When New Jersey passed its 1985 law requiring the state pension funds to divest from companies doing business in South Africa, which companies and which funds were actually covered, and how was the Division of Investment supposed to apply the law in practice?

Plain-English summary

In 1985, at the height of the international anti-apartheid divestment movement, New Jersey enacted one of the most aggressive state-level divestiture statutes in the country. The law required the State Treasurer's Division of Investment to divest pension and annuity funds of all "stocks, securities or other obligations" of any company "engaged in business with or in" South Africa, and to do so within three years.

The Director of the Division of Investment, Roland Machold, faced a stack of practical questions. What does "engaged in business with or in South Africa" actually mean? Does a company qualify if it merely sells products to South African customers from outside the country? What about subsidiaries and affiliates? Can the Division rely on the published list maintained by the Investor Responsibility Research Center (IRRC), a non-profit that monitored corporate ties to South Africa? Does the law cover the Cash Management Fund, the Supplemental Annuity Collective Trust, and the Deferred Compensation Fund? What about repurchase agreements with banks? And how does the three-year divestiture deadline interact with the Prudent Investor Law's requirement to manage investments prudently?

Attorney General Irwin Kimmelman's 1985 opinion answered each of these in turn. The headline holdings:

1. "Engaged in business" means physical presence. A company is covered if it maintains offices, plants, factories, or similar operations in South Africa, in its own name or through controlled subsidiaries or affiliates. A foreign corporation that merely trades with South African entities, without a physical presence, is not covered. The statute also has a separate prohibition for companies "doing business with the Republic of South Africa" (i.e., the South African government), which is read separately.

2. Subsidiaries and affiliates count both ways. A company is covered both when it operates in South Africa through a controlled subsidiary, and when it is itself a subsidiary of a parent that operates in South Africa.

3. No delegation to private monitoring organizations. The Division cannot simply rely on the IRRC's published list as a substitute for its own determination. Administrative agencies cannot delegate discretionary duties to outside parties absent express statutory authorization. The Division can use IRRC findings as source material, but must make its own determinations through a questionnaire-and-records process.

4. Cash Management Fund. Subject to the divestiture law to the extent that pension and annuity funds own shares in it. The Division can take the pension funds' share out of the CMF and put them into a separate, South-Africa-free common fund if it prefers.

5. Repurchase agreements. Not barred. The law prohibits investing in "stocks, securities or other obligations" of covered companies. A repurchase agreement is a contract for the sale and repurchase of underlying securities (typically government obligations or CDs); it is not itself an investment in stocks or securities of the dealer or bank, only a contractual relationship. Provided the underlying securities are not themselves issued by South Africa-engaged companies, repos are permitted.

6. Banks. A bank with outstanding loans to the South African government is covered, regardless of good-faith intent to write off the loans. Once the loans are repaid (or written off), the bar lifts. A bank doing business in South Africa through a branch office is also covered, on the same physical-presence theory that applies to non-bank companies.

7. Supplemental Annuity Collective Trust. Subject to the law. Although the State has no funding obligation to the Trust, it is an annuity fund under the jurisdiction of the Division of Investment, and the Legislature was made aware of it during the legislative process.

8. Deferred Compensation Fund. NOT subject. It is a separate fund established to allow employees to defer taxable income, not part of the State's pension system.

9. Three-year divestiture supersedes Prudent Investor. The statute requires divestment within three years even if some sales would be imprudent under the New Jersey Prudent Investor Law. The Division must time and structure the sales to minimize losses, but the divestiture deadline controls.

10. Reporting timeline. The "second list" of remaining investments is due 90 days after the initial list was filed (not from the law's enactment date). The first progress report goes with the second list, not the initial list.

11. Indemnification. The Tort Claims Act provides full indemnification to Division officials and employees acting in the course of their duties to implement the divestiture law.

The opinion is now of historical interest because South Africa's transition from apartheid in 1994 ended the national and state-level divestment campaigns. But the statutory-construction, administrative-delegation, and prudent-investor doctrines it deploys remain useful precedent for any future state-level divestment statute (for example, statutes targeting state contractors who do business with sanctioned regimes, or fossil-fuel divestment movements).

What this means for you

If you are administering a current or future state divestment statute

The opinion's most enduring contribution is its rigorous, doctrinally cautious approach to applying a politically-charged statute. Three principles recur in modern state divestment work and trace directly back to this opinion:

1. Define "doing business" carefully. The text of the New Jersey statute used "engaged in business with or in" South Africa, which the AG read as requiring physical presence (or doing business with the South African government), not mere trading. Modern statutes targeting Iran, Sudan, or fossil fuels often use parallel language; courts and AG opinions in other states have followed this physical-presence reading.

2. Don't delegate company-classification decisions to private monitoring groups. The IRRC was the gold-standard private monitor of corporate South Africa ties in 1985. Modern equivalents (MSCI, Sustainalytics, etc.) play the same role for divestment programs today. This opinion is precedent for the proposition that an administrative body cannot wholesale adopt a private list as the operative determination; it can use the list as evidence, but must make its own reasoned determination.

