STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6597

August 24, 1989

CONFLICT OF INTEREST:

Member of board of trustees of public retirement system--member of board of directors of community economic development organization--vote on investment of pension assets in small business

INVESTMENTS:

Authority of public retirement systems to invest in stock or equity interests in small business and real estate limited partnerships

RETIREMENT AND PENSIONS:

Investment of assets in equity interests or stock in small businesses and real estate limited partnerships

Standards of care of public retirement system board of trustees making investment of assets in equity interests in small business

WORDS AND PHRASES:

"Investment fiduciary"

"Investments not otherwise qualified"

A qualified public retirement system may invest its assets or reserves in a small business benefitting the local community if it determines that the investment is in the best interests of the members and beneficiaries of the retirement system and the safety and rate of return on the proposed investment are comparable to other authorized investments available to the retirement system at the time the investment decision is made.

A member of the board of trustees of a county retirement system may vote on the question of making an authorized investment in a small business in which the member has no personal interest, even though the member serves on the board of directors of a community organization seeking to persuade the small business to locate in that community.

A board of trustees of a county retirement system is an investment fiduciary for the purposes of MCL 38.1132 et seq; MSA 3.981(112) et seq, if the county board of commissioners has granted to the board of trustees authority to invest and reinvest the assets and reserves of the county retirement system.

"Investments not otherwise qualified," as used in Sec. 20d(1) of the Act, are those types of investments which the Legislature has not otherwise specifically authorized in the Act.

A retirement system with assets of $40 million is not authorized to make a direct investment of its assets in a debt, warrant, or equity interests in a small business, but it may join with other qualified public retirement systems, other qualified pension systems, public agencies or instrumentalities, corporations or financial institutions to make the investment, provided the threshold level of assets is collectively met and the investment of such retirement system is limited as provided in MCL 38.1140a; MSA 3.981(120a).

A retirement system with assets of $40 million is not authorized to make an investment in a real estate limited partnership.

A public retirement system making an investment not permitted by MCL 38.1132 et seq; MSA 3.981(112) et seq, must divest itself of the investment within a reasonable time.

A public retirement system with assets of approximately $40 million may invest in the common or preferred stock of a small business, provided the stock meets the requirements of MCL 38.1134(1)--(4); MSA 3.981(114)(1)--(4).

Honorable James A. Barcia

State Senator

The Capitol

Lansing, Michigan 48909

George B. Mullison

Prosecuting Attorney

Bay County

515 Center Avenue

Bay City, Michigan 48708

You have requested my opinion on several questions relating to the investment powers of a public retirement system with assets totalling approximately $40 million under MCL 38.1132 et seq; MSA 3.981(112) et seq.

The first question is:

Materials provided in connection with the opinion requests indicate that the community organization promotes economic development in the area, including seeking out financing for and sources of investment in businesses located or to be located in the area.

The membership of the board of directors of the community organization is comprised of individuals from business, labor, education, and the public sector. Information provided indicates that the individual in question serves as a member of the board of directors of the community organization and also as a trustee of the county retirement system by virtue of his office as a county commissioner and chairman of the ways and means committee of that board. The proposed investment would be in a new company which is considering locating in the county, building a new factory, and providing approximately 450 jobs for the area.

The Legislature has codified the investment authority of public retirement systems to supersede any authority previously granted to a system under any other law of this state. MCL 38.1133(1); MSA 3.981(113)(1).

The standard of care that an investment fiduciary of a public retirement system must exercise is set forth in Sec. 13(2) and (3), MCL 38.1133(2) and (3); MSA 3.981(113)(2) and (3), which provide:

Thus, the Legislature has required an investment fiduciary to exercise the investment authority "solely in the interest of the participants and the beneficiaries of the public retirement system" by making investments for the "exclusive purposes of providing benefits to participants." The investment fiduciary must act with the care, skill, and the judgment of a prudent person and with due regard for the management, reputation and stability of the issuer after giving due consideration to the risk of loss and the opportunity for gain or return, diversification of investments of the system, liquidity of the investment relative to cash flow requirements of the system and the projected return of the investment relative to the funding objectives of the system.

