Do Texas retirement systems have to follow the disadvantaged-business contracting rules when they hire investment brokers and advisers?

Plain-English summary

In 1991 the Texas Legislature passed House Bill 799, which amended a state procurement law (article 601b) to push state agencies to spread their contracting dollars to "disadvantaged businesses," asking each agency to make a good-faith effort to steer at least 10 percent of its contract value to those firms. A state senator asked the Attorney General whether that law reaches the contracts that big state retirement systems, the Employees Retirement System (ERS) and the Teacher Retirement System (TRS), sign when they hire people to help manage and invest their money.

The answer depended on the kind of service being bought. Article 601b only covers "services," and the statute's definition of "services" specifically leaves out "consulting services." A separate statute (article 6252-11c) defines consulting services and goes out of its way to say it does not apply to, and is not meant to discourage, the use of "investment counselors" and other advisers a retirement board decides it needs to carry out its fiduciary duties. So contracts for investment counseling or investment advice fall outside both statutes, and House Bill 799 does not apply to them.

Brokerage was different. The opinion concluded that a broker who only carries out securities trades on the instructions of the retirement system's board is not providing a "consulting service," because the broker is executing transactions, not studying or advising. That kind of service is not excepted. So when ERS and TRS contract for investment brokerage services, they have to comply with House Bill 799, which means making a good-faith effort to help disadvantaged businesses obtain at least 10 percent of the value of those brokerage contracts. In short: investment advisers, exempt; trade-executing brokers, covered.

Currency note

This opinion was issued in 1992. 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 statutes here are former civil-statute articles (article 601b, article 6252-11c, article 664-4) that were recodified into the Government Code (state purchasing and the historically underutilized business program now live in Government Code chapter 2161 and related chapters), so these article numbers no longer match current law. Confirm the current provisions before relying on anything described here.

Background and statutory framework

The question was whether House Bill 799 of the 72d Regular Session applies to the procurement of brokerage and investment services by state agencies involved in money management. House Bill 799 amended article 601b, V.T.C.S., relating to state contracts for procurement of goods and services from disadvantaged businesses (Acts 1991, 72d Leg., ch. 677). Its provisions became effective September 1, 1991, but apply only to contracts awarded on or after September 1, 1992. The opinion understood the question to relate primarily to statewide retirement systems, such as ERS and TRS, that are authorized to invest their assets in securities without distinction as to source (Gov't Code §§ 815.301(a), 825.301(a)), and to cover both individuals who supply investment advice to the boards of trustees and individuals who execute securities transactions at the boards' direction (id. §§ 815.301(c), 825.301(h)). The opinion expressly did not address the applicability of article 601b outside the procurement context.

House Bill 799 added section 3.10(b) to article 601b, providing that the General Services Commission "shall make a good faith effort to assist disadvantaged businesses to receive at least 10 percent of the total value of all contracts awarded for the purchase of supplies, materials, services, and equipment that the commission expects to make for a state agency in its fiscal year," with the commission to estimate the expected total value not later than the 60th day of the agency's fiscal year (Acts 1991, 72d Leg., ch. 677, § 5). House Bill 799 defined "disadvantaged business" to include corporations, sole proprietorships, partnerships, and joint ventures at least 51 percent owned (or, for a sole proprietorship, 100 percent owned, operated, and controlled) by socially disadvantaged persons identified as members of certain groups (the statute listing Black Americans, Hispanic Americans, women, Asian Pacific Americans, and Native Americans who have suffered the effects of discriminatory practices), as well as certain supplier contracts (Acts 1991, 72d Leg., ch. 677, § 1 (V.T.C.S. art. 601b, § 1.02(3))). The opinion was advised that the boards of trustees of ERS and TRS, rather than the General Services Commission, make the contracts in question.

Resolution depended on whether the procurement is for "services" within article 601b. The statute defined "services" as "the furnishing of skilled or unskilled labor or professional work" but excluded: (1) professional services covered by the Professional Services Procurement Act (article 664-4, V.T.C.S.); (2) services of an employee of a state agency; (3) consulting services or services of a private consultant as defined by article 6252-11c, V.T.C.S.; or (4) services of public utilities (V.T.C.S. art. 601b, § 3.01(c)). The opinion found the second and fourth exceptions plainly inapplicable, and that the Professional Services Procurement Act does not by its terms apply to investment brokers, advisers, or managers.

