BILL ANALYSIS
C.S.H.B. 2459
By: Marchant (Sponsor)
Finance
05-10-95
Senate Committee Report (Substituted)
BACKGROUND
Last year, in Texas and in the nation, political entities have
faced financial hardship as a result of poor investments. It has
often been the case that these investments were made by a single
individual with complete authority over what investments were made,
with little or no supervision.
PURPOSE
As proposed, C.S.H.B. 2459 imposes various reporting requirements
on entities investing certain public funds and on the people
selling those investments.
RULEMAKING AUTHORITY
It is the committee's opinion that rulemaking authority is granted
to the governing body of an investing entity and an investing
entity under SECTIONS 1 (Sections 2256.005(a) and (f), and
2256.016(a), Government Code), 2 (Sec. 51.0032, Education Code),
and 4 (Sec. 51.0032(a), Education Code) of this bill.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Chapter 2256, Government Code, to conform to
Section 1, Chapter 181, Section 1, Chapter 858, and Section 1,
Chapter 946, Acts of the 73rd Legislature, Regular Session, 1993,
as follows:
CHAPTER 2256. PUBLIC FUNDS INVESTMENT
SUBCHAPTER A. AUTHORIZED INVESTMENTS FOR GOVERNMENTAL ENTITIES
Sec. 2256.002. Defines "bond proceeds," "book value,"
"funds," "institution of higher education," "investing
entity," "entity," "investment pool," "local government,"
"market value," "pooled fund group," "school district,"
"separately invested asset," and "state agency."
Sec. 2256.003. New heading: AUTHORITY TO INVEST FUNDS;
ENTITIES SUBJECT TO THIS CHAPTER. Adds a local government; a
state agency; a nonprofit corporation acting on behalf of a
local government or a state agency; or an investment pool
acting on behalf of two or more local governments, state
agencies, or a combination of those entities to the list of
entities that are authorized to purchase, sell, and invest its
funds and funds under its control. Deletes certain entities
from the list. Makes conforming changes.
Sec. 2256.004. APPLICABILITY. Provides that this subchapter
does not apply to certain investments.
Sec. 2256.005. INVESTMENT POLICIES; INVESTMENT STRATEGIES;
INVESTMENT OFFICER. (a) Requires the governing body of an
investing entity to adopt by rule, order, ordinance, or
resolution, as appropriate, a written investment policy
regarding the investment of its funds and funds under its
control.
(b) Requires investment policies to include, among other
requirements, a list of authorized investments in which
funds may be invested, the maximum allowable maturity of any
investment; and the maximum average maturity allowed for
pooled fund groups.
(c) Redesignated from existing Subsections (b).
(d) Requires the governing body to adopt a separate written
investment strategy for each of the funds under its control.
Requires each investment strategy to describe the investment
objectives for the particular fund using certain priorities
in order of importance.
(e) Requires the governing body of an investing entity to
review its investment policy and investment strategies not
less than annually.
(f) Requires each entity to designate, by rule, order,
ordinance, or resolution, as appropriate, one or more
officers or employees of the state agency, local government,
or investment pool to be responsible for the investment of
its funds. Prohibits a person from depositing, withdrawing,
investing, transferring, or managing in any other manner
funds of a state agency, local government, or investment
pool without express written authority of the governing body
or chief executive officer of the state agency, local
government, or investment pool, consistent with the
investment policy adopted by the entity. Provides that
authority granted to a person to deposit, withdraw, invest,
transfer, or manage an entity's funds is effective until
rescinded by the investing entity or until termination of
the person's employment by the investing entity.
(g) Provides that Subsection (f) does not apply to a state
agency, local government, or investment pool for which an
officer of the entity is assigned by law the function of
investing its funds.
(h) Provides that an officer or employee of a commission
created under Chapter 391, Local Government Code, is
ineligible to be designated as an investment officer under
Subsection (f).
(i) Requires an investment officer of an entity who has a
personal business relationship with an entity seeking to
sell an investment to the entity to file a statement
disclosing that personal business interest. Requires an
investment officer who is related within the second degree
by affinity or consanguinity, as determined under Chapter
573, to an individual seeking to sell an investment to the
investment officer's entity to file a statement disclosing
that relationship. Requires a statement required under this
subsection to be filed with the Texas Ethics Commission and
the governing body of the entity.
(j) Authorizes the body of an investing entity to specify
in its investment policy that any such investment authorized
by this chapter is not suitable.