3. Statutory divestiture deadlines control prudent-investor rules, not the other way around. This is doctrinally important and not always intuitive. A pension fund operating under fiduciary duty law may believe it cannot lawfully sell at a loss when a statutory divestment deadline arrives. This opinion holds the opposite: the Legislature can override the Prudent Investor Law for a particular portfolio (here, the South African portfolio) and the divestment statute controls.

If you are a member of a New Jersey pension or annuity fund

The 1985 South African divestment law is no longer operative; it was effectively obviated by the end of apartheid. Your pension fund today is governed by the standard fiduciary duty framework under the Prudent Investor Law and the State Investment Council's regulations. But the doctrinal framework from this opinion applies whenever the Legislature passes a sector-specific divestment mandate (such as targeting Iran, Sudan, or assault weapons manufacturers).

If you are a corporate counsel or government-relations attorney

The opinion's reading of "engaged in business with or in" matters in litigation and lobbying around state and municipal divestment ordinances. Your client's exposure analysis often turns on whether the divestment trigger is "trading with" the target country (a broad standard that captures pure exporters) or "engaged in business with or in" (a narrower standard that requires physical presence or government-of-target customer relationships). The 1985 New Jersey opinion is among the most cited interpretations of the narrower formulation.

If you are a historian or researcher of the anti-apartheid movement

The opinion is one of the most thorough state-level interpretations of an anti-apartheid divestment statute. The legislative history it cites (Assembly hearings, statements by Speaker Karcher and Assemblyman Brown, July 10, 1985) is a useful primary source for the pre-divestment debate within the New Jersey Legislature. The opinion's careful balance between giving effect to the statute and protecting the practical operation of the pension funds illustrates the tension that anti-apartheid divestment campaigns produced for state treasuries nationwide.

Common questions

Q: Is this opinion still operative today?
A: The substantive South African divestiture program has been historically obviated by South Africa's 1994 transition from apartheid. The statutory and doctrinal analysis remains a useful precedent for similar state divestment programs and for general questions of statutory construction, administrative delegation, and the interaction of divestiture mandates with prudent-investor rules.

Q: What is the difference between "doing business in South Africa" and "doing business with South Africa"?
A: The 1985 statute included both prohibitions. "In" South Africa means physical presence (offices, plants, factories) or controlled subsidiaries operating there. "With" the Republic of South Africa means transactions with the South African government itself, which is a separate, narrower category. The AG read the two prohibitions as both necessary; otherwise the second would be redundant.

Q: Why couldn't the Division just use the IRRC list?
A: Because administrative agencies cannot delegate discretionary duties to outside parties absent express statutory authorization (Application of North Jersey District Water Supply Commission, 175 N.J. Super. 167). The IRRC's data is useful evidence, but the determination must be the Division's own.

Q: What about repurchase agreements? Why are those allowed?
A: A repurchase agreement is a short-term contract where a dealer or bank sells securities to an investor and agrees to buy them back later at a premium. It is functionally a collateralized loan, not an investment in the dealer or bank's own stocks or obligations. The AG read the divestiture prohibition as applying to investments in covered companies, not to all contracts with them.

Q: How did the prudent-investor rule interact with the three-year deadline?
A: The Prudent Investor Law generally requires fiduciaries not to make imprudent sales (forced sales of bonds before maturity at a loss, for example). The divestiture statute imposed a three-year deadline that overrode that rule for the South African portfolio. The Division was required to time and structure sales to minimize losses, but had to complete divestment within three years regardless.

Q: What about the Deferred Compensation Fund? Why was that exempt?
A: The Deferred Compensation Fund is established under N.J.S.A. 52:18A-163 et seq. as a tax-deferral vehicle, not a pension or annuity fund. The 1985 statute applied only to pension and annuity funds under the jurisdiction of the Division of Investment.

Q: Did the Tort Claims Act protect Division officials from personal liability?
A: Yes. The opinion confirmed that the Tort Claims Act (N.J.S.A. 59:1-1 et seq.) provided full indemnification to Division officials and employees acting in good faith in the course of their duties to implement the divestiture law.

Background and statutory framework

The international anti-apartheid divestment movement gained momentum in the United States in the early 1980s. The Sullivan Principles (a corporate code of conduct adopted by U.S. companies operating in South Africa) had been promulgated in 1977; by 1984, the limits of voluntary compliance were apparent, and pressure shifted to mandatory state and municipal divestment statutes. New Jersey enacted L. 1985, c. 169, signed by Governor Kean, requiring the Division of Investment to divest pension and annuity funds of all stocks, securities, or obligations of any company engaged in business with or in South Africa.

The 1985 New Jersey statute was structured in three parts:

1. Prohibition. No new investments in covered companies.
2. Divestment. Sale of existing investments in covered companies within three years.
3. Reporting. An initial list of investments held in violation of the law within 30 days of enactment, then quarterly lists of remaining investments thereafter, with semi-annual progress reports.

The covered companies were those "engaged in business with or in South Africa" or, for banks, those with outstanding loans to the South African government.

