Request By:
Mr. Joseph L. Ardery
Brown, Todd & Heyburn
Sixteenth Floor
Citizens Plaza
Louisville, KY 40202-2873
Opinion
Opinion By: FREDERIC J. COWAN, ATTORNEY GENERAL; NATHAN GOLDMAN, ASSISTANT ATTORNEY GENERAL
In your letter to the Attorney General you ask whether the Commonwealth of Kentucky through the State Investment Commission may invest public funds in a mutual fund organized under state law as a trust when the entity invests only in federal securities.
The trust is organized as a business trust under applicable state law and is a no-load, open-end, diversified management investment company registered under the Investment Company Act of 1940, whose shares are registered under the Securities Act of 1933. The trust invests only in short term U.S. Treasury obligations, which are normally held to maturity. These instruments are issued by the U.S. government, its agencies or instrumentalities and are fully guaranteed as to principal and interest by the U.S. They mature in one year or less from the date of acquisition unless they are purchased under a repurchase agreement that provides for repurchase by the seller within one year of the date of acquisition. The trust may also purchase these instruments on a when-issued or delayed delivery basis.
Investments of state funds are made through the State Investment Commission, pursuant to KRS 42.500. KRS 42.500(6) allows the Commission to invest state funds in:
"(a) Obligations and contracts for future delivery of obligations backed by the full faith and credit of the United States or a U.S. government agency, including but not limited to:
1. U.S. treasury;
2. Export-import bank of the United States;
3. Farmers home administration;
4. Governmental national mortgage corporation; and
5. Merchant marine bonds;
(b) Obligations of any corporation of the U.S. government, including but not limited to:
1. Federal home loan mortgage corporation;
2. Federal farm credit ranks;
a. Bank for cooperatives; b. Federal intermediate credit banks; c. Federal land banks;
3. Federal home loan banks;
4. Federal national mortgage association; and
5. Tennessee Valley Authority obligations . . . ."
In OAG 88-52 we opined that a similar statute regarding local government investments could be interpreted as allowing investments in mutual funds that invest soley in U.S. government securities. We based this on the reasoning of several cases that held that mutual funds were mere shells and that the investors actually owned the underlying securities. See Burks v. Lasker, 441 U.S. 471, 99 S. Ct. 1831, 60 L.Ed2d 404 (1979); Tannenbaum v. Zeller, 552 F.2d 402 (2nd Cir. 1977); Matz v. Department of Treasury, 402 N.W.2d 62 (Mich App. 1986) and Brown v. Franchise Tax Board, 242 Cal. Rptr. 810 (Cal. App. 1 Dist. 1987). See, also, Revenue Cabinet Policy 62P066 and 42P161.
Based on the reasoning expressed therein, we believe KRS 42.500 may be interpreted to allow the State Investment Commission to invest in mutual funds that invest solely in U.S. government securities including such securities subject to repurchase agreements.