Can the Texas Teacher Retirement System invest in or directly own real estate?

Plain-English summary

The Teacher Retirement System of Texas (the System) manages the pension money of the state's public school employees. Where it can put that money is not left to ordinary business judgment alone; it is fixed by the Texas Constitution. Senator John Whitmire, pointing to reports that the System had grown its real estate holdings in the United States and abroad, asked the Attorney General whether investing in or owning real estate, directly or indirectly, violated the Constitution or the Government Code, and if so, what remedy might apply.

The AG started with article XVI, section 67(a)(3) of the Constitution, which lets the trustees of a statewide retirement system invest the system's funds in "such securities as the board may consider prudent," subject to a prudent-person standard. The same provision lets the Legislature further restrict that discretion, and the Legislature did so in section 825.301(a) of the Government Code. That section defines "securities" broadly, incorporating the definitions in the Texas Securities Act and the federal Securities Act of 1933 and Securities Exchange Act of 1934, and adding limited-partnership interests and instruments used to manage currency or transaction risk. The AG traced the office's history on the question: a 1980 opinion (MW-152) had said real estate itself was not a permissible security; a 1999 opinion (JC-0043) overruled part of MW-152's reasoning but kept the conclusion that real estate is not a "security"; and a 2018 opinion (KP-0220) noted the 1999 statutory changes.

The bottom line the AG reached was twofold. Because no constitutional amendment has broadened the System's authority beyond "securities," buying realty directly remained unconstitutional. But the statutory definition of "securities" is wide enough to reach many real-estate-related investments, such as interests in publicly traded real estate investment trusts, real estate operating companies, and private real estate funds organized as limited partnerships, which can resemble investment contracts or qualify as limited-partner interests. Whether any particular product counted as a security depended on its structure and other facts the opinion process could not sort out, and the AG declined to discuss a remedy without a specific investment in front of it.

Currency note

This opinion was issued in 2020. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Note in particular that the opinion itself flagged that the Texas Securities Act was set to be recodified as Title 12 of the Government Code (sections 4001.001 through 4008.105) effective January 1, 2022, so the older article 581-4(A) citation is a historical reference. Verify current law before relying on any specific rule mentioned here.

What the opinion meant for those who asked

The opinion was written for Senator Whitmire and, through him, for the System's trustees and the public watching the System's real estate activity. For the System's board, the takeaway at the time was that its constitutional investment authority ran to "securities" as defined in section 825.301(a), not to realty owned outright, so a direct purchase of land or buildings would have been outside its authority. For anyone evaluating the System's existing holdings, the opinion explained that real-estate exposure achieved through REITs, real estate operating companies, or limited-partnership fund interests could fall within the statutory definition, while it stopped short of blessing or condemning any specific holding. The AG also made clear it could not identify a remedy in the abstract; that would have required a particular investment said to fall outside the definition. The State Securities Board and the System had both submitted briefing, which the opinion drew on to describe how "real estate securities" resemble investment contracts.

Common questions

Q: Did the AG say the Teacher Retirement System was acting illegally?
A: No. The opinion did not find any specific investment unlawful. It explained the legal standard, that investments must qualify as "securities," and said whether a particular real estate investment met that standard was a fact question it could not resolve in the opinion process.

Q: Why can't the System just buy real estate directly?
A: Because the Texas Constitution limits a statewide retirement system's investments to "securities," and the AG's office has long concluded that real estate itself is not a "security." Voters defeated a 1991 proposed amendment that would have allowed direct real estate investment.

Q: How can real estate investments still be allowed then?
A: Through securities tied to real estate. The opinion noted that interests in real estate investment trusts, real estate operating companies, and private real estate funds organized as limited partnerships can qualify as investment contracts or limited-partner interests, which fall within the statutory definition of "securities."

Q: What law sets these limits?
A: Article XVI, section 67(a)(3) of the Texas Constitution and section 825.301(a) of the Government Code, which defines "securities" by reference to the Texas Securities Act and the federal Securities Acts of 1933 and 1934.

Background and statutory framework

The constitutional anchor is article XVI, section 67, which authorizes the Legislature to create public retirement systems (subsection (a)(1)) and lets a statewide system's trustees invest in prudent "securities" while permitting the Legislature to further restrict that discretion (subsection (a)(3)). The Legislature exercised that power in section 825.301(a) of the Government Code, which defines "securities" by incorporating the Texas Securities Act (Tex. Rev. Civ. Stat. art. 581-4(A)), the federal Securities Act of 1933 (15 U.S.C. § 77b(a)(1)), and the federal Securities Exchange Act of 1934 (15 U.S.C. § 78c(a)(10)), and by listing limited-partnership interests, investment contracts, and risk-management instruments. The opinion situated its answer within the office's prior opinions MW-152 (1980), JC-0043 (1999), and KP-0220 (2018), cited Owens v. State for the principle that the Legislature may define constitutional terms within reason, and cited Life Partners, Inc. v. Arnold for the meaning of "investment contract" under the Texas Securities Act.