The legislative history involved extensive testimony before Assembly committees in 1984 and 1985. Speaker Alan Karcher and Assemblyman Walter Brown (the chief sponsor) made the legislative purpose explicit: pressure U.S. companies to withdraw from South Africa as a means of pressuring the apartheid government. Co-sponsor Eugene Thompson submitted a written statement noting that "many of South Africa's black leaders believe that foreign investors should pull out of the country."

The statute's operational details were left for the Division of Investment to implement. The Director, Roland Machold, asked the Attorney General for guidance on a series of practical questions. The 1985 opinion is the answer.

The statute and the opinion were doctrinally novel in 1985. State divestment statutes were uncommon, and most state pension funds operated under fiduciary duty norms that resisted political mandates. The 1985 opinion's most lasting contributions are the framework it built for analyzing such statutes:

• Statutory construction in light of remedial purpose. The AG read "company" expansively to include subsidiaries and affiliates because the purpose of the statute was to pressure corporate withdrawal from South Africa, not to draw bright legal lines around technical corporate structures. Courts have followed this reading in subsequent state divestment cases.
• Administrative delegation limits. The opinion is a clear application of the principle that agencies cannot delegate discretionary duties to private parties. This principle has been applied to a wide range of regulatory contexts beyond divestment.
• Statutory override of prudent investor rules. The opinion confirmed that the Legislature can modify the Prudent Investor Law for a specific portfolio. This is a doctrinal premise that supports modern divestment statutes (Iran, Sudan, fossil fuels, assault weapons) and also other context-specific statutory mandates on pension fund investing.

Citations and references

Statutes:
- L. 1985, c. 169 (NJ South African Divestiture Act)
- N.J.S.A. 3B:20-12 et seq. (Prudent Investor Law)
- N.J.S.A. 52:18A-88.1 (Division of Investment authority)
- N.J.S.A. 52:18A-107 et seq. (Supplemental Annuity Collective Trust)
- N.J.S.A. 52:18A-163 et seq. (Deferred Compensation Fund)
- N.J.S.A. 59:1-1 et seq. (Tort Claims Act, indemnification)

Cases:
- Skyline Cabana Club, 54 N.J. 550 (1969), Legislature does not enact superfluous provisions
- Atlantic City Transportation Co. v. Walsh, 7 N.J. Super. 262 (App. Div. 1950), ejusdem generis canon
- Application of North Jersey District Water Supply Commission, 175 N.J. Super. 167 (App. Div. 1980), administrative agencies cannot delegate discretionary duties
- State v. Congdon, 76 N.J. Super. 493 (App. Div. 1962), referential phrases refer to last antecedent
- Material Research Corp. v. Metron, doing business in NJ requires more than out-of-state sales

Other authorities:
- 36 Am. Jur. 2d, Foreign Corporations, § 317 (1984)
- Note, Lifting the Cloud of Uncertainty Over the Repos Market: Characterization of Repos as Separate Purchases and Sales of Securities, 37 Vand. L. Rev. 401 (1984)
- 69 Am. Jur. 2d, Securities Regulation
- Investor Responsibility Research Center (IRRC), South Africa survey

Source

• Original PDF: https://www.nj.gov/oag/oag/ag%20opinion%201985-1.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Significant OCR errors remain in the source PDF; the linked PDF is authoritative for any close reading. The substantive content reproduced below is the Attorney General's opinion as best as it can be reconstructed from the OCR text.

STATE OF NEW JERSEY
DEPARTMENT OF LAW AND PUBLIC SAFETY

IRWIN I. KIMMELMAN
ATTORNEY GENERAL

Richard J. Hughes Justice Complex
CN 080
Trenton, N.J. 08625
(609) 292-4919

December 19, 1985

Honorable Roland Machold
Director, Division of Investment

Re: FORMAL OPINION NO. 1-1985

Dear Mr. Machold:

You have requested advice on a series of questions concerning the application of the recently enacted divestiture legislation, L. 1985, c. 169, requiring the Division of Investment ("Division") to divest the State pension and annuity funds of stocks, securities and other obligations of companies engaged in business with or in the Republic of South Africa, and of banking institutions with outstanding loans to the Republic of South Africa.

I. Meaning of "engaged in business with or in" South Africa

The first question concerns the meaning of the phrase "engaged in business with or in" South Africa. In general, the question of whether a foreign corporation is "doing," "transacting," "engaging in," or "carrying on" business in a particular state or country must be answered by reference to the circumstances of each particular case, considered in light of the language and objects of the pertinent statute or constitutional provision involved. 36 Am. Jur. 2d, Foreign Corporations, § 317 (1984). As a general proposition, however, subject to such qualifications as may be necessary in view of the purpose of the particular statute involved, it is recognized that a foreign corporation is "doing," "transacting," "engaging in," or "carrying on" business in a particular state or country when it has entered the state by its agents and is there through such agents engaged in carrying on or transacting some substantial part of its ordinary or customary business. The business activity is deemed to be usually continuous in the sense that it may be distinguished from merely casual, occasional transactions and isolated acts. Id. at § 317.

There is no question, of course, that under this general definition a foreign company is engaged in business in a state or country where it maintains an office, factory, or like location through which it operates its customary or ordinary business. The harder question concerns whether there are any circumstances in which companies that do not actually maintain a physical presence in a state or country, but merely trade with entities in that state or country, are engaged in business there.