That left the consulting-services exception. Article 6252-11c applies to contracts for private consulting services by state agencies and defines "consulting service" to mean "the human service of studying or advising a state agency under a contract that does not involve the traditional relationship of employer and employee" (V.T.C.S. art. 6252-11c, § 1(1)). The act specifically states it does not apply to, and is not intended to discourage the use of, consulting services provided by, among others, "investment counselors" and "other consultants whose services are determined by the governing board of a retirement system trust fund to be necessary for the performance of its fiduciary duties under the state constitution" (id. § 2(a)(3), (6)). The opinion concluded that the consulting services of investment counselors are therefore excepted from both article 6252-11c and article 601b. But it concluded that brokerage services involving only the execution of securities transactions on the instructions of a retirement system's board are not consulting services under the act and so are not excepted. Accordingly, brokerage services are not excepted from article 601b by article 6252-11c, and the boards of trustees of ERS and TRS must comply with section 3.10(b) of article 601b when contracting for the services of investment brokers.

Common questions

Does House Bill 799 apply to a retirement system's investment-adviser contracts?
The opinion concluded it does not. Investment counseling and advice are "consulting services," which article 6252-11c carves out (and which it names investment counselors specifically), so those contracts are excepted from article 601b and from House Bill 799.

Does it apply to brokerage contracts?
Yes. The opinion concluded that a broker who only executes securities transactions on the board's instructions is not providing a consulting service, so those contracts are not excepted. ERS and TRS must comply with House Bill 799 when contracting for investment brokerage services.

What does compliance require?
Under section 3.10(b) of article 601b, it requires a good-faith effort to assist disadvantaged businesses in obtaining at least 10 percent of the total value of the contracts awarded, here, for investment brokerage services.

Who counted as a "disadvantaged business" under the 1991 law?
House Bill 799 defined it to include businesses (corporations, sole proprietorships, partnerships, joint ventures) majority-owned and controlled by socially disadvantaged persons (the statute listing Black Americans, Hispanic Americans, women, Asian Pacific Americans, and Native Americans who have suffered discriminatory practices), plus certain supplier contracts.

Citations

• V.T.C.S. art. 601b, § 1.02(3) (definition of "disadvantaged business"); § 3.01(c) (definition of "services" and exceptions); § 3.10(b) (good-faith 10 percent effort)
• House Bill 799, Acts 1991, 72d Leg., ch. 677, §§ 1, 5, 7
• V.T.C.S. art. 6252-11c, §§ 1(1), 2(a)(3), (6) (consulting services; investment counselors and retirement-fund consultants excepted)
• Professional Services Procurement Act, V.T.C.S. art. 664-4
• Government Code §§ 815.301(a), (c) (Employees Retirement System); 825.301(a), (h) (Teacher Retirement System)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0184
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1992/dm0184.pdf

Original opinion text

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

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

December 4, 1992

Honorable John Whitmire
Chairman
Intergovernmental Relations
Texas State Senate
P. O. Box 12068
Austin, Texas 78711

Opinion No. DM-184

Re: Whether the provisions of House Bill 799 of the 72d Legislature apply to the procurement of brokerage and investment services by state agencies (RQ-239)

Dear Senator Whitmire:

You ask whether the provisions of House Bill 799 of the 72d Regular Legislative Session apply to the procurement of brokerage and investment services by state agencies involved in money management. House Bill 799 amends article 601b, V.T.C.S., and relates to state contracts for the procurement of goods and services from disadvantaged businesses. Acts 1991, 72d Leg., ch. 677, at 2457. The provisions of House Bill 799 became effective September 1, 1991, but shall apply only to contracts awarded on or after September 1, 1992. Id. § 7, at 2459. We understand your question primarily relates to the activities of statewide retirement systems, such as the Employees Retirement System (ERS) and the Teacher Retirement System (TRS), that are authorized to invest their assets in securities without distinction as to their source. See, e.g., Gov't Code §§ 815.301(a) (Employees Retirement System), 825.301(a) (Teacher Retirement System).

We also understand your question pertains to services of individuals who supply investment advice to the boards of trustees of retirement systems as well as to services of individuals who execute securities transactions at the direction of and on behalf of the boards of trustees of the retirement systems. See, e.g., id. §§ 815.301(c) (board of trustees of ERS may contract with private, professional investment managers to assist board in investing assets of the system), 825.301(h) (same authority for TRS board of trustees). We will address your question accordingly.[1] As this opinion shall explain, we conclude that contracts for investment counseling or investment advice are excepted from compliance with the terms of House Bill 799; however, we believe the boards of trustees of ERS and TRS must comply with its provisions when entering into contracts for brokerage services.