Under these standards, the investment fiduciary must have "specific knowledge of the securities in which the pension fund money is invested and the relationship of each investment with the exclusive object of providing benefits to the system's participants." (Emphasis added.) House Legislative Analysis, HB 4272 (November 11, 1982).

The Legislature has also permitted the investment fiduciary to consider investments which would enhance the general welfare of this state and its citizens, but such investments may only be made if they offer comparable safety and rate of return to other permitted investments available to the fiduciary at the time of the investment decision.

It is reasonable to conclude from this that the Legislature recognized the possibility that an investment could have a two-fold benefit. First and foremost, it must benefit the participants and beneficiaries of a retirement system. Second, it can also assist the community in which the investment is made. However, the investment in a small business in the local community may be made only if the investment offers the safety and the rate of return comparable to other permitted investments available to the investment fiduciary at the time of the investment decision.

OAG, 1975-1976, No 4869, p 95, 96 (June 4, 1975), in addressing the issue of conflict of interest of a local public officer, stated:

Because no investment by the county retirement system is proposed to be made in the community organization promoting economic development in the county, 1968 PA 317, MCL 15.321 et seq; MSA 4.1700(51) et seq, which governs the conduct of county officers with respect to conflict of interest in contracts between county agencies and third persons, is not implicated.

In his office of trustee of the county retirement system, he must act in the best interest of the members and beneficiaries of the retirement system. As a member of the board of directors of the community organization, he must act in the best interests of the organization. The two interests may conflict, but unless the investment in question is in a security to be issued by the community organization, it is not proscribed by existing law.

Thus, in the absence of a personal interest in a particular authorized investment, a trustee of a local retirement system who is also a director of a community organization promoting a particular business in which the retirement system desires to make an investment may vote on the question of making a permitted investment in the local business.

It is my opinion, in answer to the first question, that a qualified public retirement system may invest its assets or reserves in a small business benefitting the local community if it determines that the investment is in the best interests of the members and beneficiaries of the retirement system and the safety and rate of return on the proposed investment are comparable to other authorized investments available to the retirement system at the time the investment decision is made. It is my further opinion that a member of the board of trustees of a county retirement system may vote on the question of making an authorized investment in a small business in which the member has no personal interest, even though the member serves on the board of directors of a community organization seeking to persuade the small business to locate in that community.

The second question is:

For purposes of MCL 38.1132 et seq; MSA 3.981(112) et seq, the term "investment fiduciary" is defined in MCL 38.1132(d); MSA 3.981(112)(d), to mean a person who does any of the following:

A rule enacted by the Legislature for the construction of statutes provides that the word "person" in a statute includes bodies politic, unless the intent of the Legislature is manifest that it not be so applied. MCL 8.3 and 8.31; MSA 2.212 and 2.212(1).

In establishing a county retirement plan, a county board of commissioners may empower a board of trustees, a collegial body, to administer the plan, to "invest, and reinvest the funds and reserves of the plan." MCL 46.12a(14); MSA 5.333(1)(14). A board of trustees of a county retirement plan which has been empowered to invest and reinvest the funds and reserves of the county retirement plan clearly exercises discretionary authority or control of the investment of the system's assets and, therefore, is an investment fiduciary under MCL 38.1132 et seq; MSA 3.981(112) et seq.

It is my opinion, in answer to the second question, that a board of trustees of a county retirement system is an investment fiduciary for the purposes of MCL 38.1132 et seq; MSA 3.981(112) et seq, if the county board of commissioners has granted to the board of trustees authority to invest and reinvest the assets and reserves of the county retirement system.

