                 THE     ATTORSEY        GESERAL
                             OF TEXAS




    Honorable 0. H. "Ike**Harris        Opinion No. JR-975
    Chairman
    Economic Development Committee      Re:   Whether public funds
    Texas State Senate                  may be invested in bank-
    P. 0. Box 12068                     oriented money market mutual
    Austin, Texas   78711               funds pursuant to article
                                        842a-2, V.T.C.S. (RQ-1345)
    Dear Senator Harris:
         Your letter   requesting   an opinion     from   this   office
    reads in part:
                The 70th Legislature of Texas passed House
            Bill 1488 enacting The public Funds Invest-
            ment Act of 1987, now codified in Article
P
            842a-2, Vernon's     Annotated     Texas   Civil
            Statutes (the 'Act'), in order to grant
            public bodies an expansion of their invest-
            ment authority. As a sponsor in the Senate
            of the companion bill to H.B. 1488 and as
            Chairman of the Committee on Economic Devel-
            opment which heard and passed such bill, I
            have received a number of inquiries from
            representatives of public bodies and finan-
            cial institutions as to the proper interpre-
            tation of Section 2(b) of the Act which
            authorizes investment of bond proceeds in
            ‘Common  trust funds or COmDarable    investment
            devices owned or      administered bv      banks
            domiciled in this State' (emphasis added)
            which consist solely of certain eligible
            obligations described in the Act ('Eligible
            Obligations'). (Emphasis in original.)
               . . . .

               In [Attorney General Opinion] JM-570, YOU
            held that traditional money-market mutual
            fund shares were not eligible for investment
            of city funds (even though the funds were
            restricted to holding federal securities)
            because no Texas statute authorized such


                                    P. 4960
Honorable 0. H. "Ike" Harris - Page 2 (JM-975)




         investment. The question now is whether H.B.
         1488 succeeded in overcoming #at    statutory
         deficiency if the mutual fund is an integral
         part of a Texas bank's management and invest-
         ment services. Accordinalv. vour oninion is
         resnectfullv reauested as     to whether    a
         bank-oriented monev market mutual fund of the
         tvne described below constitutes a 'comnara-
         ble investment device owned or administered
         bv a bank domiciled in this State.' within
         the meanina of the Act. such that a DubliC
         bodv that otherwise comnlies with the re-
         cuirements of the Act mav lawfullv invest its
         bond nroceeds in     such fund.     (Emphasis
         added.)
     **Commontrust funds . . . administered,by banks" refers
to the classification of funds excluded from the definition
of "investment company" by the Federal Investment Company
Act of 3.940,referring to **anycommon trust fund or similar
fund maintained by a bank exclusively for the collective
investment and reinvestment of m‘oneyscontributed thereto by
the bank in its.capacity as a trustee, executor, administra-
tor,~or guardian." 15 U.S.C. 5 8Oa-3(c)(3); ~99 Prop. Code
§ 113.171; Shannon v. Frost Nat'1 Bank of San Antonio, 533
S.W.Zd 389 (Tex. Civ. APP. - San Antonio 1975, writ ref'd
n.r.e.). It is explained:
         Basically, the common trust funds maintained
         by banks are investment companies in purpose
         and mode of operation, and, without the ex-
         ception in the 1940 Act, they would be reg-
         ulated by the Act.
T. Frankel, 1 The Regulation of    Money Managers, ch.   V(G) t
5 10.2, at 422.
     As your letter requesting an opinion advises, the
common trust fund typically sells units of participation in
the fund, each representing an equal, undivided interest in
its portfolio of securities, and, in the event of a dissolu-
tion of a common trust fund, the owners of units of partici-
pation will receive, pro rata, subject to the rights of
creditors, the proceeds of such sale less the liabilities of
the fund.   As described, participation in such funds is
similar to the participation of shareholders in corporations
organized for private gain. In Presnall v. Stockyards Nat'1
Bank the court said:
            It is generally agreed that shares in an
         incorporated company are the aliguot parts of