Citations and references

Constitutional and statutory provisions:

• Tex. Const. art. XVI, § 67 (public retirement systems)
• Tex. Gov't Code § 825.301 (Teacher Retirement System investments)
• Tex. Rev. Civ. Stat. art. 581-4(A) (Texas Securities Act; recodified as Tex. Gov't Code Title 12 effective Jan. 1, 2022)
• 15 U.S.C. § 77b(a)(1); 15 U.S.C. § 78c(a)(10) (federal securities-law definitions)

Cases:

• Owens v. State, 19 S.W.3d 480 (Tex. App.-Amarillo 2000, no pet.)
• Life Partners, Inc. v. Arnold, 464 S.W.3d 660 (Tex. 2015)

Related opinions:

• Tex. Att'y Gen. Op. Nos. MW-152 (1980), JC-0043 (1999), KP-0220 (2018)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0328
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2020/kp-0328.pdf

Original opinion text

August 25, 2020

The Honorable John Whitmire
Chair, Committee on Criminal Justice
Texas State Senate
Post Office Box 12068
Austin, Texas 78711-2068

Opinion No. KP-0328

Re: Authority of the Teacher Retirement System with respect to investments in or
ownership of real property (RQ-0334-KP)

Dear Senator Whitmire:

You tell us that recent news reports and presentations concerning the Teacher Retirement
System of Texas (the “System”) board of trustees indicate the System “has increased its real estate
holdings both in the United States and internationally.” 1 You ask whether “investments in or
ownership of real estate either directly or indirectly” by the System violate the Texas Constitution
or the Government Code. Request Letter at 2. If so, you ask what remedy would be appropriate
or available. Id.

Article XVI, subsection 67(a)(1) of the Texas Constitution authorizes the Legislature to
establish state and local retirement systems. See TEX. CONST. art. XVI, § 67(a)(1) (“The legislature
may enact general laws establishing systems and programs of retirement and related disability and
death benefits for public employees and officers.”). The provisions about which you ask—article
XVI, subsection 67(a)(3) of the Constitution and section 825.301 of the Government Code—
specify the System’s authority to invest its funds. See id. art. XVI, § 67(a)(3); TEX. GOV’T CODE
§ 825.301. The constitutional provision authorizes trustees of a statewide retirement system “to
invest the funds of the system in such securities as the board may consider prudent investments.”
TEX. CONST. art. XVI, § 67(a)(3) (emphasis added). Furthermore, as they make investments, the
trustees must

exercise the judgment and care under the circumstances then
prevailing that persons of ordinary prudence, discretion, and
intelligence exercise in the management of their own affairs, not in
regard to speculation, but in regard to the permanent disposition of

1
Letter from Honorable John Whitmire, Chair, Senate Comm. on Crim. Justice, to Honorable Ken Paxton, Tex. Att’y
Gen. at 1 (Feb. 27, 2020), https://www2.texasattorneygeneral.gov/opinions/opinions/51paxton/rq/2020/pdf/RQ0351.pdf
(Request Letter).

their funds, considering the probable income therefrom as well as
the probable safety of their capital.

Id. Thus, the Constitution limits the System’s investments to “securities,” and the System must
make the investments according to the “prudent person” standard. Id. Article XVI, subsection
67(a)(3) also authorizes the Legislature to “further restrict the investment discretion of a board,”
which the Legislature does in part through subsection 825.301(a) of the Government Code. Id.;
TEX. GOV’T CODE § 825.301(a) (governing the System’s investment of assets).

Before addressing subsection 825.301(a), we note that this office previously considered
whether the System could invest its funds in real estate. See generally Tex. Att’y Gen. Op. No.
MW-152 (1980) at 2–3. In the absence of state law at the time defining “securities” for purposes
of the System’s investment authority, Opinion MW-152 relied on the definition of “securities”
then current in the Texas Securities Act. Id. at 2. The opinion concluded that, while mortgage
certificates secured by real estate were permissible, investments in the realty itself were not
because real estate was not a security under that Act. 2 Id. In 1999, this office issued JC-0043,
which overruled MW-152 to the extent of its reliance on the Texas Securities Act. See Tex. Att’y
Gen. Op. No. JC-0043 (1999) at 13 (using instead an alternate statutory source to define
“securities”). Opinion JC-0043 noted that, despite its overruling of MW-152, it maintained its
position that “real estate itself is not a ‘security’ for purposes of article XVI, section 67(a)(3)”
because the alternate definition of “securities” on which JC-0043 relied did not incorporate it. Id.
at 21. 3