The third question is:

Section 20d, MCL 38.1140d; MSA 3.981(120d), in pertinent part provides:

The Legislature has not defined the term "qualified investment" in the Act. Resort may be had to the legislative history of the Act, including bill analyses, for assistance in determining the intent of the Legislature. Luttrell v Dep't of Corrections, 421 Mich 93, 103; MSA 365 NW2d 74 (1984). House Legislative Analysis, HB 4272 (November 10, 1982), in discussing the "Basket Clause," states that the bill permits investments "in any asset not specifically authorized in the bill."

Webster's Third New International Dictionary (1966) defines "qualified" to mean eligible. See Holley v Adams, 238 So2d 401, 405 (Fla, 1970).

Reading subsections (1) and (4) of Sec. 20d together in light of the legislative history, it must be concluded that the term "qualified investment" means specifically authorized by the Act.

It is my opinion, in response to your third question, that "investments not otherwise qualified," as used in Sec. 20d(1), MCL 38.1140d(1); MSA 3.981(120d)(1), are those types of investments which the Legislature has not otherwise specifically authorized in the Act.

The fourth question is:

Section 20a(1); MCL 38.1140a(1); MSA 3.981(120a)(1), states in pertinent part:

In Sec. 20d, MCL 38.1140d; MSA 3.981(120d), the so-called "basket clause," the Legislature has, in pertinent part, provided:

It is noted that both Secs. 20a(1) and 20d(1) were added at the same time by the Legislature by means of 1982 PA 55.

A plain reading of Sec. 20a(1) indicates that only those retirement systems with assets exceeding $250 million are specifically authorized to invest in a debt, warrant or equity interests of a small business. It is noted that MCL 38.1132(c); MSA 3.981(112)(c), defines the term "equity interests" to mean "limited partnership interests and other interests in which the liability of the investor is limited to the amount of the investment, but does not mean general partnership interests or other interests involving general liability of the investor." For those systems which do not meet the asset threshold of $250 million, no amount can be invested in a debt, warrant or equity interest of a small business unless the systems join a group of other qualified public retirement systems, qualified pension systems, government agencies or instrumentalities, corporations or financial institutions to meet the threshold of $250 million in making the permitted investment. Section 20d, on the other hand, permits a public retirement system with assets of $10 million or more to invest up to 5% of its assets in any investments not specifically authorized by the Act.

This reading of Secs. 20a and 20d is confirmed by a study of the legislative history of 1982 PA 55 which conferred the authority upon certain public retirement systems to make investments in small businesses. Bill analyses may be examined to ascertain and, thus, assist in giving effect to the legislative intent. Luttrell v Dep't of Corrections, supra.

Amendatory 1982 PA 55 was enacted as HB 4272. House Legislative Analysis, HB 4272 (November 10, 1982), is instructive:

Basket Clause

Small Business Investment

The Legislature has specifically authorized equity interest investments in small businesses, but has restricted direct investment to public retirement systems with more than $250 million in assets. See also Sec. 20d(5), MCL 38.1140d(5); MSA 3.981(120d)(5). A public retirement system with assets of $40 million is authorized to make such an investment only if it joins with other public retirement systems, qualified pension systems, government agencies or instrumentalities, corporations, or financial institutions to meet the threshold so as to make the investment. Since investments in small business is an authorized investment, Sec. 20d may not be employed by a public retirement system with assets of $40 million to make such a direct investment in small businesses.

It is my opinion, in response to the fourth question, that a retirement system with assets of $40 million is not authorized to make a direct investment of its assets in a debt, warrant, or equity interests in a small business, but it may join with other qualified public retirement systems, qualified pension systems, public agencies or instrumentalities, corporations or financial institutions to make the investment, provided the threshold level of assets is collectively met and the investment of such retirement system is limited as provided in MCL 38.1140a; MSA 3.981(120a).

The fifth question is:

Section 19(1), MCL 38.1139(1); MSA 3.981(11)(1), states in pertinent part:

The State Treasurer, as an investment fiduciary, may exceed the 5% of the assets of the system limitation.

