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May 1, 1972
Honorable Lloyd G. Baker, Director
Public Employees' Retirement System
201 General Administration Building
Olympia, Washington 98504 Cite as: AGLO 1972 No. 26 (not official)
This is in response to your recent memorandum in which you requested an opinion of this office on two questions which we paraphrase as follows:
(1) May the Public Employees' Retirement Board invest the funds of the Public Employees' Retirement System in savings and loan associations?
(2) Assuming that your answer to Question No. (1) is in the affirmative, what standards govern the Public Employees' Retirement Board in making such investments?
Your first question must be answered in the affirmative. Your second question is answered as set forth in the body of the opinion below.
The classes of investments in which the funds of the Public Employees' Retirement System (PERS) may be invested are set forth in RCW 41.40.071, in relevant part, as follows:
"The members of the retirement board shall be the trustees of the several funds created by this chapter and the retirement board shall [[Orig. Op. Page 2]] have full power to invest or reinvest, or to authorize the state finance committee to invest or reinvest, such funds in the following classes of investments, and not otherwise:
". . .
"(14) Investments in savings and loan associations organized under federal or state law, insured by the federal savings and loan insurance corporation, and operating in this state: PROVIDED, That the investment in any such savings and loan association shall not exceed the amount insured by the federal savings and loan insurance corporation;
". . ." (Emphasis supplied.)
It seems clear beyond any doubt that the Public Employees' Retirement Board does have the authority to place the funds of the system in "investments in savings and loan associations". The only qualifications upon this power are as follows:
(1) The association must be organized under federal or state law;
(2) It must be insured by the Federal Savings and Loan Insurance Corporation;
(3) It must be operating in this state;
(4) The investment may not exceed the amount insured by the Federal Savings and Loan Insurance Corporation.
Therefore, your first question is answered in the affirmative.
The standards guiding the conduct of the Public Employees' Retirement Board in investing the system's funds in statutorily approved classes of investment are twofold: statutory and common law.
General statutory standards are set forth in RCW 41.40.090, as follows:
[[Orig. Op. Page 3]]
"Except as provided herein, no member or employee of the retirement board shall have any interest direct or indirect in the gains or profits of any investment made by the retirement board nor as such directly or indirectly receive any pay or emolument for his services. And no member or person connected with the said retirement board, directly or indirectly, for himself or as an agent or partner of others, shall borrow any of its funds or deposits or in any manner use the same except to make such current and necessary payments as are authorized by the retirement board; nor shall any member or employee of the retirement board become an endorser of surety or become in any manner an obligor for moneys loaned or borrowed of the retirement board."
This general standard is reinforced by the criminal penalty provided by RCW 41.40.400, as follows:
"Any person who shall knowingly make any false statements, or shall falsify or permit to be falsified any record or records of this retirement system in any attempt to defraud the retirement system as a result of such act, shall be guilty of a gross misdemeanor."
These two statutory provisions obviously deal with the situation where a board member, himself, directly or indirectly, profits from an investment made by the retirement board. The common law deals with those situations where the board member, himself, did not necessarily profit from the transaction, but where the transaction was imprudent.
As you will note from the underlined section of RCW 41.40.071, set forth above, the board members when investing the funds of the PERS act as "trustees" of those funds. The Washington State Supreme Court has expressed the standards governing trustees, as follows:
". . . In administering the trust, the trustee must exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property and, in meeting this standard, the circumstances as they reasonably appear to him at the time of doing an act, [[Orig. Op. Page 4]] and not at some subsequent time when his conduct is called in question, should be considered. The trustee owes to the beneficiaries of the trust the highest degree of good faith, diligence, fidelity, loyalty, and integrity, and the duty to deal fairly and justly with them and solely in their interests." Monroe v. Winn, 16 Wn.2d 497, 508, 133 P.2d 952 (1943); cited with approval In Re Parks Trust, 39 Wn.2d 763, 765, 238 P.2d 1205 (1951).
Of course, these standards, both statutory and common law, apply to all classes of investments and not merely to investments in savings and loan associations. Whether investing retirement funds in savings and loan associations would contravene any of these standards would depend upon a myriad of considerations. Among these might be:
(1) Concerns for the cash flow of the retirement system.
(2) The security of the investment (whether guaranteed or insured or not).
(3) The expected return on the investment.
(4) Considerations as to marketability, etc.
Of course, any one of these factors might offset the others in any given instance. However where, for example, the board was advised by its investment counsel that as between two classes of investment all the considerations were the same except that one promised a rate of return of seven percent (7%) and the other promised a rate of return of four percent (4%), one might very well argue that placing money in the investment which promised a four percent (4%) return would be a breach of the fiduciary duty. Where, however, there were differences among the various characteristics of the two investments, then receiving a lower rate of return in exchange for greater security or a lower rate of return in exchange for marketability could very likely be justified and legally defended.
In each particular circumstance, then, the board should stand ready to justify its investments as the type that a man of ordinary prudence would have made under similar circumstances. In short, the standard is not so much a legal standard which can be set forth in black and white, as it is a "common sense" standard which is measured factually against the situation that existed at the time the [[Orig. Op. Page 5]] questioned investment was made.
We trust the answers to the questions set forth above have been of some assistance.
Very truly yours,
FOR THE ATTORNEY GENERAL
WAYNE L. WILLIAMS
Assistant Attorney General