We turn now to subsection 825.301(a) of the Government Code. In 1999, shortly after the
issuance of JC-0043, the Legislature used its authority to delineate the System’s investment
discretion for purposes of article XVI, subsection 67(a)(3) by amending subsection 825.301(a) to
incorporate a definition of the term “security.” See Act of May 30, 1999, 76th Leg., R.S., ch. 1540,
§ 17, 1999 Tex. Gen. Laws 5282, 5287 (codified at TEX. GOV’T CODE § 825.301(a)); see also
Owens v. State, 19 S.W.3d 480, 484 (Tex. App.—Amarillo 2000, no pet.) (“The Legislature may
define terms which are not defined in the Constitution itself, provided its definitions constitute
reasonable interpretations of the constitutional language and do not do violence to the plain
meaning and intent of the constitutional framers.”). Subsection 825.301(a) now defines the term
“securities” in part to include “any investment instrument within the meaning of the term as
defined by” state and federal securities regulatory statutes: (1) the Texas Securities Act; (2) the
federal Securities Act of 1933; or (3) the federal Securities Exchange Act of 1934. TEX. GOV’T
CODE § 825.301(a). In addition, the term includes “any derivative instrument, and any other
instrument commonly used by institutional investors to manage institutional investment

In 1991, a proposed constitutional amendment that would have broadened the range of permissible
2

investments by a statewide retirement system beyond securities to effectively permit investing directly in real estate
was defeated by voters. See Tex. S.J. Res. 6, 72d Leg., R.S., 1991 Tex. Gen. Laws 3520 (proposing a constitutional
amendment relating to investments by statewide retirement systems).
3
In 2018, this office issued KP-0220 regarding the System’s authority to invest in certain life insurance
products. See Tex. Att’y Gen. Op. No. KP-0220 (2018). Noting the Legislature’s 1999 legislative action, as discussed
hereinafter, Opinion KP-0220 declared JC-0043 superseded to the extent inconsistent with state law. Id. at 2, n.5.

portfolios.” Id. Subsection 825.301(a) goes on to specify particular investments considered to be
securities. Id.

In the first of the cross-referenced provisions above, the Texas Securities Act defines
“security” or “securities” to

include any limited partner interest in a limited partnership, share,
stock, treasury stock, stock certificate under a voting trust
agreement, collateral trust certificate, equipment trust certificate,
preorganization certificate or receipt, subscription or reorganization
certificate, note, bond, debenture, mortgage certificate or other
evidence of indebtedness, any form of commercial paper, certificate
in or under a profit sharing or participation agreement, certificate or
any instrument representing any interest in or under an oil, gas or
mining lease, fee or title, or any certificate or instrument
representing or secured by an interest in any or all of the capital,
property, assets, profits or earnings of any company, investment
contract, or any other instrument commonly known as a security,
whether similar to those herein referred to or not.

TEX. REV. CIV. STAT. art. 581-4(A). 4 Next, under the federal Securities Act of 1933, a “security”

means any note, stock, treasury stock, security future, security-based
swap, bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement, collateral-
trust certificate, preorganization certificate or subscription,
transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in
oil, gas, or other mineral rights, any put, call, straddle, option, or
privilege on any security, certificate of deposit, or group or index of
securities (including any interest therein or based on the value
thereof), or any put, call, straddle, option, or privilege entered into
on a national securities exchange relating to foreign currency, or, in
general, any interest or instrument commonly known as a “security,”
or any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.

15 U.S.C. § 77b(a)(1). Finally, the federal Securities and Exchange Act of 1934 defines “security”
to mean
any note, stock, treasury stock, security future, security-based swap,
bond, debenture, certificate of interest or participation in any profit-

4
Effective January 1, 2022, the Texas Securities Act will be codified as Title 12 of the Government Code in
sections 4001.001–4008.105. See Act of May 21, 2019, 86th Leg., R.S., ch. 491, § 1.01, 2019 Tex. Sess. Law Serv.
1238, 1238–1307.

sharing agreement or in any oil, gas, or other mineral royalty or
lease, any collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, any put, call, straddle,
option, or privilege on any security, certificate of deposit, or group
or index of securities (including any interest therein or based on the
value thereof), or any put, call, straddle, option, or privilege entered
into on a national securities exchange relating to foreign currency,
or in general, any instrument commonly known as a “security”; or
any certificate of interest or participation in, temporary or interim
certificate for, receipt for, or warrant or right to subscribe to or
purchase, any of the foregoing; but shall not include currency or any
note, draft, bill of exchange, or banker’s acceptance which has a
maturity at the time of issuance of not exceeding nine months,
exclusive of days of grace, or any renewal thereof the maturity of
which is likewise limited.