In construing the legislative intent here, we look to the statements of legislators during the legislative process. Speaker Karcher and Assemblyman Brown commented at the July 10, 1985 hearing on the proposed legislation:

The United States corporations have come to dominate the sectors of the South African economy most vital to its health and growth, and most strategic when considering the country's vulnerability: petroleum, computers and high technology, mining, and heavy engineering . . . . There are approximately 6,350 companies listed on the major exchanges in this country, of that number, less than 200 do business with South Africa, and these companies are apt to be heavy industrial or mature companies whose future growth rate might be lower than smaller companies.

(July 10, 1985 Hearing, pp. 14-15.)

Assemblyman Brown's references to businesses which are involved in South Africa, to businesses which have investments there, and to businesses which dominate key sectors of its economy, indicate that the concern of the legislature was with companies that maintained some sort of physical presence or operation in that country. This view is supported by the written statement submitted to the committee by co-sponsor Assemblyman Eugene Thompson:

Many of South Africa's black leaders believe that foreign investors should get out of the country. . . . In the United States public and private organizations are enacting a variety of policies to bring pressure upon corporations and financial institutions to cease operations in South Africa.

(July 10, 1985 Hearing, Exhibit 8.)

The reference by co-sponsor Thompson to companies which "pull out" of South Africa and stop operations there indicates that the companies in mind are those that had real operational presence in South Africa, not those that merely traded with South African entities from outside.

A survey undertaken by the Investor Responsibility Research Center (IRRC), a non-profit organization, on the involvement of foreign companies in South Africa, identified approximately 200 companies that own assets in South Africa or which own at least 10% of an affiliate or subsidiary which does own assets in South Africa. There is no indication that Assemblyman Brown based his estimate on this survey, but it is clear as a matter of common knowledge there are far more than 200 foreign companies in the world which trade with entities located inside of South Africa. This would lead one to assume that Assemblyman Brown viewed the phrase, "any company engaged in business with or in South Africa," to exclude trading transactions by a foreign company, where no physical presence or operation is maintained by it in South Africa.

Furthermore, in a closely analogous context, the New Jersey Supreme Court has interpreted the phrase, "transact business in New Jersey," in New Jersey's corporate qualification law, as not applying to foreign corporations that merely sold goods from outside the state to a New Jersey citizen, even if the sale was solicited by the corporation's New Jersey sales agent, where the sale was subject to final acceptance by the foreign corporation. Material Research Corp. v. Metron, supra.

Moreover, if the phrase "engaged in business . . . in South Africa," were intended to cover that kind of trading transaction, the additional prohibition in the law on engaging in business with the Republic of South Africa would have been unnecessary. The former prohibition would have been broad enough to cover the latter transaction. It is axiomatic that the Legislature is not presumed to enact superfluous statutory language. Skyline Cabana Club, 54 N.J. 550 (1969). The fact that the Legislature felt it necessary to add the prohibition on doing business with the Republic of South Africa must be construed as indicative of its intent to construe the phrase, "engaged in business," as generally not encompassing mere trading transactions.

For these reasons, it is our interpretation of the legislation that the ban on investments in foreign companies engaging in business in South Africa does not encompass companies which sell their products in South Africa, but do not actually own a factory, office or plant, either directly or through subsidiaries or affiliates, in some firsthand way.

II. Subsidiaries and affiliates

The divestiture language also covers companies that operate in South Africa through subsidiaries or affiliates. The investment generated by a foreign corporation through intermediaries over whom they exercise effective control can be just as vital to the economy of South Africa as that generated by foreign corporations maintaining a presence there in their own name or capacity. Accordingly, it must be assumed the Legislature intended to proscribe investment in companies that operate not only directly in South Africa, but also through the vehicle of intermediaries over whom they exercise effective control.

The Division should adopt regulations which establish criteria as guidance to determine whether effective control is being exercised in individual instances. For example, as part of an inquiry as to whether an issuer has a disqualifying relationship to an agent, franchisee or distributor in South Africa, it would be important to know whether it has the contractual power to exercise discretion as to any of the following matters: (1) the price of goods sold to third parties; (2) the payment terms; (3) the acceptance of orders; (4) the recall of products; (5) the settlement of disputes over the quality or quantity of goods delivered; or (6) the nature of promotional or advertising campaigns. In addition, the ability to share in the profits of the intermediaries would be indicative of control. An affirmative answer as to any of these questions would more likely than not support a determination that the corporation is transacting business in South Africa.

You also asked whether the divestiture mandate applies to corporations which, while they do not engage in business in South Africa themselves, do so through subsidiaries or affiliates. As in the case of controlled intermediaries, it is clear the divestiture law applies to foreign corporations that have subsidiaries or affiliates operating in South Africa. In interpreting a statute, the purpose of the legislation must be considered. Where a literal rendering will lead to a result not in accord with the essential purpose and design of an act, the spirit of the will controls the letter. New Jersey Turnpike Authority v. Local 195, IFPTE. The purpose of the divestiture law is to induce foreign corporations to withdraw from South Africa. To say to such companies that they would defeat that purpose if they were to be subject to divestiture from our pension funds because they are deemed not to operate in South Africa simply because their operations are conducted through subsidiaries or affiliates would be illogical.