(k) Requires a written copy of the investment policy to be
presented to any person seeking to sell to the entity an
authorized investment. Requires the registered principal of
the person seeking to sell an authorized investment to
execute a written instrument substantially to the effect
that the person has received and thoroughly reviewed the
investment policy of the entity; and acknowledged that
reasonable procedures and controls have been implemented in
an effort to preclude imprudent investment activities
arising out of investment transactions conducted between the
entity and the organization.
(l) Prohibits an investment officer of an entity from
buying any securities from a person who has not delivered to
the entity an instrument in substantially the form provided
by Subsection (k).
(m) Requires an investing entity, in conjunction with its
annual financial audit, to perform a compliance audit of
management controls on investments and adherence to the
entity's established investment policies. Requires state
agencies to report the results of the audit performed under
this subsection to the state auditor. Requires the state
auditor to compile the results of reports received under
this subsection and annually report those results to the
legislative audit committee.
Sec. 2256.006. STANDARD OF CARE. (a) Requires investment
of funds to be governed by certain investment objectives, in
order of priority.
(b) Requires a determination to be made, taking certain
information into consideration, in determining whether an
investment officer has exercised prudence with respect to an
investment decision.
Sec. 2256.007. INVESTMENT TRAINING; STATE AGENCY BOARD
MEMBERS AND OFFICERS. (a) Requires each member of the
governing board of a state agency and its investment officer
to attend at least one training session relating to the
person's responsibilities under this chapter within six months
after taking office or assuming duties.
(b) Requires the governor's office to provide training
under this section for members and officers other than
members and officers of an institution of higher education.
Requires the coordinating board to provide the training for
members and officers of institutions.
(c) Requires training under this section to include
education in investment controls, security risks, strategy
risks, market risks, and compliance with this chapter.
Sec. 2256.008. INVESTMENT TRAINING; LOCAL GOVERNMENTS. (a)
Requires the treasurer, the chief financial officer if the
treasurer is not the chief financial officer, and the
investment officer of a local government to attend at least
one training session relating to the treasurer's or officer's
responsibilities under this chapter within 12 months after
taking office or assuming duties.
(b) Makes a conforming change.
Sec. 2256.009. AUTHORIZED INVESTMENTS: OBLIGATIONS OF, OR
GUARANTEED BY, GOVERNMENTAL ENTITIES. (a) Provides that
certain investments are authorized investments under this
subchapter, except as provided by Subsection (b). Makes
conforming changes.
(b) Provides that certain investments are not authorized
investments under this section.
Sec. 2256.010. AUTHORIZED INVESTMENTS: CERTIFICATES OF
DEPOSIT. Sets forth the criteria for a certificate of
deposit to be an authorized investment under this subchapter.
Makes conforming changes.
Sec. 2256.011. AUTHORIZED INVESTMENTS: REPURCHASE
AGREEMENTS. (a) Sets forth the guidelines for a fully
collaterized repurchased agreement to be an authorized
investment. Makes conforming changes.
(b) Defines "repurchase agreement."
(c) Prohibits the term of any reverse security repurchase
agreement from exceeding 90 days after the date the reverse
security repurchase agreement is delivered, notwithstanding
any other law.
(d) Requires money received by an entity under the terms of
a reverse security repurchase agreement to be used to
acquire additional authorized investments, but requires the
term of the authorized investment acquired to mature by the
expiration date stated in the reverse security repurchase
agreement.
Sec. 2256.012. AUTHORIZED INVESTMENTS: BANKERS'
ACCEPTANCES. No change.
Sec. 2256.013. AUTHORIZED INVESTMENTS: COMMERCIAL PAPER.
No change.
Sec. 2256.014. AUTHORIZED INVESTMENTS: MUTUAL FUNDS. (a)
Provides that a no-load money market mutual fund is an
authorized investment under this subchapter if the mutual fund
is regulated by the Securities and Exchange Commission, and
has a dollar-weighted average stated maturity of 90, rather
than 120, days or fewer. Makes conforming changes.
(b) Sets forth criteria which makes a no-load mutual fund
an authorized investment under this subchapter.
(c) Provides that an entity is not authorized by this
section to make certain investments.
Sec. 2256.015. AUTHORIZED INVESTMENTS: GUARANTEED
INVESTMENT CONTRACTS. (a) Sets forth criteria for a
guaranteed investment contract to be an authorized investment.