Id. § 78c(a)(10). And in specifying particular investments “considered to be securities,” for
purposes of the System’s constitutional investment authority, subsection 825.301(a) identifies
“[a]n interest in a limited partnership or investment contract” and “[a]ny instrument or contract
intended to manage transaction or currency exchange risk in purchasing, selling, or holding
securities.” TEX. GOV’T CODE § 825.301(a). Thus, the Legislature defined the term “securities”
for purposes of the System’s constitutional investment authority broadly and comprehensively.

Since the time of Opinion MW-152’s analysis regarding whether the System possessed
authority to invest in real estate, however, no changes to the Texas Constitution have broadened
the investment authority of the System beyond “securities.” Thus, investments of System funds
directly in realty continue to be unconstitutional. Tex. Att’y Gen. Op. Nos. KP-0220 (2018) at 2,
n.5; JC-0043 (1999) at 21. But the Legislature’s broad delineation in subsection 825.301(a) of
what constitutes a “security” for purposes of the System’s investment authority includes some
elements that could potentially be associated with real estate. For example, each of the state and
federal securities regulatory statutes incorporated by reference in subsection 825.301(a) include
“investment contracts” in their definitions of “security.” See TEX. GOV’T CODE § 825.301(a); TEX.
REV. CIV. STAT. art. 581-4(A); 15 U.S.C. § 77b(a)(1); 15 U.S.C. § 78c(a)(10); see also Life
Partners, Inc. v. Arnold, 464 S.W.3d 660, 667 (Tex. 2015) (explaining the meaning of “investment
contract” for purposes of the Texas Securities Act). In briefing sent to this office, the Texas State
Securities Board (the “Board”) explains how certain securities known as “real estate securities”
resemble investment contracts:

[“Real estate securities”] generally consist of interests, either debt
or equity, in publicly traded real estate investment trusts . . . or real
estate related operating companies. In these cases, the securities
held by passive investors represent interests in the company that

owns and manages the real estate. As such, these securities resemble
investment contracts. 5

In addition, subsection 825.301(a) incorporates the Texas Securities Act definition of “security,”
which includes “any limited partner interest in a limited partnership.” TEX. GOV’T CODE
§ 825.301(a); TEX. REV. CIV. STAT. art. 581-4(A). The System tells us that “private real estate
funds are generally organized as limited partnerships” and describes its current investment
holdings in such limited partner interests, along with its application of investment contract analysis
under applicable caselaw “[w]hen appropriate.” 6

You do not specify a particular real estate investment of the System as the focus of your
inquiry. Investment vehicles are often complex and nuanced, and whether a particular investment
product is a security for purposes of the System’s investment authority “will depend on the
structure of the product and other fact-based inquiries that this office cannot undertake in the
opinion process.” Tex. Att’y Gen. Op. No. KP-0220 (2018) at 4. Nor can this office address a
remedy without a particular investment in mind. But to the extent any real estate investment of
the System does not qualify as a “security” pursuant to subsection 825.301(a) of the Government
Code, it is unconstitutional.

5
Letter from Ms. Marlene K. Sparkman, Gen. Counsel, Tex. State Sec. Bd., to Ms. Virginia K. Hoelscher,
Chair, Op. Comm. at 2 (Mar. 31, 2020) (on file with the Op. Comm.).
6
Letter from Ms. Carolina de Onis, Gen. Counsel, Teacher Ret. Sys., to Honorable Ken Paxton, Tex. Att’y
Gen., at 1–4 (Mar. 27, 2020) (on file with the Op. Comm.).

S U M M A R Y

Article XVI, subsection 67(a)(3) of the Texas Constitution
and section 825.301 of the Government Code specify the authority
of the Teacher Retirement System to invest its funds, which is
limited to items qualifying as “securities” under subsection
825.301(a). To the extent any real estate investment of the System
does not qualify as a “security” pursuant to subsection 825.301(a),
it is unconstitutional.

Very truly yours,

KEN PAXTON
Attorney General of Texas

JEFFREY C. MATEER
First Assistant Attorney General

RYAN L. BANGERT
Deputy First Assistant Attorney General

RYAN M. VASSAR
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

BECKY P. CASARES
Assistant Attorney General, Opinion Committee