Many, if not most, foreign corporate entities operate in South Africa not through their own corporate identities, but instead carry out their business purposes through the medium of subsidiaries or affiliates. Since the reality is that this is how foreign corporate operations in South Africa are typically structured, and keeping in mind the remedial nature of the statute, it is concluded that the term "company" in the phrase "company engaged in business . . ." must be read liberally to include any subsidiary or affiliate of a corporate issuer.

By the same token, the word "company" must be read to include any issuer which is itself a subsidiary or affiliate of a parent company engaged in business in South Africa. This situation is of importance to the Division because it invests a significant amount of money in short-term debt securities of finance companies that are subsidiaries of parents engaged in business in South Africa. The finance companies themselves operate only domestically. However, any investment in a subsidiary plainly benefits a parent company. It would equally defeat the salutary purpose of the legislation if pension and annuity funds were to be indirectly invested in companies engaged in business in South Africa through subsidiaries or affiliated companies rather than directly through a single parent corporate entity.

III. Use of IRRC findings

The Division has also asked whether it would be permissible to rely on the findings of the IRRC as to which companies are engaged in business in South Africa. Absent express statutory authorization, an administrative agency is not empowered to delegate discretionary duties to outside parties. Application of North Jersey District Water Supply Commission, 175 N.J. Super. 167 (App. Div. 1980). The legislation provides no authority for the delegation of any discretionary duties relating to its implementation. Although the canvassing or surveying of companies involves, to a certain extent, a fairly mechanical or ministerial task, the interpretation of the data received still requires some discretionary or interpretative judgment on the part of the party reviewing the information. Therefore, the Division is required to make its own determinations as to whether an issuer is engaged in business with or in South Africa, in accordance with regulations establishing standards and criteria. The most practical and effective procedure would be to prepare a questionnaire embodying standards established by the Division and to send one to each issuer in which the Division is contemplating investment. This would be accompanied by a notice to each such company that the questionnaire will be used to ascertain eligibility for investment under the legislation and, further, that the failure to respond within a reasonable time period would be taken as presumptive proof that the company is in fact engaged in business with or in the Republic of South Africa.

This is not to say, however, that the Division may not consider the IRRC findings. The IRRC publication may be used as source material and as a guide. The final determination as to which companies are engaged in business in South Africa should always be the Division's own.

IV. Cash Management Fund

You have also asked whether the legislation applies to investments of the New Jersey Cash Management Fund. That fund (the "CMF") is a common trust fund maintained by the Division of Investment in which are deposited surplus monies of the State, municipalities and local agencies, and also pension and annuity monies. These monies are then invested by the Division in certificates of deposit, commercial paper and other short-term debt securities. As provided in the regulations of the State Investment Council, the depositors in the CMF essentially share in the gains and losses resulting from the investments on a pro rata basis. Since the legislation is applicable to all assets of the pension and annuity funds and the CMF is an asset of pension funds to the extent of their proportional share therein, it is clear that the CMF is subject to the divestiture law as long as the pension and annuity funds continue to own shares therein. Application of the statute to the CMF, however, would cease were the Division to withdraw the pension and annuity funds from the CMF and establish a similar common fund strictly applicable to them, one that would have a South African-free portfolio.

V. Repurchase agreements

Another question raised is whether the Division is prohibited from entering into repurchase agreements with dealers and banks, if such companies are engaged in business in South Africa. The legislation prohibits the Division from investing pension and annuity funds in ". . . the stocks, securities or other obligations . . ." of any company engaged in business in South Africa. Repurchase agreements ("repos") are written agreements entered into between dealers or banks, on the one hand, and investors, on the other, whereby the former sell to the investors securities of third parties, consisting usually of government obligations or certificates of deposit, and promise to buy them back within a stated period of time at a premium. There are two basic types of repos: wholesale repos and retail repos. See Note, Lifting the Cloud of Uncertainty Over the Repos Market: Characterization of Repos as Separate Purchases and Sales of Securities, 37 Vand. L. Rev. 401, 403-407 (1984). The former are typically short-term contracts to sell and repurchase large-denomination government securities. These repos are entered into by the Federal Reserve to carry out monetary policies or by government securities dealers to acquire short term funds. Id. at 405. Retail repos are usually longer term contracts to sell government securities or certificates of deposit and are usually entered into by depository institutions. Ibid.