                              P. 4961
Honorable 0. H. "Ike" Harris - Page 3   (JM-975)




        the capital stock, and merely give to the
        owner a right to his share of the profits of
        the corporation while it is a going concern
        and to a share of the proceeds of its assets
        when sold for distribution in case of its
        dissolution and winding up.    The shares do
        not give to their owners any right in the
        property itself of the company. That remains
        in the artificial body called the corpora-
        tion. The right of the individual share-
        holder, according to the amount put into the
        fund of the corporation, is therefore of an
        incorporeal nature, though of value, not
        capable of manual delivery.
151 S.W. 873, 076 (Tex. Civ. App. - Texarkana 1912),    aff'd,
194 S.W. 384 (Tex. 1917).
     Your specific question asks whether a bank-oriented
money market mutual fund "of the type described below" con-
stitutes a "comparable investment device" within the meaning
of the public Funds Investment Act of 1987, and you draw
several parallels between the particular fund you describe
and a "common trust fund."   If we assume the bank-oriented
money market mutual fund to be "a comparable investment
device," a question arises as to whether it is an "indivi-
dual, association or corporation" to which political corp-
orations and subdivisions are forbidden to lend credit or in
which they cannot become stockholders.
     Article III, section 52(a),   of the Texas    Constitution
reads:
           Sec. 52 (a) Except as otherwise provided
        by this section, the Legislature shall have
        no power to authorize any county, city, town
        or other political corporation or subdivision
        of the State to lend its credit or to grant
        public money or thing of value in aid of, or
        to any individual, association or corporation
        whatsoever, or to become a stockholder in
        such corporation, association or company.
        However, this section does not prohibit the
        use of public funds or credit for the payment
        of premiums on nonassessable life, health, or
        accident insurance policies and annuity con-
        tracts issued by a mutual insurance company
        authorized to do business in this State.




                             P. 4962
Honorable 0. H. "Ike" Harris - Page 4   (JM-975)




None of the later-stated exceptions in section 52 embrace
loans to, or investments in, private enterprises or their
shares.
     If nunits of participation" in a mutual fund are the
equivalent of shares of stock in a corporation, association
or company within the contemplation of article III, section
52, of the Texas Constitution, such investments cannot be
authorized by the legislature. See Lewis v. Indeoendent
School District of Austin, 161 S.W.2d 450, 452 (Tex. 1942).
See also Citv of Tvler v. Texas EmDlOYerS' Ins. A ss'n, 288
S.W. 409 (Tex. Comm'n App. 1926 judgment adopted), aff'd on
rehearinq, 294 S.W. 195 (1927).1
     In Investment ComDanv Institute v. Camp, 401 U.S. 617
(19711, the United States Supreme Court considered the plan
of a national bank to go into the business of operating a
mutual investment fund. As described by the court:
            Under the plan the bank customer tenders
         between $10,000 and 5500,000 to the bank,
         together with an authorization making the
         bank the customer's managing agent.       The
         customer's investment is added to the fund,
         and a written evidence of participation is
         issued which exnresses in 'units of nartici-
         pation' the customer's DroDortionate interest
         in fund assets.   Units of participation are
         freely redeemable, and transferable to anyone
         who has executed a managing agency agreement
         with the bank. The fund is registered as an


     1. Monies paid to banks for such investment purposes
are not the equivalent of "deposits." In Lawson v. Baker,
220 S.W. 260 (Tex. Civ. App. - Austin 1920, writ ref'd), the
state depository statute was attacked on grounds that the
placement of state funds on deposit with banks amounted to
an unconstitutional loan or investment of public funds. The
court concluded that deDOSitS authorized by the statute in
question were not loans or investments.     It reached that
conclusion by reasoning with other jurisdictions that
     the general depositing of     money in a bank
     depository, with or without interest, subject to tZ
     check or demand of the depositor, is not a loan or
     investment.
u.    at 269.



