Can a Texas public funds investment pool create a subsidiary to invest public money?

Plain-English summary

Texas state agencies, cities, counties, school districts, and other local governments combine their cash into "public funds investment pools" so it can be invested together under the Public Funds Investment Act. Representative Rene Oliveira, who chaired the Texas House Business and Industry Committee, asked the Attorney General four related questions about how much freedom those pools have to structure themselves.

First, can a pool spin off a wholly-owned subsidiary and invest its assets through that subsidiary? The AG said the Act does not prohibit this. The Act lists the kinds of "entities" that can invest public funds and does not mention subsidiaries either way, but when the Legislature creates an entity it impliedly gives it the powers reasonably necessary to do its job. So a pool may create and invest through a subsidiary if the pool's governing body determines that doing so is reasonably necessary to fulfill the pool's statutory functions, and if the pool, the subsidiary, and the participating governments all still comply with the Act's investment rules and standard of care. The AG added that a court could treat a wholly-owned, pool-controlled subsidiary as itself an investment pool with authority to invest public funds, so long as it acts on behalf of two or more local governments or state agencies.

Second, who has to sit on a pool's advisory board? Section 2256.016(g) sets out two rules. For a pool created under the Interlocal Cooperation Act and managed by a state agency, the board must be split equally between pool participants and independent qualified advisors. For other pools, subsection (g)(2) says the board is composed of participants "and" qualified advisors. The AG read "and" to mean both: such a board must include both participants and independent qualified advisors, though it does not have to be an equal split. A board made up entirely of one group or the other would not satisfy the statute.

Third, can the same people serve on both the pool's board and its subsidiary's board? The AG said the Act does not address subsidiaries, so it does not prohibit the pool's board members from also serving as the subsidiary's board. The AG was careful to note that it was not deciding whether that overlap complies with any other state or federal law.

Fourth, can an investment pool be formed under another state's law? The AG said the Act does not prohibit it. The Act describes a pool as an entity created under the Government Code but says its authority is "in addition to" authority granted by other law, so a pool may be organized under another state's law as long as it complies with the Act and with Texas's rules for foreign entities doing business in the state.

Currency note

This opinion was issued in 2015. Subsequent statutory amendments, court decisions, or later Attorney General 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.

What the opinion meant for those who asked

Investment pool managers and their governing bodies (as the opinion described it): The opinion described a pool as free to create and invest through a wholly-owned subsidiary, but only after the governing body determined the move was reasonably necessary to fulfill the pool's statutory functions, and only if the pool and subsidiary continued to follow the Act's investment authorizations and standard of care. It also described a wholly-owned, controlled subsidiary as potentially an investment pool in its own right when it acts for two or more governments or agencies.

Pools setting up advisory boards (as the opinion described it): The opinion read subsection 2256.016(g)(2) to require both pool participants and independent qualified advisors on the board, while not requiring equal numbers. It described a board composed exclusively of one group as failing the statute.

Local governments and state agencies that invest through pools (as the opinion described it): The opinion described the participating entities' governing bodies as still bound by the Act's regulations and standards when their pool used a subsidiary, and noted that a governing body authorizes investment in a particular pool (which could include a subsidiary that is itself a pool) by rule, order, ordinance, or resolution.

Pools organized outside Texas (as the opinion described it): The opinion described the Act as not barring formation under another state's law, provided the pool complied with the Act and with Texas law governing foreign entities doing business in the state.

Common questions

What is a public funds investment pool?
The opinion described it as an entity created under the Government Code to invest public funds jointly for the governments and agencies that participate, with investment objectives ranked as preservation and safety of principal, then liquidity, then yield. The Public Funds Investment Act governs how these pools invest.

Can an investment pool create a subsidiary to hold its investments?
The AG said the Act does not prohibit it. A pool may create and invest through a wholly-owned subsidiary if its governing body determines the step is reasonably necessary to fulfill the pool's statutory duties and everyone keeps complying with the Act.

Does a pool's advisory board have to include outside advisors?
For boards governed by subsection 2256.016(g)(2), yes. The AG read the statute's "and" to require both pool participants and independent qualified advisors who do not have a business relationship with the pool, though not in equal numbers.

Can the same board run both the pool and its subsidiary?
The AG said the Act does not prohibit the pool's board members from also serving as the subsidiary's board. It expressly did not decide whether that arrangement complies with any other state or federal law.

Can a Texas investment pool be organized under another state's laws?
The AG said nothing in the Act bars it, as long as the pool complies with the Act and with Texas's rules for foreign entities doing business in Texas.

