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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN FRANK J. KELLEY, ATTORNEY GENERAL Opinion No. 5807 October 29, 1980 COLLEGES AND UNIVERSITIES: Appointment of investment counsel Standard of care to be exercised by investment counsel over retirement or endowment funds CONSTITUTIONAL LAW: Const 1963, art 9, Sec. 19 The governing body of a state institution of higher education empowered to grant baccalaureate degrees may delegate its investment authority to an investment counsel. The investment counsel must observe the standard of a prudent man dealing with the property of another in the management of university retirement or endowment funds. The governing body of such an educational institution may not agree that the investment counsel shall be free from liability for losses resulting from any good faith action taken by counsel. Albert Lee, C.P.A. Auditor General State of Michigan 567 Hollister Building Lansing, Michigan 48913 You have requested my opinion on a question which may be phrased as follows: May the governing board of a state institution of higher education empowered to grant baccalaureate degrees delegate its investment authority to investment counsel and agree that the investment counsel shall have no liabilty for any loss resulting from its good faith actions? The investment of retirement funds and endowment funds of state institutions of higher education authorized to grant baccalaureate degrees is addressed by the people in Const 1963, art 9, Sec. 19, which provides, in pertinent part, as follows: 'The state shall not subscribe to, nor be interested in the stock of any company, association or corporation, except that funds accumulated to provide retirement or pension benefits for public officials and employees may be invested as provided by law; and endowment funds created for charitable or educational purposes may be invested as provided by law governing the investment of funds held in trust by trustees . . .' 1965 PA 314; MCLA 38.1121 et seq; MSA 3.981(101), authorizes the investment of public retirement and pension funds in corporate stock or bonds. 1937 PA 177; MCLA 555.201 et seq; MSA 26.85 et seq, Sec. 1, authorizes trustees to invest trust funds in common or preferred stock. The Uniform Management of Institutional Funds Act, 1976 PA 157; MCLA 451.1201 et seq; MSA 26.1199(1) et seq, is an act to establish guidelines for the management and use of investments held by private and governmental eleemosynary institutions. Pertinent provisions of 1976 PA 157, supra, provide as follows: 'Sec. 2. As used in this act: (c) 'Governing board' means the body responsible for the management of an institution or of an institutional fund. (e) 'Institution' means an incorporated or unincorporated organization organized and operated exclusively for educational, religious, charitable, or other eleemosynary purposes, or a governmental organization to the extent that it holds funds exclusively for any of these purposes. Sec. 6. Except as otherwise provided by the applicable gift instrument or by the applicable law relating to governmental institutions or funds, the governing board may: '(a) Delegate to its committees, officers, or employees of the institution or the fund, or agents, including investment counsel, the authority to act in place of the board in investment and reinvestment of institutional funds. '(b) Contract with independent investment advisor, investment counsel or managers, banks, or trust companies to act in place of the board in investment and reinvestment of institutional funds. '(c) Authorize the payment of compensation for investment advisory or management services. 'Sec. 7 (1) In the administration of the powers to appropriate appreciation, to make and retain investments, and to delegate investment management of institutional funds, members of a governing board shall exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision. Persons to whom the governing board has delegated authority, or with whom the governing board has contracted, to act in its place in investment and reinvestment of institutional funds shall exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision. '(2) In exercising ordinary business care and prudence pursuant to subsection (1), the governing board or person to whom investment or reinvestment authority is delegated or with whom such authority is contracted shall consider the long- and short-term needs of the institution in carrying out its educational, religious, charitable, or other eleemosynary purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions.' (Emphasis added.) The above provisions plainly express the intent of the legislature to authorize governing boards of state institutions of higher education empowered to grant baccalaureate degrees to delegate their investment authority to investment counsel. The statute