[1] This opinion does not address the applicability of article 601b outside of the procurement context.

House Bill 799 added the following language to section 3.10 of article 601b, V.T.C.S.:

(b) The [General Services] commission shall make a good faith effort to assist disadvantaged businesses to receive at least 10 percent of the total value of all contracts awarded for the purchase of supplies, materials, services, and equipment that the commission expects to make for a state agency in its fiscal year. The commission shall estimate the expected total value of an agency's contract awards not later than the 60th day of the agency's fiscal year and may revise the estimate as new information requires.

Acts 1991, 72d Leg., ch. 677, § 5, at 2458 (emphasis added). We are advised that the boards of trustees of ERS and TRS, rather than the General Services Commission, make contracts for the services in question.

[2] House Bill 799 defines "disadvantaged business" to mean: (A) a corporation formed for the purpose of making a profit in which at least 51 percent of all classes of the shares of stock or other equitable securities are owned by one or more persons who are socially disadvantaged because of their identification as members of certain groups, including black Americans, Hispanic Americans, women, Asian Pacific Americans, and Native Americans, who have suffered the effects of discriminatory practices or similar insidious circumstances over which they have no control; (B) a sole proprietorship created for the purpose of making a profit that is 100 percent owned, operated, and controlled by a person described by Paragraph (A) of this subdivision; (C) a partnership formed for the purpose of making a profit in which at least 51 percent of the assets and interest in the partnership is owned by one or more persons described by Paragraph (A) of this subdivision. Those persons must have a proportionate interest in the control, operation, and management of the partnership's affairs; (D) a joint venture in which each entity in the joint venture is a disadvantaged business under this subdivision; or (E) a supplier contract between a disadvantaged business under this subdivision and a prime contractor under which the disadvantaged business is directly involved in the manufacture or distribution of the supplies or materials or otherwise warehouses and ships the supplies. Acts 1991, 72d Leg., ch. 677, § 1, at 2457 (V.T.C.S. art. 601b, § 1.02(3)).

The resolution of your question therefore will depend on whether the procurement in question is for services within the meaning of article 601b. The statute defines "services" as "the furnishing of skilled or unskilled labor or professional work but does not include:"

(1) professional services covered by the Professional Services Procurement Act [article 664-4, V.T.C.S.];
(2) services of an employee of a state agency;
(3) consulting services or services of a private consultant as defined by [article 6252-11c, V.T.C.S.]; or
(4) services of public utilities.

V.T.C.S. art. 601b, § 3.01(c).

The second and fourth exceptions obviously are not involved here. The Professional Services Procurement Act does not by its terms apply to the services of investment brokers, advisers, or managers. Article 6252-11c applies to contracts for private consulting services by state agencies. It defines "consulting service" to mean "the human service of studying or advising a state agency under a contract that does not involve the traditional relationship of employer and employee." V.T.C.S. art. 6252-11c, § 1(1). The act specifically states that it does not apply to and is not intended to discourage the use of consulting services provided by, among others, "investment counselors," and "other consultants whose services are determined by the governing board of a retirement system trust fund to be necessary for the performance of its fiduciary duties under the state constitution." Id. § 2(a)(3), (6).

The consulting services of investment counselors thus are excepted from the provisions of both V.T.C.S. articles 6252-11c and 601b. However, we do not believe that brokerage services which involve only the execution of securities transactions on the instructions of a retirement system's board of trustees are excepted under the provision just quoted because such services may not be classified as consulting services under the act. Accordingly, we conclude that brokerage services are not excepted from article 601b by article 6252-11c. The boards of trustees of ERS and TRS must therefore comply with the terms of section 3.10(b) of article 601b, V.T.C.S., when contracting for the services of investment brokers.

SUMMARY

Article 601b, V.T.C.S., applies to contracts for investment brokerage services of the Employees Retirement System and the Teacher Retirement System. The boards of trustees of these retirement systems must comply with the provisions of House Bill 799 of the 72d Legislature when awarding such contracts. ERS and TRS are therefore required to make a good faith effort to assist disadvantaged businesses in obtaining at least ten percent of the total value of contracts awarded for investment brokerage services.

DAN MORALES
Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Assistant Attorney General

RENEA HICKS
Special Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Steve Aragon
Assistant Attorney General