Background and statutory framework

The Public Funds Investment Act governs how state agencies, local governments, and public funds investment pools invest public money (Tex. Gov't Code Ann. § 2256.003). An investment pool is an entity created under the Government Code to invest public funds jointly for participating entities, with objectives ranked as safety of principal, liquidity, and yield (Tex. Gov't Code Ann. § 2256.002(6)). The Act defines "entity" and "investing entity" by reference to those described in section 2256.003, which include local governments, state agencies, certain nonprofit corporations, and an investment pool acting for two or more local governments or state agencies (Tex. Gov't Code Ann. § 2256.002(5); § 2256.003(a)).

The Act does not mention a pool's authority to form a subsidiary. The AG applied the principle that a legislatively created entity impliedly has the powers reasonably necessary to carry out its express functions (Tex. Orthopaedic Ass'n v. Tex. State Bd. of Podiatric Med. Exam'rs, 254 S.W.3d 714, 719 (Tex. App.-Austin 2008, pet. denied)). It concluded the Act does not prohibit a pool from creating and investing through a wholly-owned subsidiary, subject to the governing body's reasonable-necessity determination and continued compliance with the Act, and said a court could find such a subsidiary is itself an investment pool under section 2256.003(a)(4).

On advisory boards, the Act requires an equal split of participants and unaffiliated qualified advisors for pools created under the Interlocal Cooperation Act and managed by a state agency, and for other pools requires a board "composed ... of participants in the pool and other persons who do not have a business relationship with the pool" (Tex. Gov't Code Ann. § 2256.016(g)). Reading "and" in its ordinary conjunctive sense, the AG concluded subsection (g)(2) requires both groups, though not in equal numbers (In re Brookshire Grocery Co., 250 S.W.3d 66, 69-70 (Tex. 2008); Bayou Pipeline Corp. v. R.R. Comm'n of Tex., 568 S.W.2d 122, 125 (Tex. 1978)). The Act lets an entity authorize investment in a particular pool by rule, order, ordinance, or resolution (Tex. Gov't Code Ann. § 2256.016(a)).

Finally, the Act describes a pool's origin as an entity "created under" the Government Code but adds that its authority "is in addition to that granted by other law" (Tex. Gov't Code Ann. §§ 2256.002(6), .024(a)). On that basis the AG concluded the Act does not bar a pool formed under another state's law, provided it complies with the Act and Texas law on foreign entities doing business in the state (Tex. Bus. Org. Code Ann. §§ 9.001-.301). The Interlocal Cooperation Act is codified at sections 791.001-.035 (Tex. Gov't Code Ann. §§ 791.001-.035).

Citations

Statutory provisions:

• Tex. Gov't Code Ann. § 2256.003 (entities authorized to invest public funds)
• Tex. Gov't Code Ann. § 2256.002(5), (6) (definitions of "entity," "investing entity," and "investment pool")
• Tex. Gov't Code Ann. § 2256.003(a), (a)(4) (investment authority; pool acting for two or more governments)
• Tex. Gov't Code Ann. § 2256.016(a), (g), (g)(1), (g)(2) (investing through a pool; advisory board composition)
• Tex. Gov't Code Ann. §§ 2256.002(6), .024(a) (authority in addition to that granted by other law)
• Tex. Gov't Code Ann. §§ 791.001-.035 (Interlocal Cooperation Act)
• Tex. Bus. Org. Code Ann. §§ 9.001-.301 (foreign entities)

Cases:

• Tex. Orthopaedic Ass'n v. Tex. State Bd. of Podiatric Med. Exam'rs, 254 S.W.3d 714, 719 (Tex. App.-Austin 2008, pet. denied)
• In re Brookshire Grocery Co., 250 S.W.3d 66, 69-70 (Tex. 2008)
• Bayou Pipeline Corp. v. R.R. Comm'n of Tex., 568 S.W.2d 122, 125 (Tex. 1978)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0022
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2015/kp0022.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

June 9, 2015

The Honorable Rene O. Oliveira Opinion No. KP-0022
Chair, Committee on Business & Industry
Texas House of Representatives Re: Authority of investment pools under the
Post Office Box 2910 Public Funds Investment Act (RQ-1233-GA)
Austin, Texas 78768-2910

Dear Representative Oliveira:

