South Dakota's state investment officer invests state retirement funds. SDCL 4-5-14 prohibits members of the State Investment Council from benefitting directly or indirectly from any transaction made by the state investment officer. Does that conflict-of-interest rule disqualify a state employee from serving on the council, since strong investment returns improve the retirement fund the employee is also a member of?

Plain-English summary

South Dakota's State Investment Council is the body that oversees how state retirement funds and other state investment funds are managed. The executive board of the Legislative Research Council appoints five of the eight voting members. SDCL 4-5-14 sets qualifications: members must have training and experience in investment or finance, must not be engaged in selling marketable or public securities to the state during their tenure, and must not "benefit directly or indirectly from any transaction made by the state investment officer."

Director Anderson asked AG Meierhenry whether that benefit restriction disqualified state employees from serving on the council. The reasoning would be: a state employee is also a member of the state retirement system (governed by SDCL chapter 3-12). Strong investment performance by the state investment officer would improve the retirement fund, which would (at least indirectly) benefit the employee. Does that "indirect benefit" trip SDCL 4-5-14?

Meierhenry said no. He read the conflict rule narrowly. In his words, the benefit restrictions in SDCL 4-5-14 "do not apply to individuals who may be benefited directly or indirectly through improvement of state retirement system," and the restriction is "to be read to only preclude individuals who could benefit directly or indirectly by the investment of the monies." In other words, a state employee whose retirement security rises and falls with the fund alongside every other member is not the kind of beneficiary the statute was meant to keep off the council.

Meierhenry closed with a procedural pointer. If the Legislative Research Council's executive board disagreed with his reading, the legislature was about to convene and could pass a bill specifically excluding state employees. That preserved the option to tighten the rule statutorily if there was political appetite for it.

Currency note

This opinion was issued in 1983. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. SDCL 4-5-13, 4-5-14, and chapter 3-12 governing the retirement system may have been amended since 1983. Modern questions about state investment council member qualifications and the boundary between direct and indirect benefits should be checked against the current statute before relying on this opinion.

What the opinion meant at the time

For the Legislative Research Council's executive board, the practical answer was that they could appoint state employees to the State Investment Council without violating SDCL 4-5-14. The qualifications were "training and experience in investment or finance" and the prohibition on selling securities to the state; both could be satisfied by a state employee with the right background.

For state employees considering accepting an appointment, the opinion removed the conflict-of-interest concern from the analysis. They could serve and continue to be retirement-system participants without falling afoul of SDCL 4-5-14. Other practical considerations (time commitment, supervisor approval for outside service, gift-and-disclosure rules) might still apply.

For the State Investment Council itself, the opinion confirmed that the institutional design contemplated some members with diverse state-government experience. The eight-voting-member structure (five appointed plus the state treasurer, the commissioner of school and public lands, and a SDRS board representative as ex officio members) already includes state-government insiders.

For taxpayers or watchdogs worried about self-dealing, the opinion was a reminder that the conflict rule has limits. Generalized benefit from good investment performance is not a conflict; transactional benefit from direct or indirect dealings with the investment officer is.

Common questions

Q: How is the State Investment Council structured?
A: Eight voting members. Five are appointed by the Legislative Research Council's executive board (up to three may hold public office, no more than four may be from the same political party). The state treasurer and commissioner of school and public lands serve ex officio. A representative of the SDRS board of trustees, appointed by the board for a one-year term, is also a voting member.

Q: What does the state investment officer do?
A: The investment officer (a position separate from the council) handles the actual investment of state funds, including the retirement system funds. The council's role is oversight, policy-setting, and supervision. The conflict rule attaches to council members because they could influence what the investment officer does.

Q: What kind of benefit would actually trigger SDCL 4-5-14?
A: The opinion gives the contours indirectly. A council member whose financial advisory firm has the state as a client would be conflicted. A council member with material personal holdings that could be affected by state investment decisions could be conflicted. The common thread is that the council member's personal economic outcomes are tied transactionally to particular investment decisions.

Q: Could a state employee on the council vote on retirement-fund policy?
A: The opinion did not address voting or recusal. It resolved only the threshold eligibility question: a state employee's membership in the retirement system does not, by itself, disqualify the employee from serving on the council under SDCL 4-5-14.

