Can the trustees of a Texas municipal firefighters' pension fund enter into securities lending agreements with a corporate borrower?

Texas AG Opinion JM-1210: Can a Firefighters' Pension Fund Enter a Securities Lending Agreement?

Plain-English summary

The Firemen's Pension Commissioner, on behalf of the City of Austin Fire Fighters Relief and Retirement Fund, asked whether the fund's trustees could enter into "securities lending agreements" with a corporate borrower. In these arrangements, the fund would transfer securities it already owned to a securities dealer, who would post collateral of equal or greater value; over the life of the agreement, the fund would remain entitled to the income from its loaned securities while the dealer received income from the collateral, and at the end the dealer would return equivalent securities to the fund. Proponents argued these agreements functioned much like the repurchase agreements the fund's governing statute already permitted.

The Attorney General concluded securities lending agreements were not authorized. Section 10(g) of the fund's governing statute lists twelve specific categories of investments the fund's surplus money may be placed in, from U.S. Treasury securities to specified categories of stocks and bonds, and securities lending agreements are not among them. The opinion explained these transactions do not constitute an investment in the securities loaned or the collateral received, but rather an investment in the borrower's contractual promise to deal with the loaned property in a particular way, a category of transaction the legislature had not included in the statute's list. Because the trustees lacked authority to enter these agreements, the opinion did not reach any of the requester's other questions.

Currency note

This opinion was issued in 1990. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Who this opinion affected (as of 1990)

Trustees of the City of Austin Fire Fighters Relief and Retirement Fund: The opinion concluded the trustees were not authorized, under section 10(g) of article 6243e.1 or any other law, to enter into securities lending agreements with a corporate borrower.

Other municipal firemen's pension funds governed by the same statute: Because the opinion turned on the statutory list of authorized investments in article 6243e.1, its reasoning would apply generally to any fund governed by that same provision considering a similar securities lending arrangement.

Common questions

Could a Texas municipal firefighters' pension fund lend its securities to a dealer for a fee under 1990 law?
No, according to the opinion. The Attorney General found the fund's governing statute lists twelve specific categories of authorized investments for surplus fund money, and securities lending agreements are not among them.

Why didn't the Attorney General treat a securities lending agreement the same as a repurchase agreement, which some other funds could use?
The opinion explained that a securities lending agreement is legally a different kind of transaction: it is an investment in the borrower's contractual obligation to deal with the fund's loaned securities in a specified way, not a direct investment in the securities or the collateral themselves, and the legislature had not listed this category among the fund's authorized investments.

Did the opinion answer the requester's other questions about how securities lending agreements would work?
No. Because the Attorney General concluded the trustees lacked authority to enter such agreements at all, the opinion did not reach the requester's remaining questions about their mechanics.

Background and statutory framework

Section 10(g) of article 6243e.1, V.T.C.S., the statute governing municipal firemen's relief and retirement funds like the City of Austin's, allows the fund's board of trustees to invest surplus money not needed for current demands in twelve enumerated categories: United States Treasury securities, U.S. government agency obligations, investment-grade corporate bonds, preferred corporate stocks, high-rated commercial paper, state and municipal bonds, insured savings and loan shares, insured bank deposits, short-term investment or mutual funds, FHA-insured mortgage debt, dividend-paying common stocks meeting specified ratings and listing requirements, and similarly qualifying foreign corporate stocks. Securities lending agreements do not appear among these categories.

The opinion characterized a securities lending agreement as economically similar to a repurchase agreement in that title does not pass to the borrower, but concluded both types of transactions share the same legal character for purposes of this statute: they are investments in the borrower's contractual promise regarding how it will handle the transferred property, not investments in the underlying securities themselves, citing the office's own earlier opinions JM-1201 (1990) and JM-23 (1983), which had reached similar conclusions about repurchase agreements and related instruments under comparable investment-authorization statutes. The opinion also noted a prior opinion, MW-506 (1982), which had similarly held a firemen's relief fund could not invest in a local partnership under the same kind of enumerated-list statute, reinforcing that the fund's investment authority is limited to what the statute specifically lists.