While repos certainly represent contractual obligations of the dealer or bank, we do not read the phrase ". . . or other obligations," to mean any contractual or legal obligation of a party with whom the Division may deal. The legislation specifically bars investments by the Division, not any and all contracts entered into by it with companies doing business in South Africa. Indeed, on signing the bill, Governor Kean recommended that executive action now be considered restricting state contracts with vendors that engage in business in South Africa, making it clear that he did not intend it to encompass such normal contractual obligations between the State and outside parties. It is also an axiom of statutory construction that in the construction of a statute in which special language is followed by general language, the special language is, under the doctrine of ejusdem generis, definitive of the general language, and the general words are not to be construed in their widest sense, but are meant to apply only to things of the same general kind of class as those specifically mentioned. Atlantic City Transportation Co. v. Walsh, 7 N.J. Super. 262 (App. Div. 1950). Thus, the phrase "or other obligation" must be read to apply only to the same general kind of class as those specifically mentioned, i.e. stocks and securities. It refers to "bonds," "notes" and other instruments designed and used to raise capital for a corporate enterprise. 69 Am. Jur. 2d, Securities Regulation. The SEC has issued a policy statement concluding that retail repos are not, in its view, securities. The Division's research has revealed no subsequent judicial decision invalidating these interpretations of repos by the SEC. You are advised that, unless the SEC should recharacterize repos as securities, or the federal courts should construe them as securities, their purchase by the Division would not be barred, provided the issuers of the underlying securities are not themselves engaged in business in South Africa.

VI. Options and futures contracts

In a related question, you have also asked whether the Division may invest in an option or futures contract involving a "market basket" of stocks selected from among the Standard and Poor 400 list of issuers. Suffice it to say that, to the extent the basket contains the stocks of companies engaged in business in South Africa or trading with the Government, the investment would be prohibited.

VII. Banks

In regard to banks, the prohibitory provision of the legislation provides that the Division may not invest pension and annuity monies in ". . . any bank or financial institution which directly or through a subsidiary has outstanding loans to the Republic of South Africa or its instrumentalities . . ." The Division has inquired as to whether it is prohibited from investing in a bank that may have had an outstanding loan to the Republic of South Africa at the time of enactment of the legislation, but no longer does. It also asks whether a company which was engaged in business in South Africa at the time of enactment, but ceased such business there, is subject to the divestiture law.

To conclude that the prohibition would continue to apply, regardless of future actions of a bank or company, would mean that, once prohibited, an investment in a bank would remain prohibited. The principal purpose of the legislation, though, is to induce banks and companies to withdraw from South Africa. If a company is forever barred from eligibility for investment, it would have no incentive to withdraw. The only reasonable construction of the legislation is that, if a bank no longer has outstanding loans to the Republic of South Africa or if a company has ceased business there, the Division may invest in its stocks, securities or other obligations.

It has been pointed out that some banks may want to retire outstanding loans to the Republic of South Africa but, that, in some cases, it is impossible to retire the debt, short of writing it off. The question asked is whether the Division is prohibited from investing in such banks, despite their good intentions. Although disqualification of such banks may arguably defeat an aspect of the legislative purpose insofar as it may encourage banks seeking investment of our pension monies to write off the debt owed by the South African government, thereby helping it, the language used here by the Legislature is plain and unambiguous. Hence, no interpretative process is necessary, nor is the legislative wisdom in structuring a strict rule open to debate. Accordingly, it must be concluded that the intent of the Legislature was to impose the disqualification regardless of the good faith efforts of certain banks to alter lending practices as long as loans to the government remain outstanding.

It has been suggested that a conflict exists between two clauses in the prohibitory provision of the legislation in respect to banks, since the provision specifically bars investment in banks having outstanding loans to the Republic of South Africa, and also bars investment in any company engaged in business with or in the Republic of South Africa. The question that arises is whether a bank that does not have outstanding loans to the Republic of South Africa, but has a branch office in South Africa from which loans are made to South African companies (and, hence, is engaged in business there), is subject to this law. In our view, no such irreconcilable conflict exists. As in the case of non-bank commercial enterprises, a two part test exists. Those which merely trade their products in South Africa without being engaged in business there directly or through subsidiaries, affiliates or intermediaries are outside the reach of the statute. Irrespective of whether they have a presence within South Africa, those doing business with or trading with the South African government trigger the divestiture act's provisions and its attendant disabilities. The same is true with respect to banks. That is the general statutory scheme, and while arguably there may have been no need to include the specific bank investment clause at all, since banks making loans to the government of South Africa are doing business with it within any reasonable definition of that phrase and so would be subsumed in the broader prohibition, the fact that it was so included does not warrant the inference that the Legislature meant to otherwise relieve banks of the divestiture act's reach. Indeed, it would be anomalous to suggest that the Legislature intended to draw a distinction between banks having outstanding loans with the Republic of South Africa, and those doing business in South Africa, prohibiting investment in the former, but allowing investment in the latter. Given the breadth of the legislative object, to encourage retreat by companies essential to the economy of South Africa and thus encourage it to alter its ways, exemption of banks, save where they loaned monies directly to the South African government, would deprive the statute of much of its economic threat. Consequently, investment in banks engaged in business in South Africa (as defined infra) is prohibited, as well as investment in banks which have loans outstanding with the government of that country.

