanent, trust, retirement and building funds, such securities shall either mature within eighteen months from the date of purchase or be redeemable at the option of the holder within eighteen months from the date of purchase; or (b) repurchase agreements fully collateralized by securities described in (a) and meeting the requirements of 4-5-9, if the repurchase agreements are entered into only with those primary reporting dealers that report to the federal reserve bank of New York and with the one hundred largest United States commercial banks, as measured by domestic deposits; or (c) in shares of an open-end, no load fund administered by an investment company registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933 and whose only investments are in securities described in (a) and repurchase agreements described in (b).
The South Dakota Legislature thereby authorized local governmental subdivisions to acquire repurchase agreements whose assets are restricted to fully collateralized securities that are issued or guaranteed directly or indirectly by the United States government and open-end, no load mutual funds administered by an investment company registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933 and whose investments are restricted to securities issued or directly or indirectly guaranteed by the United States government as well as repurchase agreements fully collateralized by such securities.
Given these amendments, it is my opinion that a trust department of a South Dakota financial institution may purchase on behalf of local government subdivisions mutual fund shares that meet the investment restrictions contained in SDCL 4-5-6. To the extent that AGR 87-06 conflicts with this opinion, it is overruled.
In addition, it is my opinion that a trust department of a South Dakota financial institution may purchase certificates of participation or ownership in Massachusetts business trusts whose trust assets are restricted to securities issued or directly or indirectly guaranteed by the United States government as well as repurchase agreements fully collateralized by such securities, even though such securities may not fall within the authorized mutual fund provision of SDCL 4-5-6. My opinion is based upon the fact that unlike an equity mutual fund, individuals who invest in a Massachusetts business trust actually own the underlying government securities and repurchase agreements. A no load fund administered by an investment company registered under the Federal Investment Company Act of 1940, which is issuing shares in a Massachusetts business trust registered under the Federal Securities Act of 1933, is also a qualified investment so long as the fund's assets meet the other restrictions of SDCL 4-5-6.
AGR 89-31 provides guidance in determining what governmental securities fall within the category of those issued by or directly or indirectly guaranteed by the United States government as provided by SDCL 4-5-6.
Respectfully submitted,
ROGER A. TELLINGHUISEN
ATTORNEY GENERAL
RAT/db
