South Dakota's state investment officer invests state retirement funds. SDCL 4-5-14 prohibits members of the State Investment Council from benefitting directly or indirectly from any transaction made by the state investment officer. Does that conflict-of-interest rule disqualify a state employee from serving on the council, since strong investment returns improve the retirement fund the employee is also a member of?
Plain-English summary
South Dakota's State Investment Council is the body that oversees how state retirement funds and other state investment funds are managed. The executive board of the Legislative Research Council appoints five of the eight voting members. SDCL 4-5-14 sets qualifications: members must have training and experience in investment or finance, must not be engaged in selling marketable or public securities to the state during their tenure, and must not "benefit directly or indirectly from any transaction made by the state investment officer."
Director Anderson asked AG Meierhenry whether that benefit restriction disqualified state employees from serving on the council. The reasoning would be: a state employee is also a member of the state retirement system (governed by SDCL chapter 3-12). Strong investment performance by the state investment officer would improve the retirement fund, which would (at least indirectly) benefit the employee. Does that "indirect benefit" trip SDCL 4-5-14?
Meierhenry said no. His reading of the conflict rule was narrower than its literal text suggested. The restriction targets council members "who could benefit directly or indirectly by the investment of the monies" in a transactional sense. The kind of generalized benefit that any state employee gets when the retirement fund performs well is not a conflict-of-interest concern.
The reason matters. The conflict rule is structured to prevent self-dealing by people in a position to direct or influence investment decisions for their own private gain. A council member whose firm sells securities to the state could benefit transactionally from steering business toward the firm. A council member with personal holdings could front-run state investment decisions. Those are the situations SDCL 4-5-14 targets.
A state employee's interest in retirement-fund returns is shared with thousands of other employees. It is not transactional; the council member cannot direct any particular benefit to themselves. The benefit is generalized, dispersed, and structurally similar to the benefit any taxpayer gets when state government performs well.
Meierhenry closed with a procedural pointer. If the Legislative Research Council's executive board disagreed with his reading, the legislature was about to convene and could pass a bill specifically excluding state employees. That preserved the option to tighten the rule statutorily if there was political appetite for it.
Currency note
This opinion was issued circa 1983 during AG Mark Meierhenry's tenure (1979-1987). Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. SDCL 4-5-13, 4-5-14, and chapter 3-12 governing the retirement system have all been amended multiple times since 1983. Modern questions about state investment council member qualifications, conflict-of-interest rules, and the boundary between direct and indirect benefits should be verified against current statute and any applicable South Dakota Retirement System board rules or Legislative Research Council guidance.
What the opinion meant at the time
For the Legislative Research Council's executive board, the practical answer was that they could appoint state employees to the State Investment Council without violating SDCL 4-5-14. The qualifications were "training and experience in investment or finance" and the prohibition on selling securities to the state; both could be satisfied by a state employee with the right background.
For state employees considering accepting an appointment, the opinion removed the conflict-of-interest concern from the analysis. They could serve and continue to be retirement-system participants without falling afoul of SDCL 4-5-14. Other practical considerations (time commitment, supervisor approval for outside service, gift-and-disclosure rules) might still apply.
For the State Investment Council itself, the opinion confirmed that the institutional design contemplated some members with diverse state-government experience. The eight-voting-member structure (five appointed plus the state treasurer, the commissioner of school and public lands, and a SDRS board representative as ex officio members) already includes state-government insiders.
For taxpayers or watchdogs worried about self-dealing, the opinion was a reminder that the conflict rule has limits. Generalized benefit from good investment performance is not a conflict; transactional benefit from direct or indirect dealings with the investment officer is.
Common questions
Q: How is the State Investment Council structured?
A: Eight voting members. Five are appointed by the Legislative Research Council's executive board (up to three may hold public office, no more than four may be from the same political party). The state treasurer and commissioner of school and public lands serve ex officio. A representative of the SDRS board of trustees, appointed by the board for a one-year term, is also a voting member.
Q: What does the state investment officer do?
A: The investment officer (a position separate from the council) handles the actual investment of state funds, including the retirement system funds. The council's role is oversight, policy-setting, and supervision. The conflict rule attaches to council members because they could influence what the investment officer does.
Q: What kind of benefit would actually trigger SDCL 4-5-14?
A: The opinion gives the contours indirectly. A council member whose financial advisory firm has the state as a client would be conflicted. A council member with material personal holdings that could be affected by state investment decisions could be conflicted. The common thread is that the council member's personal economic outcomes are tied transactionally to particular investment decisions.
Q: Could a state employee on the council vote on retirement-fund policy?
A: The opinion does not directly say. Read carefully, the answer points toward yes. The opinion treats state-employee participation in the retirement system as falling outside the prohibition entirely, which would imply the employee can vote on retirement-fund-related matters without recusal.