VIII. Supplemental Annuity Collective Trust

A further question presented in respect of the prohibitory provision is whether it applies to assets of the Supplemental Annuity Collective Trust, established pursuant to N.J.S.A. 52:18A-107 et seq. State employees are authorized to supplement their state retirement benefits under the pension system by making additional or supplemental payments out of salary deductions into a trust called the Supplemental Annuity Collective Trust. N.J.S.A. 52:18A-113.1. The Trust is administered by a council, the Council of Trust, comprised of the State Treasurer, the Commissioner of Banking, and the State Budget Director. N.J.S.A. 52:18A-111. At the election of the worker, his or her contributions may be placed in either a Variable Division Account or a Fixed Division Account. N.J.S.A. 52:18A-116, 119. Monies in the former account are to be invested in common stocks and securities listed on a securities exchange in the United States, N.J.S.A. 52:18A-115, while monies in the Fixed Division account are to be invested in fixed-income securities that are legal investments for life insurance companies. N.J.S.A. 52:18A-118. Upon retirement, a worker will get supplemental retirement benefits in the form of a life annuity or of a cash payment, in lieu thereof, based solely on the contributions made by him and the income earned thereon from the investments. N.J.S.A. 52:18A-117. Unlike the regular pension systems, the supplemental annuity program is not a defined benefit plan; the worker is not entitled to a fixed retirement account, and consequently, the State has no obligation to fund the Trust.

The law, by its terms, applies to ". . . any pension or annuity fund under the jurisdiction of the Division of Investment . . ." While the Supplemental Annuity Collective Trust is an annuity fund in a generic sense, the issue is whether it is an annuity fund under the jurisdiction of the Division of Investment. By statute, the Division is charged with responsibility for the investment of all monies belonging to the six state-administered retirement systems, e.g., the Public Employee's Retirement System, plus monies in or belonging to the 1837 Surplus Revenue fund and the Trustees for the Support of Public Schools fund. N.J.S.A. 52:18A-88.1. No such specific charge is made to the Division to invest or manage the funds in the Trust. However, by understanding with the Council, i.e., an inter-agency agreement, the Division invests the money in the Trust.

The question, therefore, is whether this difference in the source of legal responsibility for investment should remove the trust assets from the ambit of the divestiture legislation. The use of the word "jurisdiction" by the legislature does not provide a clear answer, since, as used in this context, the word is ambiguous. Jurisdiction generally and most commonly refers to the power of a court to hear or decide a judicial controversy. But it is reasonable to conclude that the Legislature here meant to use the word in the sense of an agency's having the administrative responsibility over a certain matter within the province of the Executive Branch, as where the Division of Taxation has the power to collect state taxes. The Division certainly has such responsibility here. It matters not that the source of the responsibility is by way of voluntary undertaking, rather than legislative mandate. Nor does it matter that the Council could oust the Division of its "jurisdiction" by opting to handle the investment of the trust's assets itself or through another agent. In sum, there is no question that the Trust is an annuity fund under the jurisdiction of the Division, and that, notwithstanding the lack of state contributions, it is an integral part of the State's overall retirement program. Hence, the provision of the statute applies to trust assets provided their investment remains within the responsibility of the Division.

Any doubt as to the validity of this conclusion is dissipated by the legislative history. During the legislative process, details concerning all the funds being managed by the Division were submitted to the Legislature (the fiscal note to A1309) and the trust assets were included. Presumably, therefore, the Legislature was aware that the Division invests the monies in the Trust and that the assets of the trust were thought encompassed within the ambit of the bill. Therefore, it is reasonable to conclude that if the Legislature had wanted to exclude the monies in the Trust from the scope of the divestiture law, it would have so provided.

IX. Deferred Compensation Fund

You also have inquired about the Deferred Compensation Fund. Suffice it to say here that that fund, established under N.J.S.A. 52:18A-163 et seq., is not part of the State's pension system, but is simply a fund established to allow workers the opportunity to establish the equivalent of individual retirement accounts in order to defer taxable income. As such, the Deferred Compensation Fund is not subject to the divestiture law.

X. Three-year divestiture and the Prudent Investor Rule

Turning to the divestiture provision of the statute, Section 2 states in pertinent part that:

. . . the Division of Investment shall take appropriate action to sell, redeem, divest or withdraw any investment held in violation of the provisions of this act. Nothing in this act shall be construed to require the premature or otherwise imprudent sale, redemption, divestment or withdrawal of an investment, but such sale, redemption, divestment or withdrawal shall be completed not later than three years following the effective date of this act.

It has been suggested that the required divestiture within three years might, in regard to certain of the Division's investments, contravene the prudency requirement imposed on fiduciaries under the New Jersey Prudent Investor Law, N.J.S.A. 3B:20-12 et seq., which establishes the so-called prudent investor standard for New Jersey fiduciaries. By virtue of N.J.S.A. 52:18A-88.1, investment of funds in the State-administered retirement systems by the Division is subject to that prudency law. You are concerned because, under the divestiture legislation, the Division is required to dispose of certain low-interest bonds prior to their date of maturity. You are advised, however, that since this section of the statute imposes a divestiture requirement on the Division, it must be considered to have modified the prudent investor standard. Thus, even if divestiture might, in other circumstances, be deemed imprudent under the Prudent Investor Law, it is nevertheless sanctioned, and indeed required. It is true of course that the divestiture provision states that nothing therein shall be deemed to require a "premature or otherwise imprudent" divestment, but this is plainly qualified by the controlling three year time limit for divestment. The plain thrust of this provision is that the Division need not dispose of its South African-related portfolio immediately, but should manage that portfolio so as to achieve divestiture at a point within the three years where the loss to be sustained is minimized. In any event, general prudency standards were superseded by the three-year divestiture requirement, at least insofar as it applies to the South African-related portfolio.