You ask several questions about investment pools' authority under the Public Funds Investment Act (the "Act"). [1] The Act generally governs the investment of public funds by state agencies, local governments, and public funds investment pools. See TEX. GOV'T CODE ANN. § 2256.003 (West 2008). An investment pool is "an entity created under [the Government Code] to invest public funds jointly on behalf of the entities that participate in the pool and whose investment objectives in order of priority are: (A) preservation and safety of principal; (B) liquidity; and (C) yield." Id. § 2256.002(6). You state that in some circumstances it may be advantageous for an investment pool to form a subsidiary to facilitate an investment pool's operation and compliance with state and federal securities law. Request Letter at 1-2. Your first question is two-fold: (1) "whether an investment pool may invest all or a portion of its assets in a wholly-owned subsidiary trust or other entity ... as long as such Subsidiary complies with all provisions of the [Act] applicable to 'entities,' as such term is defined therein," and (2) whether such a subsidiary is itself "an 'entity' as defined in the [Act] and therefore may make authorized investments for the ultimate benefit of the participants of the Parent pool." Id. at 2, 4.

The Act defines the terms "entity" and "investing entity" as "an entity subject to [the Act] and described by Section 2256.003." TEX. GOV'T CODE ANN. § 2256.002(5) (West 2008). The entities described in section 2256.003 are "a local government[,] ... a state agency," certain nonprofit corporations, and "an investment pool acting on behalf of two or more local governments, state agencies, or a combination of those entities." Id. § 2256.003(a) (granting investment authority to the governing body of "an investment pool acting on behalf of two or more local governments, state agencies, or a combination of those entities"). The Act does not expressly address a public funds investment pool's authority to create and invest in a subsidiary. But when the Legislature creates an entity, the Legislature "impliedly intends that the [entity] have whatever powers are reasonably necessary to fulfill its express functions or duties, and the legislature is not required to include every specific detail or anticipate all unforeseen circumstances" when it enacts the entity's authorizing statute. Tex. Orthopaedic Ass'n v. Tex. State Bd. of Podiatric Med. Exam'rs, 254 S.W.3d 714, 719 (Tex. App.-Austin 2008, pet. denied) (quotation marks omitted). Although the Act does not attempt to prescribe in detail how an entity may execute its investments, the Act regulates an entity's investing by authorizing only certain kinds of investments, prioritizing investment objectives, and mandating the standard of care that an entity's governing body must observe when it invests public funds, among other requirements. [2] The Act does not prohibit an investment pool from creating and investing all or part of its assets in a wholly owned subsidiary, but to do so the investment pool's governing body must determine that it is reasonably necessary to fulfill the investment pool's statutory functions and duties. Furthermore, the respective governing bodies of the investing entities, the investment pool, and the subsidiary must otherwise comply with the Act's regulations and standards. [3] And, although no judicial or attorney general opinion has addressed the question, a court could conclude that a subsidiary that is wholly-owned and controlled by an investment pool is itself an investment pool with the authority to invest public funds if it acts "on behalf of two or more local governments, state agencies, or a combination of those entities." TEX. GOV'T CODE ANN. § 2256.003(a)(4) (West 2008).

In your second question, you ask about the composition of the advisory boards of investment pools and their subsidiaries under subsection 2256.016(g)(2) of the Act. Request Letter at 2, 4-5. Subsection (g) provides:

(g) To be eligible to receive funds from and invest funds on behalf of an entity under this chapter, a public funds investment pool must have an advisory board composed:

(1) equally of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool, for a public funds investment pool created under 791 [the Interlocal Cooperation Act] and managed by a state agency; or

(2) of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool, for other investment pools.

TEX. GOV'T CODE ANN. § 2256.016(g) (West Supp. 2014). Subsection (g)(1) requires that the board of a public funds investment pool created under the Interlocal Cooperation Act and managed by a state agency must be composed equally of pool participants and qualified advisors who do not have a business relationship with the pool. Id. § 2256.016(g)(1). [4] For other investment pools, subsection (g)(2) requires that the board be composed of participants and qualified advisors, without stating that the number of participants and qualified advisors must be equal as in subsection (g)(1). Id. § 2256.016(g)(2). You state that it may be advisable for a board subject to subsection 2256.016(g)(2) to be composed exclusively of either all pool participants or all independent qualified advisors. Request Letter at 5. You ask whether a board subject to subsection (g)(2) must be composed of both pool participants and independent qualified advisors, or whether subsection (g)(2) is merely a prohibition against including board members who are neither pool participants nor independent qualified advisors. Id. at 2, 4-5.

