                       October    8, 1990



Mr. Charles D. Travis            Opinion No.   J-M-1231
Executive Director
Employees Retirement System      Re: Authority of the Employees
   of Texas                      Retirement System of Texas  to
P. 0. Box 13207                  operate a securities   lending
Austin, Texas   78711-3207       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, 5 67(b)(2). The constitu-
tional 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   'I
                                                          in
such securities as the board may consider prudent    invest-
ments .. XL I 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 EFG
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) prescr ibes 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 &I&,       de-
        pository trust comnanies,   x other entities
        to serve as custodian      or custodians   of
        the system's  securities   and to lend    the



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ktr. Charles D. Travim - Pago 2~ (JM-1231)




        m          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 pro-
           gram ;

                 (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 indem-
           nifying the retirement system against loss
           resulting from its operation     of a secu-
           rities loan program      for the    system's
           securities: and

                (4) reguiz; a;: securities broker or
           dealer to                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 re-
        payment 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.




                               p. 6549
Wr. Charles D. Travis - Page 3     '(JM-1231)




Gp. Wash. Att'y Gen. No. 5 (1986).     See aenerally    Attorney
General opinion JW-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 reguirements that a
bank or brokerage fund must  satisfy in order to lend EPS's
securities.  Gov't Code 0 815.303(b).   The ERS, of course,
is to adopt rules governing  the lending of its securities.
&   5 815.303(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
systemVs 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.



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



                                   fJ ban%
                                      Very truly y     s,

                                           A‘,
                                      JIW     WATTOX
                                      Attorney General of Texas

WARY XELUS
First Assistant Attorney General

mu WccmARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General


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Mr; Charles 0. Travfs~m+Page   4     (m-1231)




RENEA HICKS
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Karen C. Gladney
Assistant Attorney General




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