(b) Prohibits bond proceeds, other than bond proceeds
representing reserves and funds maintained for debt service
purposes, from being invested in a guaranteed investment
contract with a term of longer than five years from the date
of issuance of the bonds.
(c) Sets forth the criteria to be eligible as an authorized
investment. Deletes existing section regarding common trust
funds.
Sec. 2256.016. AUTHORIZED INVESTMENTS: INVESTMENT POOLS.
(a) Authorizes an entity to invest its funds and funds under
its control in an eligible investment pool, if the governing
body of the entity, by rule, order, ordinance, or resolution,
as appropriate, authorizes investment in the particular pool.
Requires an investment pool to invest the funds it receives
from entities in authorized investments permitted by this
subchapter.
(b) Requires an investment pool to furnish to the
investment officer or other authorized representative of the
entity an offering circular or other similar disclosure
instrument that contains, at a minimum, certain information
to be eligible to receive funds from and invest funds on
behalf of an entity under this chapter.
(c) Requires an investment pool to furnish to the
investment officer or other authorized representative of the
entity certain information to maintain eligibility to
receive funds from and invest funds on behalf of an entity
under this chapter.
(d) Authorizes an entity by contract to delegate to an
investment pool the authority to hold legal title as
custodian of investments purchased with its local funds.
(e) Requires "yield" to be calculated in accordance with
regulations governing the registration of open-end
management investment companies under the Investment Company
Act of 1940, as promulgated from time to time by the federal
Securities and Exchange Commission. Deletes existing
Section 2256.013.
Sec. 2256.017. PORTFOLIO OF CERTAIN INVESTMENT POOLS.
Requires a public fund investment pool created to function as
a money market mutual fund to mark to market its portfolio
daily and, to the extent reasonably possible, stabilize at a
$1 net asset value. Requires the portfolio holdings to be
sold as necessary to maintain the ratio between 0.995 and
1.005 if the ratio of the market value of the portfolio
divided by the book value of the portfolio is less than 0.995
or greater than 1.005.
Sec. 2256.018. ADVISORY BOARD OF INVESTMENT POOLS. (a)
Requires an investment pool other than a pool described in
Subsection (b) to establish an advisory board (board) composed
of participants in the pool and other persons.
(b) Requires a public funds investment pool created under
Chapter 791 and managed by a state agency to establish an
advisory board composed equally of participants in the pool
and other persons who do not have a business relationship
with the pool. Requires a board member to be qualified to
advise the pool.
Sec. 2256.019. RATING OF CERTAIN INVESTMENT POOLS. Requires
a public funds investment pool to be continuously rated no
lower than AAA or AAA-m or at an equivalent rating by at least
one nationally recognized rating service. Deletes section
regarding common trust fund.
Sec. 2256.020. AUTHORIZED INVESTMENTS: INSTITUTIONS OF
HIGHER EDUCATION. Authorizes an institution of higher
education to purchase, sell, and invest its funds and funds
under its control in certain investment options. Deletes
existing Section 2256.014.
Sec. 2256.021. EFFECT OF LOSS OF REQUIRED RATING. Provides
that an investment that requires a minimum rating under this
subchapter does not qualify as an authorized investment during
the period the investment does not have the minimum rating.
Requires an entity to take all prudent measures that are
consistent with its investment policy to liquidate an
investment that does not have the minimum rating.
Sec. 2256.022. EXPANSION OF INVESTMENT AUTHORITY. Requires
expansion of investment authority granted by this chapter to
require a risk assessment by the state auditor or performed at
the direction of the state auditor.
Sec. 2256.023. INTERNAL MANAGEMENT REPORTS. (a) Requires
the investment officer to prepare and submit to the governing
body of the entity a written report of the entity's local
funds investment transactions for the preceding reporting
period.
(b) Requires the report to contain certain information.
(c) Requires the report to be presented not less than
quarterly to the governing body and the chief executive
officer of the entity. Deletes subsection regarding banks
unwilling to bid.
Sec. 2256.024. SUBCHAPTER CUMULATIVE. (a) Provides that
this subchapter does not prohibit an investment specifically
authorized by other law or authorize an investment
specifically prohibited by other law, except as provided by
Subsection (b). Makes a conforming change.
(b) Provides that a security described by Section
2256.006(b) is not an authorized investment for an investing
entity, notwithstanding any other law.
(c) Provides that mortgage pass-through certificates and
individual mortgage loans that may constitute an investment
described in Section 2256.009(b) are authorized investments
with respect to the housing bond programs operated by
certain entities.