Q: What if a state employee was also a retiree drawing benefits?
A: The opinion was about active state employees, not retirees. A retiree drawing pension benefits has a more direct economic stake in fund performance than an active employee. The analysis might differ at the margin, but Meierhenry's reasoning ("generalized benefit shared with all members") would likely cover retirees too.
Q: Has the legislature ever responded to this opinion?
A: Meierhenry's closing line was an invitation to the legislature to disagree by legislation if it wanted. Whether the legislature acted is outside the scope of this opinion; modern users should check current SDCL 4-5-14 for any amendments specifically addressing state-employee eligibility.
Background and statutory framework
State investment councils are a common public-finance governance structure. They sit between the political branches (governor, legislature) and the operational investment professionals (the investment officer or pension fund manager). The council sets investment policy, monitors performance, and ensures accountability without micromanaging individual investment decisions.
The conflict-of-interest provision in SDCL 4-5-14 is conventional. Statutes governing similar bodies in other states usually combine three elements: a qualifications floor (investment/finance experience), an active prohibition on related-party dealings (no selling securities to the state during tenure), and a prohibition on directly or indirectly benefitting from investment officer decisions. South Dakota's text fits this pattern.
Meierhenry's reading harmonizes the broad "directly or indirectly benefit" language with the narrower transactional purpose of the statute. A purely literal reading would disqualify almost any council member who lives in South Dakota, since any council member with retirement savings invested in the broad market would benefit "indirectly" from strong overall economic performance, which could be influenced by state investment decisions. That reading would render the qualifications floor (investment/finance experience) unworkable, since experienced people necessarily have financial holdings.
The narrower reading preserves the qualifications structure while still catching the transactional self-dealing the statute was designed to prevent. It does so at the cost of letting state employees onto the council, which Meierhenry was confident the statute did not intend to bar.
The SDRS context matters too. SDCL chapter 3-12 governs the South Dakota Retirement System, which most state employees participate in. The retirement system's board of trustees has its own governance structure separate from the State Investment Council, though the boards interact via the SDRS-appointed council representative. A state employee on the State Investment Council would not normally be on the SDRS board too.
Citations and references
Statutes:
- SDCL 4-5-13 (state investment council composition)
- SDCL 4-5-14 (member qualifications and conflict rule)
- SDCL ch. 3-12 (South Dakota retirement system)
Source
Original opinion text
State Investment Council members qualifications
Dear Director Anderson:
You have requested an official opinion based upon the following factual situation.
FACTS:
Pursuant to SDCL 4-5-13, the executive board of the Legislative Research Council appoints five members of the state investment council. The qualifications of council members are delineated in SDCL 4-5-14. The section says, in part, that no member may 'benefit directly or indirectly from any transaction made by the state investment officer. . . .' In addition, state retirement funds are invested by the state investment officer and the earnings therefrom are available to vested state employees at time of retirement.
Based upon these facts, you have asked the following question:
QUESTION:
Is a state employee eligible for appointment to the investment council in light of the fact that state retirement funds are invested by the council and a potential improvement in this specific fund may be a benefit to the state employees who are members of that fund?
IN RE QUESTION:
SDCL 4-5-13 provides:
The state investment council shall consist of eight voting members. Five members of the council shall be appointed by the executive board of the legislative research council and the executive board may appoint persons holding public office, appointed or elective, provided no more than three members of the state investment council, at any one time, shall hold public office. Action shall be by majority vote. Each of the members of the state investment council shall be appointed for a term of five years. No more than four appointed members may be members of the same political party. In addition to those members appointed by the executive board, the state treasurer and commissioner of school and public lands shall serve as ex officio voting members and a representative of the board of trustees of the South Dakota retirement system shall serve as ex officio voting member. The term of the representative of the board of trustees shall be one year and he shall be appointed by the board of trustees of the South Dakota retirement system.
SDCL 4-5-14 provides:
The members of the state investment council shall be qualified by training and experience in the field of investment or finance. During his tenure, a member of the council or his firm shall not be engaged in the sale of marketable or public securities to the state or to any fund thereof; nor shall any member benefit directly or indirectly from any transaction made by the state investment officer; nor shall he hold any office, position, or employment in any political party.
Based upon my reading of the above-stated sections, together with provisions under South Dakota retirement system, SDCL ch. 3-12, it is my opinion that the benefit restrictions under SDCL 4‑5‑14 do not apply to individuals who may be benefited directly or indirectly through improvement of state retirement system.
It is my opinion, that the restrictive provisions in SDCL 4-5-14 are to be read to only preclude individuals who could benefit directly or indirectly by the investment of the monies.
Finally, given the close proximity of the next legislative session, if the members of the executive board of the legislative research council disagree with my opinion, a bill can be introduced that specifically excludes state employees.
Respectfully submitted,
Mark V. Meierhenry
Attorney General