provides that a standard of business care and prudence is to guide both the governing boards and the person or persons to whom governing boards delegate their investment authority. The governing boards of institutions of higher education having the authority to grant baccalaureate degrees, under Const 1963, art 8, Secs. 5 and 6, are subject to legislative exercise of the police power. See OAG, 1975-1976, No 3662, p 708 (December 15, 1976), and authorities cited therein. The police power includes protecting the public from financial loss. People v Murphy, 364 Mich 363, 368; 110 NW2d 805, 807 (1961); Opinion of the Justices, 113 NH 287; 306 A2d 55, 57 (1973). Thus, 1976 PA 157, supra, may be applied to the governing boards of institutions of higher education granting baccalaureate degrees without violating Const 1963, art 8, Secs. 5 and 6. One purpose of 1976 PA 157, supra, is to avoid the principle of nondelegation normally applicable to investments by trustees. Bogert, Trusts and Trustees, 2nd. Ed., Sec. 396, pp 282-283; Midlantic National Bank v Frank G. Thompson Foundation; CH. D.V. 170 NJ Super 128; 405 A2d 866, 870 (1979). Moreover, private persons may be granted a role in exercising governmental powers if standards as reasonably precise as the subject matter permits are provided for exercising such power. Dukesherer Farms, Inc. v Director of the Department of Agriculture, 405 Mich 1; 273 NW2d 877 (1979). City of Detroit v Detroit Police Officers's Association, 408 Mich 410, 458, 459; 294 NW2d 68 (1980). Here, as quoted above in 1976 PA 157, supra, Sec. 7, the legislature has provided standards that are as reasonably precise as the subject matter of investing public funds permits. (1) The investment counsel would also be subject to any investment policy adopted by the governing board of the institution of higher education having authority to grant baccalaureate degrees. 1976 PA 157, supra, Sec. 7 requires the exercise of ordinary business care and prudence under the facts and circumstances on the part of the university governing board and those to whom the governing board delegates its investment authority. An agreement that the investment counsel would not be liable for any losses incurred as a result of actions made in good faith clearly fails to require the degree of care specified by the legislature in 1976 PA 157, supra, Sec. 7. Moreover, it must be noted that Const 1963, art 9, Sec. 19, provides that university endowment funds 'may be invested as provided by law governing the investment of funds held in trust by trustees.' In adopting that language, it is clear that the constitutional framers intended that the standard of care for investing university funds would be the standard of care applicable under existing law to the investment of funds by a trustee, i.e., the 'prudent man' rule. Delegate Van Dusen, in explaining Committee Proposal 37d., which became, as amended, art 9, Sec. 19, expressed the understanding that: '. . . The reference in the constitutional provision to the law governing the investment of trust funds by trustees is simply a reference to existing law and, therefore, with the adoption of this constitutional provision, the university endowment funds could be held and managed pursuant to the existing law governing the investment of trust funds, which is the 'prudent man' rule.' 1 Official Record, Constitutional Convention 1961, p 768. In the Revised Probate Code, 1978 PA 642, Sec. 813; MCLA 700.813; MSA 27.5813, the legislature has provided: 'Except as otherwise provided by the terms of the trust, the trustee shall observe the standards in dealing with the trust assets that would be observed by a prudent man dealing with the property of another, and if the trustee has special skills or is named trustee on the basis of representations of special skills or expertise, he is under a duty to use those skills.' (Emphasis added.) Thus, in light of Const 1963, art 9, Sec. 19, it must be concluded that, in investing university funds, a governing board or the investment counsel to whom it delegates investment authority are also held to the standard of a prudent man dealing with the property of another in relation to the long and short-term needs of the university and the other factors set forth in 1976 PA 157, Sec. 7(2), supra. It is my opinion, therefore, that the governing board of a state institution of higher education empowered to grant baccalaureate degrees may delegate its investment authority to investment counsel. However, the board of governors may not agree that the investment counsel shall be free from liability for losses resulting from any good faith action taken by counsel. It is further my opinion that a more exacting standard, that of a prudent man dealing with the property of another, must be observed. Frank J. Kelley Attorney General (1)
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