Subsection (g)(2) states that a board subject to its terms must be composed of pool participants and qualified advisors, not pool participants or qualified advisors. TEX. GOV'T CODE ANN. § 2256.016(g)(2) (West Supp. 2014). As the Texas Supreme Court has explained, "ordinarily the words 'and' and 'or' are not interchangeable." In re Brookshire Grocery Co., 250 S.W.3d 66, 69-70 (Tex. 2008) (quotation marks omitted). The word "and" in a statute should be construed to mean "or" only "where it must be done in order to effectuate the manifest intention of the user; and where not to do so would render the meaning ambiguous, or result in an absurdity; or would be tantamount to a refusal to correct a mistake." Bayou Pipeline Corp. v. R.R. Comm'n of Tex., 568 S.W.2d 122, 125 (Tex. 1978). Subsection 2256.016(g)(2) unambiguously requires the board of an investment pool subject to its terms be composed of both pool participants and independent qualified advisors, although the board is not required to be composed of an equal number of such persons.

You also ask whether the members of the advisory board of a wholly-owned subsidiary may be identical to the members of the investment pool that owns the subsidiary. Request Letter at 2, 5. As noted above, the Act does not address subsidiary entities owned by investment pools. Accordingly, the Act does not prohibit the board members of an investment pool from serving as the board of a wholly-owned subsidiary. You do not ask, and we do not address, whether such an arrangement would comply with other state or federal law.

Finally, you ask "whether an investment pool may be an entity formed under the laws of another state in the United States ... as long as such entity otherwise satisfies all requirements under Texas law for such foreign entity to conduct business in the State." Id. Section 2256.016 of the Act provides general requirements of an investment pool but does not address whether it may be formed under another state's law. TEX. GOV'T CODE ANN. § 2256.016 (West Supp. 2014). The Act defines the origin of an investment pool as "an entity created under" the Government Code but states that the authority it grants "is in addition to that granted by other law." Id. §§ 2256.002(6), .024(a) (West 2008). Accordingly, the Act does not prohibit an investment pool from being formed under the laws of another state provided the investment pool so formed complies with the Act and other Texas law applicable to an entity doing business in Texas. See, e.g., TEX. BUS. ORG. CODE ANN. §§ 9.001-.301 (West 2012) (chapter 9 "Foreign Entities").

SUMMARY

The Public Funds Investment Act does not prohibit an investment pool from creating and investing in a subsidiary, provided that (1) the investment pool's governing body determines that doing so is reasonably necessary to fulfill the investment pool's statutory functions and duties; and (2) the governing bodies of the investing entities, the investment pool, and the subsidiary otherwise comply with the Act's regulations and standards. A court could conclude that a subsidiary that is wholly-owned and controlled by an investment pool is itself an investment pool with the authority to invest public funds if ultimately it acts on behalf of two or more local governments, state agencies, or a combination of those entities.

Subsection 2256.016(g)(2) of the Act requires the board of an investment pool subject to its terms to be composed of both pool participants and independent qualified advisors, although the board is not required to be composed of an equal number of such persons. The Act does not prohibit the members of a board of an investment pool from serving as the board of a wholly-owned subsidiary.

The Act does not prohibit an investment pool from being formed under the laws of another state provided that state's laws are consistent with the Act and other Texas law applicable to an entity doing business in Texas.

Very truly yours,

KEN PAXTON
Attorney General of Texas

CHARLES E. ROY
First Assistant Attorney General

BRANTLEY STARR
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

WILLIAM A. HILL
Assistant Attorney General, Opinion Committee

[1] See Letter from Honorable Rene O. Oliveira, Chair, House Comm. on Bus. & Indus., to Honorable Greg Abbott, Tex. Att'y Gen. at 1 (Dec. 10, 2014), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter").

[2] See, e.g., TEX. GOV'T CODE ANN. §§ 2256.002(6) (West 2008) (stating the order of priority of an investment pool's investment objectives); .003 (stating an entity's authority to invest funds); .005(b) (West Supp. 2014) (requiring the governing body of an investing entity to formulate investment policies which "primarily emphasize safety of principal and liquidity" and "address investment diversification," among other requirements); .006 (West 2008) (stating the standard of care for making investments); .009-.016 (West 2008 & Supp. 2014) (authorizing specific investments).

[3] Section 2256.016 of the Government Code authorizes an entity to invest through an investment pool, provided that "the governing body of the entity by rule, order, ordinance, or resolution, as appropriate, authorizes investment in the particular pool," which could include a subsidiary that is an investment pool. Id. § 2256.016(a) (West Supp. 2014).

[4] See id. §§ 791.001-.035 (West 2012 & Supp. 2014) (Interlocal Cooperation Act).