XI. Reporting requirements

Questions have also been raised in respect of the timing and substance of the periodic lists and reports that the Division must file with the Legislature regarding the progress of divestiture. The reporting provision of the law in Section 3 directed that, within 30 days of the law's enactment, the Division had to file with the Legislature an "initial list" of all investments held as of the effective date which were in violation of the provisions of this act. This, you have advised, the Division has already done. The reporting provision also requires, however, that:

. . . Every three months thereafter, and until all of these investments are sold, redeemed, divested or withdrawn, the director shall file with the Legislature a list of the remaining investments. The director shall include with the first such list, and with the lists to be filed at six month intervals thereafter, a. a report of the progress which the division has made since the previous report and since the enactment of this act in implementing the provisions of section 2 of this act, and b. an analysis of the fiscal impact of the implementation of those provisions upon the total value of and return on the investments affected, taking all possible account of the investment decisions which would have been made had this act not been enacted, and including an assessment of any increase or decrease, as the result of the implementation of those provisions and not as the result of market forces, in the overall investment quality and degree of risk characteristic of the pension and annuity funds' portfolio.

You have asked whether the list of remaining investments next following the initial list (the "second list") should be filed three months from the effective date of the act, i.e. August 27, 1985, or, instead, three months from the date of filing of the initial list. The reporting provision, as noted, imposes the requirement that the initial list be filed within 30 days of enactment and that the filing of the second list should occur "every three months thereafter." It is clear from this sequence that the word "thereafter" refers back to the filing of the initial list, not the date of enactment. Thus, the second list is due to be filed 90 days from the date the initial list was filed.

You have also asked when the first progress report must be filed. The above quoted provision states that the Director is to include the first progress report "with the first such list," without specifying whether the initial list, or the second list, was intended. Referential and qualifying phrases in a statute refer solely to the last antecedent where no contrary intention appears. State v. Congdon, 76 N.J. Super. 493 (App. Div. 1962). Here, the antecedent is the second list. It would also be illogical to interpret the provision as requiring that a progress report on divestiture be included with the initial list, since no meaningful progress could realistically be achieved within only 30 days of enactment. You are, accordingly, advised that the first progress report shall be due upon the filing of the second list.

This will also confirm our previous advice that the filing of that list may be deferred a very brief period of time so as to enable the Division to include in its progress report the most up-to-date financial information. The Division's records as to the value of its portfolio and other information are based in part on the most recent quarterly reports of corporate issuers. Since the initial list was filed September 26, 1985, technically, the second list is due December 26, 1985, but that would mean that the most recent quarterly reports would have been dated September 30, 1985, whereas, if the Division deferred filing a brief time, its progress report would include the most recent data deriving from the December 31, 1985 quarterly reports. Such deferment would be a one-time matter only, since the progress reports would be synchronized thereafter with the most recent quarterly reports.

A primary purpose of the periodic progress report provision is to enable the Legislature to periodically assess the wisdom of the legislation in light of predictions made by the Chairman of the State Investment Council and others as to the loss in earnings that would result from the divestiture.

XII. Indemnification

You have also asked about indemnification of Division officials and employees from suits arising out of their efforts to implement the divestiture law. You are advised that the full protection of the Tort Claims Act, N.J.S.A. 59:1-1 et seq., including indemnification, applies.

Summary

In summary, based upon an interpretation of the statutory language, a review of legislative history and an awareness of the social purposes for which the divestiture legislation was enacted, you are advised of the following major conclusions: The prohibition on investment by the Division of Investment in stocks, securities and obligations of any company engaged in business in the Republic of South Africa means any company conducting ongoing business activities in that country and maintaining a physical presence through the operation of offices, plants, factories or similar premises and would not include trading transactions of a company with entities in that country. The prohibitory provisions of the statute would encompass corporations operating in South Africa through subsidiaries or affiliated companies over which the issuer maintains effective control. The prohibitory provisions also include corporations with subsidiaries doing business in South Africa, and corporations making loans to the South African government. The legislation applies to investments made by the New Jersey Cash Management Fund to the extent the State pension and annuity funds continue to own shares therein. There is no ban on the Division of Investment entering into repurchase agreements with dealers and banks doing business in South Africa, provided the issuers of the underlying securities are not themselves engaged in business in South Africa. The divestiture provisions of the legislation would not preclude investment in a banking institution which retired an outstanding loan to the Republic of South Africa but would apply to such banking institutions where the loan has not yet been retired. The terms of the act apply to prohibit investments in banking institutions doing business in South Africa in the same manner as a non-banking institution, as well as prohibiting investment in banks lending money directly to the government of South Africa. Because the Trust is an annuity fund under the jurisdiction of the Division of Investment, the divestiture law applies to monies invested by the Division in that Trust. The divestiture law does not apply to the Deferred Compensation Fund, which is not part of the State's pension program. Reporting under the law: the second list is due 90 days after the initial list was filed, with the first progress report to accompany the second list.

Sincerely,

IRWIN I. KIMMELMAN
Attorney General