                              P. 4963
Honorable 0. H. "Ike" Harris - Page 5      (JM-975)




        investment company    under the    Investment
        Company Act of 1940. The bank is the under-
        writer of the fund's units of participation
        within the meaning of that Act. The fund has
        filed a registration statement pursuant to
        the Securities Act of 1933.     The fund is
        supervised by a five-member committee elected
        annually by the participants pursuant to the
        Investment Company Act of 1940. The Securi-
        ties and Exchange Commission has exempted the
        fund from the Investment Company Act to the
        extent that a majority of this committee may
        be affiliated with the bank, and it is
        expected that a majority always will be offi-
        cers in the bank's trust and investment
        division. The actual custody and investment
        of fund assets is carried out by the bank as
        investment advisor pursuant to a management
        agreement. (Emphasis added.)
401 U.S. 617, at 622-623.
     A federal law provided that a national bank "shall not
underwrite any issue of securities or stock.tl 12 U.S.C.
§ 24. After observing that a bank which operates an invest-
ment fund has a particular investment to sell, the court
held that the operation of the investment fund involved a
bank in the underwriting, issuing, selling and distributing
of securities in violation of the federal law as it then
read. BK!R, 401 U.S. 617, at 639.
     In the   course   of   reaching its   decision,   the   court
noted:
        A IiIUtUal   fund is an ODen-end investment com-
        w.        The Investment Company Act of 1940
        defines an investment company as an 'issuer'
        of 'any security' which 'is or holds itself
        out as being engaged primarily                 in
        the business of investing . . . in' securi-
                                                  * '
        ties            .'   15 U.S.C. 55 80a-2(a)(21),
        80a-3 (i)'(i).      An open-end company is one
        'which is offering for sale or has out-
        standing any redeemable security of which it
        is the issuer.' 15 U.S.C. 5 80a-5(a)(l). An
        investment comnanv also includes a \unit
        investment trust': an investment          comoany
        which. among other thinas. 'is oraanized
        under a . . . contract of . . . aaencv . .
        and . . . issues only redeemable securities:
        each of        which renresents    an .undivided


                                P. 4964
Honorable 0. H. *Ike" Harris - Page 6   (JM-975)



                                                               ?




        interest in a unit of snecified    securities
              .' 15 U.S.C. 5 80a-4(2).      (Emphasis
        Added.)
&j at 625 n. 11.
     The characterization of a "unit of participation" by
the United States Supreme Court as a "proportionate interest
in the fund assets" could be fairly used as a description,
also, of a share of stock. m    Presnall v. Stockvards Nat'1
&&,   sutxq.  Section 52 of article III of the Texas Consti-
tution prevents a county, city or other municipal corpora-
tion from becoming Ita stockholderl' in a "corporation,
association or company."   It has been suggested, however,
that units of participation in bank-oriented money market
mutual funds are not the functional equivalents of shares of
stock in a profit-seeking enterprise, and that holders of
certificates evidencing ownership of such participatory
interests would not be V1stockholdersV*
                                      within the meaning of
the constitution.
     The argument suggests that units of participation in a
portfolio consisting of governmental obligations are not
equivalent to shares of stock within the constitutional
prohibition because they are not shares of bank stock, they
are not interests in a portfolio of securities consistinq of
stock in a private corporation, association or company, and
the fund itself is not a corporation. However, it must be
admitted that such funds, though not organized as corpora-
tions, are private enterprises operated for profit or gain,
that money invested in such an enterprise is put at risk in
a common venture, that the securities in the portfolio of
the fund (whether consisting of stocks of private corpora-
tions or of government bonds) are merely the assets of the
fund and not themselves the enterprise, and that return on
the investment depends upon how those assets are~~used by
fund managers.
      In Attorney General Opinion JM-570 (1986), to which
you refer, we advised that money market mutual funds,
including those that deal only in government securities, are
private enterprises operated for private gain.      We also
said:
           While it may be true as an abstract matter
        that an investor in such a fund owns an
        undivided pro rata interest in the portfolio
        of short-term obligations owned by the fund,
        it is true only in the same sense that an                  --.
        investor in the stock of a manufacturing
        concern can be said to own an undivided pro


