Request By:
Frank A. Wichmann, Esq.
500 First National Bank Building
Covington, Kentucky 41011
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Thomas R. Emerson, Assistant Attorney General
This is in reply to your letter raising questions concerning investment by the trustees of the Policemen's Pension Fund of the City of Erlanger, a pension fund organized and operating pursuant to KRS 95.520 to 95.620.
Your first question asks:
"Does KRS 95.620 prohibit the Board of Trustees of the Pension Fund from hiring an investment counselor and paying a fee for his services in regard to the investment of the Pension Fund? "
KRS 95.620(1) states as follows:
"Except as provided in subsections (2), (3) and (4) of this section, the policemen's and firemen's pension fund in cities of the third or fourth class shall be held and distributed for the purpose of paying pensions and benefits, and for no other purpose."
The responsibility for the control and proper operation of the pension fund rests with the board of trustees. The General Assembly has made no provision for the expenditure of pension funds by the trustees for purposes of employing an investment counselor. Nor is there any provision whereby the board of trustees can delegate their functions to someone else in connection with management and investment duties involving the pension fund. Note the provisions of KRS 96.520(2):
"The board of trustees is the trustee of the pension fund, and has exclusive control and management of the pension fund and of all moneys donated or paid for the relief or pensioning of members of the police and fire departments. It may do all things necessary to protect the fund."
See also OAG 72-783, copy enclosed, where we said that in absence of legislative authority, the board of trustees of a pension fund cannot hire an investment counselor. We rejected the concept of the employment of an investment counselor not only in those situations where the counselor would exercise control over pension funds for investment purposes but also where the investment counselor was hired merely for the purpose of rendering advice concerning the investment of pension fund moneys.
Your second questions asks:
"Is investment of the Pension Fund limited to investments indicated in KRS 386.020, 386.030 and 386.050?"
KRS 95.600 reads as follows:
"The board of trustees in cities of the third class may draw the pension fund from the treasury and shall invest it, in whole or in part, in the name of the board, as the board deems most advantageous for the objects of the fund, in interestbearing bonds of any county, or any city of the first, second or third class in this state, or in any securities in which trustees are permitted to invest trust funds under the laws of this state. The securities shall be deposited with the treasurer of the board and shall be subject to the order of the board."
Thus, the investments by the trustees of the pension fund must be made pursuant to KRS 95.600 and those provisions relating to investments authorized for trustees, KRS 386.020, 386.030 and 386.050. See OAG 69-584, copy enclosed, at pages two and three.
Your third question is as follows:
"What criteria is to be used for determining if an investment would be regarded by a prudent businessman as a safe investment as indicated in KRS 386.020(g)."
KRS 386.020(1)(g) provides that, "Any fiduciary holding funds for loan or investment may invest them in:
"Real estate mortgage notes, bonds and other interest-bearing or dividend-paying securities (including securities of any open-end or closed-end management type investment company or investment trust registered under the Federal Investment Company Act of 1940) which would be regarded by prudent businessmen as a safe investment; " (Emphasis supplied.)
Kentucky has adopted the "prudent businessman investment rule" which is discussed in part in 90 C.J.S. Trusts § 320 (pages 506-507):
"In the investment of trust funds the trustee must exercise sound discretion as well as good faith and honest judgment. Ordinarily the rule which should govern his conduct is that he is bound to employ such prudence and such diligence in the care and management of the estate or property as men of ordinary prudence, discretion, and intelligence employ in their own like affairs, not with a view to speculation, but rather to permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested. The standard is comprehensive and remains fixed; it is not bound to particular classifications of securities, but continues as a safe guide under changed financial institutions, business customs, usages, and investment combinations. The power to invest is not an unlimited authority to invest the money as an ordinarily prudent man would invest his own; a trustee must take such risks only as an ordinarily prudent man would take who is trustee of the money of others. Moreover, it is incumbent on the trustee to watch constantly the investment of the trust fund and be on the alert to protect it from harm, or to terminate or convert the investment if it becomes unsound . . . ."
In Bogert, The Law of Trusts and Trustees, § 541 (2nd Ed.), p. 447, the following appears:
"Judgments as to what is due care are dependent on the circumstances of time and place which surrounded the trustee when he took the action in question. There is no formula fixed once and for all by equity which enables one to decide what is due care. As business and economic conditions change, the conduct which is reasonable care changes. The standard 'is susceptible of being adapted to whatever conditions may arise in the evolution of society and the progress of civilization.'"
In deciding whether a trustee has used the required reasonable skill and prudence, the courts consider many factors, including the nature of the investment, the needs of the particular trust, the trust investments already acquired, the investment market at the time and the current practices of the ordinarily prudent investment public. See Bogert, Handbook of the Law of Trusts, Chapter 12, Sec. 106 (4th Ed.), p. 282. Also for an extensive discussion of the "Prudent loan Standard," see Bogert, " The Law of Trusts and Trustees, § 612 (2nd Ed.) p. 407.
Kentucky cases involving the discussion and application of the "prudent businessman investment rule" to specific factual situations include Security Trust Co. v. Mahoney, 307 Ky. 661, 212 S.W.2d 115 (1948); People's State Bank & Trust Co. v. Wade, 269 Ky. 89, 106 S.W.2d 74 (1937); Fidelity & Columbia Trust Co. v. Meek, 294 Ky. 122, 171 S.W.2d 41 (1943); and Davis v. Woods, 273 Ky. 210, 115 S.W.2d 1043 (1938).
While we cannot cite you a specific rule covering your particular factual situation, perhaps some of the above mentioned references, cases and discussion will help you in determining what would be regarded by prudent businessmen as a safe investment for the trustees of the policemen's pension fund.