Q: What if a state employee was also a retiree drawing benefits?
A: The question Director Anderson posed concerned employees who are members of the fund. The opinion did not separately analyze retirees drawing benefits, so it does not directly answer that variation.

Q: Has the legislature ever responded to this opinion?
A: Meierhenry's closing line was an invitation to the legislature to disagree by legislation if it wanted. Whether the legislature acted is outside the scope of this opinion; modern users should check current SDCL 4-5-14 for any amendments specifically addressing state-employee eligibility.

Background and statutory framework

The State Investment Council oversees how state funds, including the retirement system funds, are invested, while the state investment officer carries out the actual investing. SDCL 4-5-14 sets the council's qualifications: training and experience in investment or finance, no sale of marketable or public securities to the state during tenure, no benefit "directly or indirectly from any transaction made by the state investment officer," and no party office.

The interpretive question was how far the "directly or indirectly benefit" language reaches. Meierhenry concluded it does not reach the diffuse gain a state employee shares with every other member of the retirement system; it reaches benefit tied to "the investment of the monies." The opinion stated that conclusion without working through a longer rationale.

The SDRS context matters too. SDCL chapter 3-12 governs the South Dakota Retirement System, which most state employees participate in. The retirement system's board of trustees has its own governance structure separate from the State Investment Council, though the boards interact via the SDRS-appointed council representative. A state employee on the State Investment Council would not normally be on the SDRS board too.

Citations and references

Statutes:

• SDCL 4-5-13 (state investment council composition)
• SDCL 4-5-14 (member qualifications and conflict rule)
• SDCL ch. 3-12 (South Dakota retirement system)

Source

• Landing page: https://atg.sd.gov/OurOffice/OfficialOpinions/opinionhtml.aspx?id=1175

Original opinion text

State Investment Council members qualifications

Dear Director Anderson:

You have requested an official opinion based upon the following factual situation.

FACTS:

Pursuant to SDCL 4-5-13, the executive board of the Legislative Research Council appoints five members of the state investment council. The qualifications of council members are delineated in SDCL 4-5-14. The section says, in part, that no member may 'benefit directly or indirectly from any transaction made by the state investment officer. . . .' In addition, state retirement funds are invested by the state investment officer and the earnings therefrom are available to vested state employees at time of retirement.

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

QUESTION:

Is a state employee eligible for appointment to the investment council in light of the fact that state retirement funds are invested by the council and a potential improvement in this specific fund may be a benefit to the state employees who are members of that fund?

IN RE QUESTION:

SDCL 4-5-13 provides:

The state investment council shall consist of eight voting members. Five members of the council shall be appointed by the executive board of the legislative research council and the executive board may appoint persons holding public office, appointed or elective, provided no more than three members of the state investment council, at any one time, shall hold public office. Action shall be by majority vote. Each of the members of the state investment council shall be appointed for a term of five years. No more than four appointed members may be members of the same political party. In addition to those members appointed by the executive board, the state treasurer and commissioner of school and public lands shall serve as ex officio voting members and a representative of the board of trustees of the South Dakota retirement system shall serve as ex officio voting member. The term of the representative of the board of trustees shall be one year and he shall be appointed by the board of trustees of the South Dakota retirement system.

SDCL 4-5-14 provides:

The members of the state investment council shall be qualified by training and experience in the field of investment or finance. During his tenure, a member of the council or his firm shall not be engaged in the sale of marketable or public securities to the state or to any fund thereof; nor shall any member benefit directly or indirectly from any transaction made by the state investment officer; nor shall he hold any office, position, or employment in any political party.

Based upon my reading of the above-stated sections, together with provisions under South Dakota retirement system, SDCL ch. 3-12, it is my opinion that the benefit restrictions under SDCL 4‑5‑14 do not apply to individuals who may be benefited directly or indirectly through improvement of state retirement system.

It is my opinion, that the restrictive provisions in SDCL 4-5-14 are to be read to only preclude individuals who could benefit directly or indirectly by the investment of the monies.

Finally, given the close proximity of the next legislative session, if the members of the executive board of the legislative research council disagree with my opinion, a bill can be introduced that specifically excludes state employees.

Respectfully submitted,

Mark V. Meierhenry

Attorney General