When a South Dakota school district, county, or city wants to invest extra cash, can it just buy shares of a mutual fund that holds U.S. Treasury bonds? Or does it have to actually own the Treasury bonds itself?

Plain-English summary

Auditor General Maurice Christiansen asked whether school districts, counties, and municipalities could invest in funds created by financial institutions that had purchased federally guaranteed securities.

The AG answered that a subdivision could invest in such a fund only when it received an ownership interest in the actual qualifying securities. SDCL 4-5-6 authorized investment in "securities of the United States and securities guaranteed by the United States government either directly or indirectly." The AG explained that the mutual fund itself was not federally guaranteed and required "a direct assignment of a specific portion of the securities themselves" for the subdivision to acquire the required ownership interest.

The AG illustrated qualifying securities with U.S. Savings Bonds, U.S. Treasury Notes, G.N.M.A.s, F.R.M.A.C.s, and comparable securities. The decisive condition for an investment through a fund was ownership of the securities themselves by direct assignment of a specific portion. A fund investment lacking that interest did not qualify.

The AG closed by saying he was not judging whether mutual funds or other equity securities were prudent investments; he was interpreting the statutes governing these public funds.

Currency note

This opinion was issued in 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. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The political subdivision investment statutes in SDCL 4-5-5 through 4-5-11 may have been amended since 1987, and the list of authorized investment vehicles may have broadened. Local government finance officers should consult current law before relying on the 1987 framework.

What the opinion meant at the time

For county treasurers, school district business managers, and city finance directors, the opinion makes the ownership interest decisive. A fund created by a financial institution could qualify under SDCL 4-5-6 only if the subdivision received a direct assignment of a specific portion of the actual U.S. or federally guaranteed securities.

For brokerage firms, the opinion said a mutual fund or equity fund holding qualifying securities would not qualify where the subdivision received no ownership interest in the securities themselves. The AG did not announce a categorical ban on every fund structure.

For the Auditor General's office, the opinion supplied the condition to check: whether the subdivision received ownership of a specific portion of the underlying securities, rather than only an interest in a fund.

For permanent, trust, retirement, or building funds, the opinion quoted SDCL 4-5-6's provision allowing securities with redeemable dates beyond eighteen months. That timing provision did not remove the ownership-interest condition for investments through funds.

Common questions

Q: What did "ownership interest" mean in practice?
A: The AG required "a direct assignment of a specific portion of the securities themselves" to the subdivision. The opinion does not analyze particular brokerage custody arrangements or fund share terms.

Q: Why didn't a fund holding only Treasuries qualify?
A: The AG said "the mutual funds themselves are not guaranteed directly or indirectly by the United States government." The subdivision needed an ownership interest in the underlying qualifying securities through "a direct assignment of a specific portion of the securities themselves." Without that interest, a fund investment did not qualify.

Q: What was the 18-month maturity limit about?
A: The opinion quoted SDCL 4-5-6's language on securities redeemable within eighteen months and its express allowance for permanent, trust, retirement, and building funds to hold securities redeemable later. It did not analyze how a particular fund investment would meet those timing terms.

Q: What were GNMAs and FRMACs?
A: The AG listed G.N.M.A.s and F.R.M.A.C.s as examples of securities guaranteed directly or indirectly by the United States. He did not describe their structure or distinguish the type of guarantee each carried.

Q: Could a subdivision pool its money with other subdivisions?
A: The opinion did not address a pool run by subdivisions. It addressed funds created by a brokerage firm, bank, or other financial institution and required the subdivision to receive an ownership interest in the actual securities.

Q: What about money market funds that held only government paper?
A: The opinion did not discuss money market funds by name. For a mutual fund holding government securities, it required a direct assignment giving the subdivision ownership of a specific portion of those securities. Without that ownership interest, the investment did not qualify.

