Request By:
Mr. Mim C. Clark
General Manager
Kentucky Retirement Systems
226 West Second Street
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; Elizabeth E. Blackford, Assistant Attorney General
You have noted that certain securities held in the portfolio of the Kentucky Retirement Systems are in short-term demand by brokerage firms who are either unwilling or unable to purchase like securities in the market place. Under these conditions, the firms are willing to pay the Kentucky Retirement System a fee if the System will lend the needed security for a short period of time. You enclosed an extensive explanation of the transaction involved. The fundamentals are as follows:
When the firm is in need of a security it will get in touch with the Retirement System. The Retirement System will then turn over the security duly encorsed and in bearer form. During the term of the loan the firm shall own all incidents of ownership of the securities. In consideration, the firm shall pay the System a premium, and shall turn over to the System U.S. Treasury Bills or equivalent securities with a market value equaling or exceeding the market value of the borrowed securities to stand as collateral for the loan. The System will retain these Treasury Bills until the loan is terminated. At that time the firm shall return securities which are identical to those borrowed to the System, and the System shall return the Treasury Bills to the firm.
As described, the transaction is in fact a short term exchange or transfer of securities. The security which is being used for collateral is one in which the System in its fiduciary capacity would have the power to invest. Accordingly, this office is of the opinion that the System may engage in such short term lending or short term exchange agreements because KRS 61.650 provides that the Board shall have the power to invest in securities which are, at the time of making the investment, permitted for the investment of funds by fiduciaries in this state and that:
"Subject to such limitations, the board shall have full power to hold, purchase, sell, assign, transfer or dispose of, any of the securities or investments in which any of the funds created herein have been invested, as well as of the proceeds of such investments and any moneys belonging to such funds."