                             P. 4965
Honorable 0. H. **Ikell
                      Harris - Page 7   (JM-975)




        rata interest in the machinery, buildings,
        and other assets of the manufacturer.     The
        investor can exercise no personal control
        over the portfolio of the fund or its dispo-
        sition, and has no right to reduce to posses-
        sion any part of it for safekeeping or for
        any other purpose.
Attorney General Opinion JM-570 (1986), at 5. It was also
noted there that an investor in such a fund assumes risks as
to the fidelity, accountability and expertise of the fund
managers as well as the financial stability and responsibil-
ity of the entities whose obligations are represented in the
portfolio of the fund.   Cf. Attorney General Opinion JM-23
(1983) (repurchase agreements).
     Although we concluded in Attorney General Opinion
JM-570 (1986) that statutes advanced there by proponents to
support investment of public funds in the securities (in-
                               of private entities did not
cluding participatory **units@')
provide that support, we did not suggest that statutes
purporting to do so, if enacted, would face no constitu-
tional hurdles.         Attorney General Opinions     x4-932
(1988): JM-832 (198F; JM-545 (1986); JM-23 (1983)'      -
(1980) (constitutional issue not addressed). The ente$iii
represented by a mutual fund such as you describe is one of
individuals or entities associated for the purpose of
private gain. Although the fund is not incorporated, it is
an "association" or "company" within the meaning of the
Texas Constitution. Mills v. State, 23 Tex. 295 (1859).
     In Mills v. State, m,      the Texas Supreme Court had
occasion to examine a provision of the 1845 Texas Constitu-
tion that provided, "No cornorate bodv shall hereafter be
created, renewed, or extended, with banking or discounting
privileges." (Emphasis added.) Tex. Const., art. VII, 5 30
(1845). In 1840, the legislature enacted a law declaring
"[t]hat any Cornoration.     Comnanv. or Asssociation     of
individuals who shall use or exercise banking or discounting
privileges in this State, . . . shall be deemed guilty."
(Emphasis added.)   An Act to Suppress Illegal Banking, Acts
1840, ch. 156, g 1, at 234. The court said:
           We think that the statute of 1040, to
        suppress illegal banking, was enacted for the
        purpose of carrying into effect this 30th
        section of the General Provisions of the
        Constitution. And inasmuch as the exercise
        of bankina and discountina orivileses. by
        comnanies   and   associations   of   indivi-
        duals. was a violation of the snirit of the


                             P. 4966
Honorable 0. H. "Ike" Harris - Page 0   (JM-975)




        constitution, iust as much as the exercise of
        the like nrivileaes bv a cornoration. the
        cornorate bodies. but also to      comnanies,
        and associations of individum.      (Emphasis
        added.)
Id. at 302-303. The court said the word, Vompany,'* as
used, applied to persons acting together for the prosecution
of enterprises, and that the word, "association," was used
as a synonym for Vompany."      Those words signified, the
court concluded, persons acting together, through officers
or agents, in the prosecution of important enterprises. Id.
at 303-304.
     Scarcely fifteen years later, using words given meaning
by the Mills court, section 52 of article III of the 1876
Constitution was written to deprive the legislature of power
to authorize any political subdivision to become a "stock-
holder" in a *'corporation,association or company." In that
era, nstock'*broadly referred to the capital of an enter-
prise. The 1859 edition of Bouvier's Law Dictionary defined
"stock" as:
                                                               -,
        The capital of a merchant, tradesman, or
        other person, including his      merchandise,
        money and credits.   In a narrower sense it
        signifies only the goods and wares he has for
        sale and traffic. The capital of corpora-
        tions is also called stock: this is usually
        divided into shares of a definite value, as
        one hundred dollars, fifty dollars per share.
2 Bouvier's Law Dictionary (8th ed. 1859), at 550.
     In the light of Mills v. State, the reference placed in
the new constitution to ustockholders'Oin associations -and
companies (as well as to stockholders in corporations),
exhibited a plain determination that its prohibition should
reach participation in non-corporate, private enterprises of
aggregated capital.   That is the construction given the
provision by the Texas courts. Lewis v. Indenendent School
District of Austin, sunrq; WcCaleb v. Continental Casualty
Co., 116 S.W.Zd 679 (Tex. 1938); Southern Casualty Co. v.
Moruan, 12 S.W.2d 200 (Tex. Comm'n App. 1929, judgment
adopted): Citv of Tvler v. Texas EmDlovers' Ins. Ass'n,
sunra.
     The leading case, Lewis v. Indenendent School District
of Austin   m,      was decided by the Supreme Court of
Texas in i942 before the current final sentence was added to


