STATE OF SOUTH DAKOTA
OFFICE OF THE ATTORNEY GENERAL

August 17, 1990

Dennis A. Groff
Pennington County State's Attorney
300 Kansas City Street
Rapid City, South Dakota 57701

OFFICIAL OPINION NO. 90-32

Public Entity Investment in Mutual Funds

Dear Mr. Groff:

You have requested an official opinion from this Office regarding the following factual situation:

FACTS:

Pennington County is seeking to invest its excess cash in qualifying investments under SDCL 4-5-6. During this process, the Pennington County Treasurer received a proposal from a trust department of a South Dakota financial institution to establish a trust account for the county and to provide cash management and investment services. The investment of Pennington County funds was proposed to be in an open-end no-load fund administered by an investment company registered under the Federal Investment Company Act of 1940 which would issue shares in a Massachusetts business trust registered under the Federal Securities Act of 1933. In addition, the trust department of the financial institution proposed a wide variety of financial services for which the financial institution would charge the county annual and monthly fees. The South Dakota Auditor General's Office became aware of proposal to the Pennington County Treasurer. The Auditor General's Office raised a question concerning whether the deposit of monies for investment into a mutual fund fell within the "no-load fund" provisions of SDCL 4-5-6 due to the fees charged by the trust department of the financial institution for services rendered to the county.

Based upon the above facts, you have asked the following question:

QUESTION:

What qualifies as a "no-load" investment company eligible for the investment of public funds under SDCL 4-5-6?

IN RE QUESTION:

SDCL 4-5-6 provides:

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).

It is clear, under the above provisions, that a local governmental entity can invest any public funds which will not be needed for current operating expenses in open-end, no-load mutual funds administered by an investment company registered under the Federal Investment Company Act of 1940. Provided the company's shares are registered under the Federal Securities Act of 1933 and provided the fund's investments are restricted to securities issued, or directly or indirectly guaranteed by, the United States government, and repurchase agreements are fully collateralized by such securities.

In AGR 90-23, I opined that a trust department of a South Dakota financial institution may purchase, on behalf of local governmental subdivisions, mutual fund shares that meet the investment restrictions contained in SDCL 4-5-6. The question you now present for my review is whether fees charged by a trust department of a South Dakota financial institution for services rendered constitute a "sales load," which would render an otherwise qualified mutual fund an unauthorized investment under SDCL 4-5-6. It is my opinion that the fees charged by a trust department of the South Dakota financial institution do not constitute a "sales load" under South Dakota law.

The Legislature did not define what constitutes a sales load in SDCL 4-5-6 or elsewhere. Federal law cited within the state statute does provide a definition. The Federal Investment Company Act of 1940, 15 U.S.C. Rule 80a-2 (35), defines sales load as:

"Sales load" means the difference between the price of a security to the public and that portion of the proceeds from its sale which is received and invested or held for investment by the issuer (or in the case of a unit investment trust, by the depositor or trustee), less any portion of such difference deducted for trustee's or custodian's fees, insurance premiums, issue taxes, or administrative expenses or fees which are not properly chargeable to sales or promotional activities. In the case of a periodic payment plan certificate, "sales load" includes the sales load on any investment company securities in which the payments made on such certificate are invested, as well as the sales load on the certificate itself.

It is my opinion that the Legislature's references in SDCL 4-5-6 to the Federal Investment Company Act of 1940 and Federal Securities Act of 1933 expresses the intent that the law's construction be guided by relevant federal law. In applying the above federal definition to your question, it is my opinion that in order to determine whether an investment is a "no-load" fund under South Dakota law, one must examine only the cost associated with the security itself and not fees for services provided by another entity.

In applying that definition of a sales load to the circumstances you present, it is my opinion that Pennington County may authorize a trust department of a South Dakota financial institution to utilize public funds in trust with it, that are not needed for current operating expenses of the county, to purchase shares of a qualified open-end no-load fund despite the fact that the financial institution may charge the county fees associated with its trustee services.

In addition, it is my opinion that the services provided by a trust department of a South Dakota financial institution are not required to be bid under SDCL ch. 5-18. The services rendered are professional services that are exempt from the governmental competitive bidding laws. Though a governmental entity is not required to bid for financial services, it does have a fiduciary responsibility to ensure that its citizens receive a fair rate of return on all invested funds. In order to make this determination, a governmental entity needs to look not only at the rate of return from a particular investment but also the cost associated with going through various financial intermediaries. Therefore, any investment decision should be made by a governmental entity only after careful review of the various investment options and their associated costs.

Sincerely,

ROGER A. TELLINGHUISEN
ATTORNEY GENERAL

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