Could a Louisiana political subdivision invest public funds in a mutual fund organized as a Massachusetts business trust that holds Treasury repurchase agreements?

Plain-English summary

This opinion was issued in 1997, on behalf of the New Orleans Home Mortgage Authority. It addressed whether a political subdivision could invest in a particular mutual fund (the "Fund") that itself invested in repurchase agreements involving U.S. Treasury obligations, where the Fund was organized as a Massachusetts business trust. At the time, the AG concluded yes.

Currency note

This opinion was issued in 1997. 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.

The AG first flagged, as it did routinely in investment-related opinions, that it would not examine the specific fund prospectus or organizational documents, or opine on the wisdom of a particular investment; each political subdivision was expected to evaluate its own investment needs with its own attorney and financial advisor.

On the substantive question, LSA-R.S. 33:2955A(1)(c) at the time authorized political subdivisions to invest directly in repurchase agreements of federal book-entry securities meeting certain requirements. Because a unit holder in a Massachusetts business trust "owns an undivided beneficial interest in the underlying assets of the trust" (per a prior AG opinion, No. 88-534(A)), the AG treated an investment in such a trust as equivalent to a direct investment in the securities the trust owned, making it permissible.

The opinion also addressed a follow-up question about multi-class share structures. Some Massachusetts business trusts had more than one class of shares, differing only in dividend treatment (one class not subject to 12b-1 distribution fees). Reading prior opinion No. 88-546(A), which described a single-class trust where "each unit... represents an equal proportionate beneficial interest in the assets of the trust," the AG concluded that a political subdivision could invest in a multi-class trust too, as long as every class represented an equal proportionate interest in the trust's underlying assets, with the only permissible distinction being which classes bore 12b-1 fees against their dividends.

The request had also raised two other issues, which the requester advised had become moot, so the opinion did not address them.

Common questions

Q: Did this opinion evaluate whether the specific fund at issue was a good investment?
A: No. The AG explicitly declined to examine the fund's prospectus or organizational documents and stated that evaluating the suitability of a particular investment was outside its role, leaving that to the political subdivision and its own advisors.

Q: What made a multi-class mutual fund acceptable under this opinion's reasoning?
A: The classes had to represent an equal proportionate beneficial interest in the fund's underlying assets. A difference limited to which classes paid 12b-1 distribution fees against their dividends did not break that equality, according to the opinion.

Background and statutory framework (as it stood in 1997)

Political subdivision investment authority. LSA-R.S. 33:2955A(1)(c), as in effect in 1997, authorized political subdivisions to invest directly in repurchase agreements of federal book-entry-only securities meeting the requirements of LSA-R.S. 33:2955A(1)(a) or (b).

Massachusetts business trusts as investment vehicles. The opinion relied on two prior AG opinions: No. 88-534(A), establishing that investing in a Massachusetts business trust is tantamount to a direct investment in the trust's underlying securities, and No. 88-546(A), describing the single-class equal-proportionate-interest structure that the multi-class analysis in this opinion built on.

Richard P. Ieyoub was the Attorney General of Louisiana at the time this opinion issued.

Citations and references

Constitutional and statutory provisions (as they stood in 1997):
- La. Const. Art. VII, Sec. 14 (cited in the opinion's subject-matter heading)
- LSA-R.S. 33:2955 (political subdivision investment authority, including repurchase agreements)

Prior AG opinions referenced:
- La. Atty. Gen. Op. No. 88-534(A) (Massachusetts business trust investment treated as direct investment in underlying securities)
- La. Atty. Gen. Op. No. 88-546(A) (single-class trust, equal proportionate beneficial interest)

Source

• Landing page: https://www.ag.state.la.us/Opinions
• Original PDF: https://www.ag.state.la.us/Opinion/Download/97-0057

Original opinion text

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

DEPARTMENT OF JUSTICE
CIVIL DIVISION
BATON ROUGE
P.O. Box 94005
TEL.: (504) 342-7013
FAX: (504) 342-2090

RICHARD P. IEYOUB
ATTORNEY GENERAL
70804-9005

FEBRUARY 24, 1997

OPINION NUMBER 97-57

8-A Bond Issues
90-A-2 Public Funds

La. Const. Art. VII, Sec. 14; LSA-R.S. 33:2955

Mr. Kenneth A. Weiss
McGlinchey Stafford Lang
643 Magazine Street
New Orleans, Louisiana 70130-3477

Political subdivision can invest in mutual fund that invests in repurchase agreements involving U.S. Treasury obligations if mutual fund is organized as Massachusetts business trust.

Dear Mr. Weiss:

On behalf of the New Orleans Home Mortgage Authority, you have requested an opinion of this office regarding a particular investment made by the Authority, which investment shall be referred to herein as the "Fund".

Before turning to the issues raised by your request, I would like to reiterate herein our advice to you that it is beyond the purview of this office to examine a particular prospectus and/or the organizational documents of a particular fund, or to address the legality or advisability of a particular investment. As such, even though you included a Fund prospectus and agreement with your opinion request, we have not examined same. Furthermore, we feel compelled to state herein that every political subdivision should give consideration to its own unique investment needs in determining whether or not a particular investment is suitable, and should consult with its own attorney and/or financial advisor with regard thereto.

The first issue raised by your request is whether a political subdivision can invest in a mutual fund that invests in repurchase agreements involving U.S. Treasury obligations if the mutual fund is organized as a Massachusetts business trust. As you point out in your letter, LSA-R.S. 33:2955A(1)(c) authorizes political subdivisions to invest directly in direct security repurchase agreements of any federal book entry only security that meets the requirements of LSA-R.S. 33:2955A(1)(a) or (b). Furthermore, Atty. Gen. Op. No. 88-534(A) determined that an investment in a mutual fund organized as a Massachusetts business trust is tantamount to a direct investment in the securities owned by the mutual fund, because a unitholder in a Massachusetts business trust "...owns an undivided beneficial interest in the underlying assets of the trust...". It is the opinion of this office that it is permissable for a political subdivision to invest in a mutual fund that invests in repurchase agreements involving U.S. Treasury obligations if the mutual fund is organized as a Massachusetts business trust.

The second issue raised by your request is whether a political subdivision may invest in a mutual fund that is organized as a Massachusetts business trust with more than one class of shares.

Specifically, you advise that each unit of beneficial interest represents an equal proportionate beneficial interest in the mutual fund, and that the only variance among the classes is in the amount of dividends payable to each class, based upon the fact that one class of shares is not subject to 12b-1 distribution fees. It appears that your question arises in light of language contained in Atty. Gen. Op. No. 88-546(A), pertinently the following:

"The trust is established as a Massachusetts business trust in which the trust instrument establishing the fund authorizes the issuance of an unlimited number of units of beneficial interest of a single class, each of which represents an equal proportionate beneficial interest in the assets of the trust." (Emphasis added).

In our opinion, a political subdivision may invest in a mutual fund properly organized as a Massachusetts business trust, as long as all classes of the mutual fund represent an equal proportionate interest in the assets of the mutual fund, the only distinction among the classes being the fact that 12b-1 fees are charged against the dividends of some, but not all classes of the trust.

We note that your request also referred to two other issues, which you have advised are now moot, obviating our need to answer same. We hope the foregoing is of assistance.

Yours very truly,

RICHARD P. IEYOUB
Attorney General

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