                             P. 4967
Honorable 0. H. *'Ike"Harris - Page 9   (JM-975)




article III, section 52(a) by amendment (November 4, 1986,
allowing the purchase of certain      mutual policies with
public funds), but it did not break new ground. It followed
a well marked furrow.
     In 1916, the Texas Supreme Court, in Middleton v. Texas
Power & Liaht Co., 185 S.W. 556 (Tex. 1916), said that the
Texas Employers Insurance Association (legislatively created
in conjunction with the enactment of the Workmens' Compensa-
tion Law) was not a private corporation but, instead, was
only an agency for proper administration of the law notwith-
standing its designation by the legislature as a "corpora-
tion." Id. at 562. (It issued no stock or certificates of
ownership and, in fact, was not l'ownedl* by anyone in the
usual sense, but its "subscribers" aggregated their capital
to operate it as a vehicle for their common advantage,
sharing in its success to the extent it relieved them of
obligations.) A decade later, the Commission of Appeals
held in Citv of Tvler v. Texas EmDlOVSrS’ Ins. Ass'n, suora,
that the ~~stockholder~~
                       provision of article III, section 52,
prohibited the legislature from permitting political subdi-
visions to become members of the association. The court
said the organization was 'a corporation engaged in the
insurance business on the mutual plan, whose subscribers are
stockholders in such corporation.' Id: at 412. For that
reason, the court said, the constitution forbade cities and
towns from "becoming stockholders therein." Id.
     On rehearing, the Commission of Appeals denied that it
had overruled the Middleton case. The court said the point
in the Middleton case was that the association was not a
corporation within the meaning of the general law authoriz-
ing corporations,   but that it did not follow that the
association did not have elements of a private corporation,
concluding:
        We have merely indicated ours opinion that the
        nature of such association, whether 'techni-
        callv a cornoration or not,' is such that
        municipal corporations cannot become sub-
        scribers thereto without violating constitu-
        tional limitations. (Emphasis added.)
CitV of Tvler v. Texas EmDlovers8 Ins. Ass'n,   294 S.W. 195,
196.
      Later, in Southern Casualty Co. v. Moraan, sunra, the
Commission of Appeals read the City of Tvler court to have
held:




                             p. 4968
Honorable 0. H. aIke*'Harris   -    Page 10 (JM-975)




        [T]he Legislature is without power (section
        52, art. 3, Constitution) to authorize a
        municipal corporation of the kind involved~to
        become, in effect, a 'stockholder' in the
        Texas Employers' Insurance Association (sub-
        stantially a 'mutual‘ company), and thus to
        'lend its credit,' etc., or to make the 'ap-
        propriation of public money' (held to be a
        gratuity) necessary to affecting insurance.
        (Emphasis added.)
12 S.W.Zd 200.   Later still, the Texas Supreme Court ex-
plained the Citv of Tvler holding.     The court said in
McCaleb v. Continental Casualty Co:
        It was also held that by virtue of section 52
        of article 3 of our Constitution, Vernon's
        Ann. St. Const. art. 3, 5 52,       municipal
        corporations could not take out a policy of
        insurance in a mutual insurance-company which
        would require a city to become a member of or
        stockholder in    such   insurance   company.
        (Emphasis added.)
116 S.W.2d 679, 680 (Tex. 1938).
      Nevertheless, when the Lewis case came before the Court
of Civil Appeals in 1941, the intermediate court was per-
suaded that the Citv of Tvler and Southern Casualty Co.
holdings were merely "obiter" to be dismissed as not con-
trolling. Lewis v. Indenendent School District, 147 S.W.2d
298, 303 (Tex. Civ. App. - Beaumont 1941), rev'd, 161 S.W.Zd
450 (Tex. 1942).     The appeals court concluded that the
school district in the Lewis case made ~g loan of its credit
to the mutual insurance company from which it purchased
workmen*9 compensation coverage, that the school district
did nnf;become a stockholder in the insurance company or a
subscriber  to  its  capital stock by its purchase of the
insurance policy, and it quoted from a North Carolina case
to the effect that a YstockholdeY is the owner of shares in
a corporation having capital stock represented by shares,
and that a mutual company is without "stock" or "stockhold-
ers" . && at 302.
     When the Lewis case reached the Texas Supreme Court,
the court characterized the question as whether the legisla-
ture could constitutionally authorize the school district, a
political corporation, to purchase a policy of mutual insur-
ance. Citing the Citv of Tvlel:case, among others, it said:




