Can the Texas Employees Retirement System operate its own securities lending program?

Texas AG Opinion JM-1231: Could the State Pension System Run Its Own Securities Lending Program?

Plain-English summary

The Executive Director of the Employees Retirement System of Texas asked two questions about the system running a securities lending program. In a securities lending program, a fund lends out securities it owns in exchange for collateral and a return, then gets the securities back later. The first question was whether the retirement system could operate the program in-house, using its own personnel, while its securities sat under a custodial agreement. The second was whether the system could instead contract with some entity other than an existing custodian to run the program.

The Attorney General answered no to the first and yes to the second. Government Code section 815.303 authorized the retirement system to lend its securities through eligible third-party custodians, not to run the lending program itself. The statute also set eligibility requirements (experience with a fully secured securities loan program, adequate capital, an indemnification agreement, and a 100 percent collateral rule) that a bank or brokerage firm had to meet, and the system itself could not satisfy those. So there was no statutory authority for an in-house program.

On the second question, section 815.303(a) let the system name more than one entity to serve as custodian and lend securities, so the opinion saw no barrier to the system appointing an additional custodian to run a lending program. In fact, if the system's existing custodians did not meet the eligibility requirements, the system would have to appoint a new one in order to have its securities lent at all.

Currency note

This opinion was issued in 1990. 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 mentioned here.

Who this opinion affected (as of 1990)

The Employees Retirement System of Texas: The opinion told the system it could not lend its securities through an in-house program run by its own staff, but that it could contract with an eligible outside custodian, including a newly appointed additional custodian, to run a lending program.

Custodian banks and brokerage firms: The opinion described the section 815.303(b) eligibility requirements a bank or brokerage firm had to meet to lend the system's securities: experience with a fully secured securities loan program, adequate capital, a satisfactory indemnification agreement, and collateral of at least 100 percent of the loaned securities' market value.

Other statewide retirement systems and their trustees: The opinion read the statute and the constitutional prudent-investment provision to treat securities lending as a form of investment, carried out through eligible custodians under rules adopted by the board of trustees.

Common questions

Could the Texas retirement system run a securities lending program with its own employees?
No. The Attorney General concluded there was no statutory authority for the Employees Retirement System to operate an in-house securities lending program. Section 815.303 allowed lending only through eligible third-party custodians.

Could the system hire a new company just to run the lending program?
Yes. Section 815.303(a) let the system name more than one entity to serve as custodian and lend securities, so the opinion saw no impediment to appointing an additional custodian for that purpose.

What did a bank have to do to be eligible to lend the system's securities?
Under section 815.303(b), it had to be experienced in operating a fully secured securities loan program, maintain adequate capital, execute a satisfactory indemnification agreement, and require collateral of at least 100 percent of the market value of the loaned securities.

Background and statutory framework

The Employees Retirement System of Texas is a statewide retirement system established under a constitutional mandate. Article XVI, section 67, of the Texas Constitution requires the statutes governing each statewide system to provide for a board of trustees to administer the system and to invest the system's funds in such securities as the board considers prudent.

Chapter 815 of the Government Code sets out the powers and duties of the retirement system's board and provides for the management and operation of the system. Sections 815.207, 815.301, 815.302, and 815.303 authorize the system to select one or more commercial banks, depository trust companies, or other entities to serve as custodian of all or part of the system's assets. Section 815.303(a) grants express authority to select custodians and to lend the securities as the board of trustees determines, and section 815.303(b) prescribes the eligibility requirements for entities selected to engage in securities lending.

The opinion treated securities lending as a form of investment, and quoted a 1986 Washington Attorney General opinion describing securities lending agreements as income-producing loans that are an investment of funds. It also referred to Attorney General Opinion JM-1210 (1990).