An investment in an interest in real or personal property is a specifically authorized investment, but only public retirement systems with assets of more than $250 million may make such investments. Even though the investment is an authorized investment under the Act, a public employees retirement system with assets of $40 million may not make such an investment. Thus, since the retirement system in question has assets of only $40 million, it is precluded from making an investment in an interest in a real estate limited partnership under MCL 38.1140d; MSA 3.981(120d).

It is my opinion, in response to the fifth question, that a retirement system with assets of $40 million is not authorized to make an investment in a real estate limited partnership.

The sixth question is:

While the Act permits the retention of an investment initially purchased in accordance with the Act, which investment later becomes nonqualified, MCL 38.1132(e); MSA 3.981(112)(e), it is silent as to what must be done with investments which were not permitted when initially made. There is no Michigan case law on this question. Review of the common law of other states with respect to unauthorized investments by trusts in general is helpful.

It is a general rule of trust law that unless retention of an investment is authorized by the trust instrument or by statute, the trustee who receives an improper investment must dispose of that investment within a reasonable time and invest the proceeds in proper trust investments. Guaranty Trust Co of New York v Lewis, 279 NY 396; 18 NE2d 635, 637 (1939), Rigdon v Cooper, 203 Ga 547; 47 SE2d 633, 639 (1948). Ordinarily, the power of a trustee to retain investments is not different from the power of the trustee to make investments, Cameron Trust Co v Leibrandt, 229 MoApp 450; 83 SW2d 234, 235-236 (1935), and a trustee cannot retain an investment that could not properly have been initially made. Rigdon, supra.

It is my opinion, in answer to the sixth question, that a public retirement system making an investment not permitted by MCL 38.1132 et seq; MSA 3.981(112) et seq, must divest itself of the investment within a reasonable time.

The last two questions are related and will be considered together. The questions are:

MCL 38.1132(c) and (j); MSA 3.981(112)(c) and (j), provide:

These definitions are mutually exclusive.

A public retirement system with assets of $40 million may invest assets or reserves of the system in the common stock or preferred stock of a small business, provided it observes the following limitations imposed by the Legislature in MCL 38.1134; MSA 3.981(114):

It is my opinion, in answer to your seventh question, that a public retirement system with assets of approximately $40 million may invest in the common or preferred stock of a small business, provided the stock meets the requirements of MCL 38.1134(1)--(4); MSA 3.981(114)(1)--(4).

In light of the answer to the fourth question that a public retirement system with assets of $40 million may not invest in equity interests in a small business as defined in MCL 38.1132(c); MSA 3.981(112)(c), no answer to your eighth question is required.

In summary, it is my opinion that:

A. A qualified public retirement system may invest its assets or reserves in a small business benefitting the local community if it determines that the investment is in the best interests of the members and beneficiaries of the retirement system and the safety and rate of return on the proposed investment are comparable to other authorized investments available to the retirement system at the time the investment decision is made.

B. A member of the board of trustees of a county retirement system may vote on the question of making an authorized investment in a small business in which the member has no personal interest, even though the member serves on the board of directors of a community organization seeking to persuade the small business to locate in that community.

C. The board of trustees of a county retirement system empowered to invest the assets and reserves of the system is an investment fiduciary within the purview of MCL 38.1132 et seq; MSA 3.981(112) et seq.

D. "Investments not otherwise qualified," as used in MCL 38.1140d(1); MSA 3.981(120d)(1), are those investments not specifically authorized by the Act.

E. A public retirement system with assets of approximately $40 million may not make a direct investment of its assets or reserves in a debt, warrant or equity interest in a qualified small business.

F. A public retirement system with assets of approximately $40 million may not invest in a real estate limited partnership.

G. A public retirement system making an investment not permitted by MCL 38.1132 et seq; MSA 3.981(112) et seq, must divest itself of the investment within a reasonable time.

H. A public retirement system with assets of approximately $40 million may invest in the common or preferred stock of a small business, provided the stock meets the requirements of MCL 38.1134(1)--(4); MSA 3.981(114)(1)--(4).

Frank J. Kelley

Attorney General