                                   P-   4969
Honorable 0. H. "Ike" Harris - Page 11   (JM-975)




           This Court has held that Section 52 of
        Article 3 of our Constitution      prohibits
        cities from becoming members of a mutual
        insurance association whose subscribers are
        stockholders in such company.
Lewis, 161 S.W.Zd 450, 452.
It held the school district to be prohibited by the Texas
Constitution from taking a policy in the mutual company,
saying:
        The lancuase used in the Constitution is
        clear and unambiauous. It soecificallv nro-
        hibits the School District from becomina a
        stockholder in a corooration, association. or
        comnanv. Whether the public policy announced
        in the Constitution is wise or unwise is not
        for this Court to decide. As said by Judge
        Speer, in the case of City of Tyler v. Texas
        Employers Ins. Ass'n., Tex.Com.App., 294 S.W.
        195, 197:
           'It is not a question of expediency, for
        upon that point we might all agree, but expe-
        diency cannot substitute the judgment of the
        municipality for that of the judgment of the
        framers of the Constitution. public policy
        cannot be contrary to the express provisions
        of the Constitution. When that instrument
        speaks, the matter is indelibly settled, and
        its wisdom cannot be questioned.'   (Emphasis
        added.)
Id. at 452-453.
     We are persuaded that %nits of participationI'in a
mutual fund operated as a private enterprise, whether
"bank-oriented" or not, are the functional equivalents of
shares of stock within the meaning of article III, section
52 of the Texas Constitution.   As a consequence, it is not
within the power of the Texas Legislature to permit munici-
palities to invest public funds therein and to thereby
become nstockholdersV'in an association or company within
the meaning of that provision.
     In 1986, subsection (a) of article III, section 52 w.as
amended to add a final sentence to the general prohibition:
        However, this section does not prohibit the
        use of public funds or credit for the payment




                              P. 4970
Honorable 0. H. "Ike" Harris - Page 12 (JM-975)




        of premiums on nonassessable life, health or
        accident insurance    policies and    annuity
        contracts issued by     a mutual    insurance
        company authorized to do business in this
        state.
Although the 1986 amendment added a sentence which now
expressly allows the use of public funds to purchase certain
mutual policies, the amendment did not otherwise alter the
scope of the constitutional prohibition, and we believe it
continues to prohibit the investment of public funds in
other private enterprises of aggregated capital, whatever
might be their nomenclature.
     In recent years, the courts of other states have ac-
corded a similar reading to prohibitory provisions found in
their own constitutions. See In   re J.iOn CaDital GrOUD  49
Bankr. 163 (S.D.N.Y. 1985): Board of Trustees of the P;blic
EmDlOVees' Retirement Fund of Indiana v. Pearson, 459 N.E.2d
715 (Ind. 1984); Public Housina Administration v. Housinq
Authoritv of Boaalusa, 137 So.Zd 315 (La. 1961).         a.
Louisiana State EmDlOVeSS’ Retirement Svstem v. State, 423
So.2d 73 (La. Ct. App. - [let Cir.] 1982), writ denied, 427
So.2d 1206 (1983). ,~.                                          I

     In our opinion, insofar as the Public Funds Investment
Act of 1987 (article 842a-2, V.T.C.S.) purports to authorize
political corporations and political subdivisions to invest
public funds in bank-oriented money market mutual funds or
securities of private entities, it conflicts with the con-
stitutional provision.
                        SUMMARY
           Insofar as article 842a-2, the Public
        Funds Investment Act of 1987, purports to
        authorize political corporations and politi-
        cal subdivisions to invest public funds in
        bank-oriented money market mutual funds or
        other securities of private entities, it
        conflicts with article III, section 52, of
        the Texas Constitution.




                                    Attorney General of Texas   ?




                              P- 4971
i.




     Honorable 0. H. "Ike" Harris - Page 13 (JM-975)




     MARY KELLER
     First Assistant Attorney General
     mu MCCREARY
     Executive Assistant Attorney General
     JUDGE ZOLLIE STEAKLEY
     Special Assistant Attorney General
     RICK GILPIN
     Chairman, Opinion Committee
     Prepared by Bruce Youngblood
     Assistant Attorney General




                                    P. 4972