Background and statutory framework

SDCL 4-5-5 through 4-5-11 set out the investment authority addressed here. The AG also reviewed provisions for counties (SDCL ch. 7-20), municipalities (SDCL ch. 9-22), and school districts (SDCL ch. 13-16), and found that none granted broader authority for this question.

The AG's reading turned on what the subdivision owned. He distinguished an ownership interest in securities issued or guaranteed by the United States from an interest in a fund that held them but did not assign a specific portion of the securities to the subdivision.

The AG expressly declined to assess the propriety of mutual fund investments. His conclusion was limited to the statutory authority for an investment through a fund where the subdivision lacked direct ownership of the underlying securities.

Citations and references

Statutes:

• SDCL 4-5-5 to 4-5-11 (general investment authority)
• SDCL 4-5-6 (US securities)
• SDCL 4-5-11 (supplemental nature)
• SDCL ch. 7-20 (county investments)
• SDCL ch. 9-22 (municipal investments)
• SDCL ch. 13-16 (school district investments)

Source

• Landing page: https://atg.sd.gov/OurOffice/OfficialOpinions/opinionhtml.aspx?id=167

Original opinion text

Investment of public funds in securities, directly or indirectly guaranteed by the United States government

Dear Mr. Christiansen:

You have requested an official opinion from this office in regard to the following question:

QUESTION:

May school districts, counties and municipalities invest in funds created by a brokerage firm, bank, or other financial institution which has purchased securities directly or indirectly guaranteed by the Federal Government?

The answer to your question is governed by relevant statutes governing an investment of political subdivision funds, SDCL 4-5-5 through 4-5-11. SDCL 4-5-6 provides:

Any public funds which will not be needed for current operating expenses, may be invested in securities of the United States and securities guaranteed by the United States government either directly or indirectly and redeemable within eighteen months from the date of purchase. The maturity date may exceed eighteen months. Provided, however, that permanent, trust, retirement and building funds may be invested in securities having a redeemable date beyond eighteen months.

SDCL 4-5-11 provides:

Sections 4-5-5 to 4-5-10, inclusive, are supplemental to any other laws relating to the investment, deposit or administration of the public funds therein specified, and shall supersede the provisions thereof only to the extent that such other laws may restrict or prohibit investments in accordance with the provisions thereof.

A review of the relevant statutory provisions governing the separate investment powers of school districts as contained in SDCL ch. 13-16; counties as contained in SDCL ch. 7-20; and municipalities as contained in SDCL ch. 9-22 reveals there are no other statutes that grant broader investment authority.

Based upon a review of the above-discussed statutory provisions, it is my opinion, that school districts, counties and municipalities under SDCL 4-5-6 may invest in funds created by a brokerage firm, bank or other financial institution only when they receive an ownership interest in the actual securities that are issued by the United States, or the securities guaranteed directly or indirectly by the United States government. It is my opinion that the "securities of the United States" include U.S. Savings Bonds, U.S. Treasury Notes and other securities issued by the United States government. "[S]ecurities guaranteed by the United States government, either directly or indirectly," would include bonds, notes and other securities for which the United States government will guarantee payment if the original fails to perform his responsibilities. Examples of these types of securities would include G.N.M.A.s. and F.R.M.A.C.s and other comparable types of securities.

Under SDCL 4-5-6, political subdivisions cannot invest in mutual funds or other types of equity funds that purchase United States securities or securities guaranteed by the United States government either directly or indirectly where the local political subdivision would not acquire an ownership interest in the securities themselves. The reason for this restriction is that the mutual funds themselves are not guaranteed directly or indirectly by the United States government. In order to acquire an ownership interest, the local governmental entity must have a direct assignment of a specific portion of the securities themselves.

In rendering my opinion, I am in no way making any statement concerning the propriety of investments in mutual funds and other types of equity securities. This opinion is only based upon my interpretation of the relevant statutes.

Sincerely,

Roger A. Tellinghuisen

ATTORNEY GENERAL