Citations

Statutes:

• V.T.C.S. art. 6243e.1, § 10(g) (list of authorized investments for municipal firemen's relief and retirement fund surplus money)
• Tex. Const. art. XVI, § 67(a)(1) (investment policy for public retirement systems)
• Tex. Const. art. XVI, § 67(a)(3) (investment policy for public retirement systems)
• 12 U.S.C. § 1701 (National Housing Act, referenced regarding FHA-insured mortgage debt as an authorized investment category)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1210
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1210.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

August 20, 1990

Ms. Helen Campbell
Commissioner
Office of Firemen's Pension Commissioner
3910 South IH 35, Suite 235
Austin, Texas 78704

Opinion No. JM-1210

Re: Authority of the City of Austin Fire Fighter's Relief and Retirement Fund to enter into "securities lending agreements" with a corporate borrower (RQ-1847)

Dear Ms. Campbell:

On behalf of the City of Austin Fire Fighters Relief and Retirement Fund you pose questions about the authority of the trustees of the fund to enter into "securities lending agreements." You advise:

Securities lending contracts are usually made between a corporate securities dealer, as 'borrower,' and a pension fund or other investor, as 'lender,' and involve securities already owned by the lender. Under the lending agreement, the lender agrees to deliver and transfer the securities to the borrower (so as to register the securities in the borrower's name as owner), and at the same time the borrower delivers to the lender collateral securities of equal or greater value than the borrowed securities. During the period of the 'loan,' these agreements provide that, as between the borrower and the lender, the lender remains the owner of the 'borrowed securities' (and the borrower remains 'owner' of the 'collateral' securities) with the lender entitled to receive (from the borrower) the amount of dividends, interest, or earnings attributable to the 'borrowed' securities, and the borrower is entitled to receive from the lender the dividends or earnings attributable to the 'collateral' securities. However, it is expressly provided in the agreement that the borrower is to be invested with the indicia of complete title to the borrowed securities, and has the right to sell or transfer the borrowed securities to others, so as to have, as to all third parties, ownership of the securities. At the conclusion of the period of the lending agreement, the borrower is required to 'return' the borrowed securities, or more precisely, to deliver to the lender the same amount and type of securities borrowed, but not necessarily the same certificates; and the lender is required to redeliver to the borrower the 'collateral' securities.

Briefs received in support of the power of the fund to enter such agreements characterize them as similar to "repurchase agreements." The only difference, it is said, between a securities lending agreement and such a purchase/sale agreement is that in a securities lending agreement, title to the securities does not pass to the borrower and title to the collateral securities does not pass to the board.

Such transactions do not involve investments by the lender in the securities loaned or in the collateral received; rather, they constitute investments in the contractual obligations of the borrower (to deal with the loaned property in a particular way). See Attorney General Opinion JM-1201 (1990); JM-23 (1983).

Your first question reads:

Are the trustees of the Fund authorized under subsection (g) of Section 10, or other law to enter into "securities lending agreements" with a corporate borrower? [of article 6243e.1, V.T.C.S.]

Section 10, subsection (g), provides:

(g) When, in the opinion of the board of trustees, there is on hand in the fire fighter's relief and retirement fund of any city under this Act a surplus over and above a reasonable and safe amount to take care of the current demands on the fund, the surplus, or so much of it as in the judgment of the board is deemed safe, may be invested in:

(1) United States Treasury notes, bonds, and bills;

(2) United States government agency obligations;

(3) corporate bonds rated 'A' or better by Moody's or Standard and Poor's bond ratings;

(4) preferred corporate stocks;

(5) commercial paper rated 'P2' or better by Standard and Poor's and 'A2' or better by Moody's bond ratings;

(6) state, county, or municipal bonds;

(7) shares or share accounts of savings and loan associations, if the shares or share accounts are insured by the Federal Savings and Loan Insurance Corporation;

(8) shares or share accounts of banks, if the shares or share accounts are insured by the Federal Deposit Insurance Corporation;

(9) short-term investment funds, mutual funds, or their equivalent, which may include investments in bank certificates of deposit;

(10) notes and other evidence of debt secured by mortgages insured or guaranteed by the Federal Housing Administration under the National Housing Act (12 U.S.C. Section 1701 et seq.);

(11) common stocks of companies incorporated within the United States that have paid cash dividends for at least five consecutive years immediately before the date of purchase, are rated 'B' or better by Standard and Poor's bond ratings or are equivalent, and are listed on an exchange registered with the Securities and Exchange Commission; and

(12) common stocks of foreign corporations that are designated in United States dollars and are registered with the Securities and Exchange Commission.

The legislature did not include "securities lending agreements" among the transactions the statute would sanction. See Attorney General Opinion MW-506 (1982) (firemen's relief fund may not be invested in local partnership under statute). See generally Tex. Const. art. XVI, § 67(a)(1), (a)(3) (investment policy for retirement systems and related programs).

In response to your first question, we advise that the trustees of the fund are not authorized by subsection (g) of section 10 of article 6243e.1, V.T.C.S., or any other law, to enter into "securities lending agreements" with a corporate borrower. In view of this answer, we do not reach your other questions.

SUMMARY

The trustees of the City of Austin Fire Fighters Relief and Retirement Fund are not authorized to enter into "securities lending agreements" with a corporate borrower.

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RENEA HICKS
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Rick Gilpin
Assistant Attorney General