SUBCHAPTER B. New heading: MISCELLANEOUS PROVISIONS
Sec. 2256.051. ELECTRONIC FUNDS TRANSFER. Authorizes any
local government to use electronic means to transfer or invest
all funds collected or controlled by the local government.
Deletes existing Sections 2256.051-2256.057.
Sec. 2256.052. PRIVATE AUDITOR. Redesignates existing
Section 2256.058. Requires a state agency to employ a private
auditor if authorized by the legislative audit committee on
the committee's initiative or on request of the governing body
of the agency, notwithstanding any other law. Deletes
existing Sections 2256.059 and 2256.101.
Sec. 2256.053. PAYMENT FOR SECURITIES PURCHASED BY STATE.
Prohibits a purchase of securities from being made at a price
that exceeds the existing market value of the securities.
Sec. 2256.054. DELIVERY OF SECURITIES PURCHASED BY STATE.
Authorizes a security purchased under this chapter to be
delivered to the state treasurer, a bank, or the board or
agency investing its funds. Requires the delivery to be made
under normal and recognized practices in the securities and
banking industries, including the book entry procedure of the
Federal Reserve Bank.
Sec. 2256.055. DEPOSIT OF SECURITIES PURCHASED BY STATE.
Authorizes a security purchased under this chapter to be
deposited in trust with a bank or federal reserve bank or
branch designated by the treasurer at the direction of the
state treasurer or the agency, whether in or outside the
state. Requires the deposit to be held in the entity's name
as evidenced by a trust receipt of the bank with which the
securities are deposited.
SECTION 2. Amends Section 51.003(b), Education Code, to make a
conforming change.
SECTION 3. Amends Section 51.0031(a), Education Code, to make a
conforming change.
SECTION 4. Amends Chapter 51A, Education Code, by adding Section
51.0032, as follows:
Sec. 51.0032. INVESTMENT REPORTS AND POLICIES. (a)
Requires a governing board to adopt, by rule or resolution, a
written investment policy for the investment of its
institutional funds.
(b) Requires an institution to prepare and submit to the
governing board of the institution a written report of the
institution's institutional funds investment transactions
for the preceding reporting period.
(c) Requires the report to contain certain information in
addition to other information that may be required by the
governing board.
(d) Defines "governing board," "institution of higher
education," "pooled fund group," and "separately invested
asset."
SECTION 5. Repealer: Section 1, Chapter 181( Relating to transfer
and investment of certain funds by electronic means); Section 1,
Chapter 858 (Relating to the authorized investment of the state and
certain units of local government); and Section 1, Chapter 946
(Relating to the investment of the funds of a local government or
an institution of higher education), Acts of the 73rd Legislature,
Regular Session, 1993.
SECTION 6. Provides that this Act controls over S.B. 959 to the
extent of any conflict, as provided by Section 1.02, S.B. 959, Acts
of the 74th Legislature, Regular Session, 1995.
SECTION 7. Requires each member of a governing board and each
investment officer who is in office or who has assumed duties on
September 1, 1995, and who would be required by Section
2256.007(a), Government Code, as amended by this Act, to attend
investment training within six months after taking office or
assuming duties to attend at least one training session relating to
the person's responsibilities under Chapter 2256, Government Code,
that meets the requirements of that section not later than March 1,
1996.
SECTION 8. Requires each treasurer, chief financial officer, and
investment officer who is in office or who has assumed duties on
September 1, 1995, and who would be required by Section
2256.008(a), Government Code, as amended by this Act, to attend
investment training within 12 months after taking office or
assuming duties to attend at least one training session relating to
the person's responsibilities under Chapter 2256, Government Code,
that meets the requirements of that section by September 1, 1997.
SECTION 9. Requires the state auditor to conduct, or to hire an
independent evaluator to conduct, an assessment of the risks and
benefits associated with authorizing entities subject to this
chapter to invest in mutual funds other than money market mutual
funds, investment pools other than investment pools that function
as money market mutual funds, and guaranteed investment contracts.
Requires the state auditor to report these findings to the
legislature by September 1, 1996. Provides that this section
expires on September 2, 1996.
SECTION 10. Effective date: September 1, 1995.
SECTION 11. Provides that an entity that acquired authorized
investment securities under Chapter 2256, Government Code, before
the effective date of this Act that are no longer authorized
investment securities under that chapter, as amended by this Act,
is not required by this Act to liquidate those securities before
the final stated maturity of the investment.
SECTION 12. Emergency clause.