Citations

Statutes:

• Tex. Const. art. XVI, § 67 (statewide retirement systems; board of trustees; prudent investment)
• Tex. Gov't Code § 815.303 (custodians; securities lending; eligibility requirements)
• Tex. Gov't Code § 815.207 (selection of custodians)
• Tex. Gov't Code § 815.301 (management of assets)
• Tex. Gov't Code § 815.302 (custody of securities)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1231
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1231.pdf

Original opinion text

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

October 8, 1990

Mr. Charles D. Travis
Executive Director
Employees Retirement System of Texas
P. O. Box 13207
Austin, Texas 78711-3207

Opinion No. JM-1231

Re: Authority of the Employees Retirement System of Texas to operate a securities lending program (RQ-1908)

Dear Mr. Travis:

You ask two questions regarding the participation of the Employees Retirement System of Texas (hereinafter ERS) in a securities lending program. The ERS is a statewide retirement system established pursuant to constitutional mandate. Tex. Const. art. XVI, § 67(b)(2). The constitutional provision requires the statutes governing each statewide system to provide for a board of trustees to administer the system and to invest the system's funds "in such securities as the board may consider prudent investments." Id. § 67(a)(3).

Chapter 815 of the Government Code (hereinafter the code) specifies the powers and duties of the ERS board and provides for the management and operation of the system. Sections 815.207, 815.301, 815.302, and 815.303 of the code authorize the ERS to select one or more commercial banks, depository trust companies, or other entities to serve as custodian of all or part of the retirement system's assets.

Section 815.303(a) grants express authority to the ERS to select one or more commercial institutions to serve as custodians of the system's securities and to lend the securities as the board of trustees determines. Section 815.303(b) prescribes the requirements for the entities selected to engage in securities lending:

(a) The retirement system may, in the exercise of its constitutional discretion to manage the assets of the retirement system, select one or more commercial banks, depository trust companies, or other entities to serve as custodian or custodians of the system's securities and to lend the securities under rules adopted by the board of trustees and as required by this section.

(b) To be eligible to lend securities under this section, a bank or brokerage firm must:

(1) be experienced in the operation of a fully secured securities loan program;

(2) maintain adequate capital in the prudent judgment of the retirement system to assure the safety of the securities;

(3) execute an indemnification agreement satisfactory in form and content to the retirement system fully indemnifying the retirement system against loss resulting from its operation of a securities loan program for the system's securities; and

(4) require any securities broker or dealer that lends securities belonging to the retirement system to deliver to and maintain with the custodian collateral in the form of cash or United States government securities in an amount equal to not less than 100 percent of the market value, from time to time, of the loaned securities. (Emphasis added.)

Securities lending is a form of investment. A 1986 opinion issued by the attorney general of the state of Washington described securities lending agreements as follows:

Under the terms of a securities lending agreement, securities are presently paid out in exchange for the right to receive repayment of the securities, plus interest, at some future date. Securities lending agreements, as income-producing loans, are therefore an investment of funds and may be constitutionally entered on behalf of the permanent common school fund, public pension or retirement funds, and industrial insurance funds.

Op. Wash. Att'y Gen. No. 5 (1986). See generally Attorney General Opinion JM-1210 (1990).

You first ask whether the ERS may operate an in-house securities lending program using its own personnel when its securities are held under a custodial agreement. Section 815.303 of the code authorizes securities lending through eligible third party custodians, not by the ERS itself. Further, the ERS could not satisfy the requirements that a bank or brokerage firm must satisfy in order to lend ERS's securities. Gov't Code § 815.303(b). The ERS, of course, is to adopt rules governing the lending of its securities. See § 815.303(a).

Next you ask whether the ERS has the authority to contract with an entity other than an existing custodian for the purpose of operating a lending program for the system's securities. Section 815.303(a) allows the ERS to designate more than one entity to "serve as custodian or custodians of the system's securities and to lend the securities." Consequently, we see no impediment to the ERS's naming an additional custodian to engage in securities lending. Indeed, if existing custodians did not satisfy the requirements of subsection (b) of section 815.303, the ERS would have to appoint a new custodian in order to have its securities lent.

SUMMARY

There is no statutory authority for the ERS to operate an in-house securities lending program. The ERS may select an eligible institution other than an existing custodian to operate a lending program for its securities.

Very truly yours,

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RENEA HICKS
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Karen C. Gladney
Assistant Attorney General