85th Regular Session of Texas Legislature: Bills Passed Amending the - - PDF document

85th Regular Session of Texas Legislature: Bills Passed Amending the Public Funds Investment Act

Jeffrey A. Leuschel Partner McCall, Parkhurst & Horton L.L.P. For the first time in several sessions, numerous bills were filed, debated and had action taken on them by the Texas Legislature. Five bills passed both houses and were sent to the Governor for action. Of those five bills, as of the date this presentation went to print, two bills, HB 1003 and HB 1701, have been signed by the Governor. The other three bills, HB 1238, HB 2647 and HB 2928, are awaiting action by the Governor. This presentation will focus on these bills and their potential impact on investing entities in the State of Texas. The scope of the bills ranges from clean-up of existing law to significantly altering the law as it has existed since 1995. BILL SIGNED INTO LAW BY THE GOVERNOR HB 1003 HB 1003 makes several changes to the Public Funds Investment Act. The changes include: Institutions of Higher Education. Institutions of higher education which have total endowment funds as of September 1, 2017 of at least $150 million are exempted from the provisions of the Public Funds Investment Act. HB 1003 also made changes to Section 171.901(4), Texas Tax Code, to provide that the depreciation and tax-exempt use provisions of Section 47(c)(2) of the Internal Revenue Code do not apply to costs and expenses incurred by an institution of higher education or a university system. This change in law expires on January 1, 2022. Waiver of Sovereign Immunity. An investing entity may waive sovereign immunity in connection with the execution of a repurchase agreement, a guaranteed investment contract, or a hedging contract (discussed below). Money Market Mutual Funds. A no-load money market mutual fund is an eligible investment if it complies with Rule 2a-7 promulgated by the Securities and Exchange

• Commission. HB 1003 also eliminates the requirement that to be an eligible investment, the

money market mutual fund must maintain a stable net asset value of $1.00. Money Market Funds. To be an eligible investment, money market funds with a duration of greater than one year shall consist of eligible investments under the Public Funds

Investment Act, and money market funds with a duration of less than one year shall be limited to investment grade securities, excluding asset backed securities. Public Funds Investment Pools. Public funds investment pools must have stated policies relating to holding deposits in cash. A public fund investment pool may be structured to have a stable net asset value of $1.00 if it uses amortized cost or fair market accounting. If the public funds investment pool does not maintain a $1.00 net asset value, it shall takes steps to restore a $1.00 net asset value without diluting or unfairly affecting pool investors. A public funds investment pool using amortized cost shall report yield to its investors consistent with applicable Securities and Exchange Commission rules and regulations. Hedging Transactions. An eligible entity (one that has at least $250 million in

• utstanding long-term indebtedness or long-term indebtedness proposed to be issued, or a

combination of the two, and the indebtedness is rated in one of the four highest rating categories) may enter into contracts to protect against economic loss due to price fluctuation of a commodity

• r related investment. The contracts may be in the form of a hedging contract, and related

security, credit or insurance contracts, used by an eligible entity in the entity's general operations, with the acquisition or construction of a capital project, or with an eligible project (as defined in Chapter 1371, Government Code). A hedging transaction must comply with the regulations of the Commodity Futures Trading Commission and the Securities and Exchange Commission. An eligible entity may pledge as security for and to the payment of a hedging contract or a security, credit, or insurance agreement any general or special revenues or funds the entity is authorized by law to pledge to the payment of any other obligation. HB 1003 also provides guidance as to whether the costs of a hedging contract are to be treated as an item of expense or as a capital cost. The hedging provisions of HB1003 were contentious and had to be resolved by a conference committee, as the Senate stripped the hedging provisions from the bill that it passed. The hedging provisions were restored in a conference committee substitute that was passed by both

• houses. This bill became law, effective June 14, 2017.

HB 1701 This bill, which has been signed into law and becomes effective on September 1, 2017, significantly changes the requirement that has been in effect since the Public Funds Investment Act was enacted in 1995, limiting the business organizations that are required to file a certificate addressing the review of an investing entity’s investment policy. The bill states that an investing entity shall present its investment policy to a “business organization”, defined to mean an investment pool or an investment management firm that has accepted by contract authority for investment discretion in the investment of funds of an investing entity. The bill also limits the certifications made by the business organization to those investments made through accounts or

• ther contractual arrangements that the business organization has accepted discretionary

investment authority.

What does this mean? An organization that sells investments to an investing entity is no longer required to file a certificate acknowledging receipt and review of the investing entities investment policy, unless it fits within the definition of business organization. Effectively, the requirement would likely reside only upon investment pools. This leaves an investing entity with several choices to make, all of which, regardless of the choice made, likely will require amendments to the investing entities investment policy. Option A: Do nothing. By this, the investing entity would no longer provide an

• rganization seeking to sell investments to the investing entity with its investment policy. This

places the entire burden of determining the suitability of the investment purchase on the investing entity. Option B: Send the organization seeking to sell investment securities to the investing entity a current copy of its investment policy. Include a statement to the effect that the provision

• f the investment policy is as a courtesy to the organization seeking to sell the investment

securities to the investing entity. Option C: Send the organization seeking to sell investment securities to the investing entity a current copy of its investment policy. Include a statement to the effect that the investing entity deems that by providing the investment policy to the organization, and the subsequent purchase of the investment securities from the organization, the organization has reviewed the investment policy. Option D: Send the organization seeking to sell investment securities to the investing entity a current copy of its investment policy. Include a statement to the effect that the investing entity is providing the organization its investment policy to aid the organization in meeting its duties under Financial Industry Regulatory Authority (FINRA) Rule 2111, relating to “knowing your customer”, and that the investing entity deems that by providing the investment policy to the organization, and the subsequent purchase of the investment securities from the organization, the organization has reviewed the investment policy in satisfaction of the organization’s duties under FINRA Rule 2111. The rule provides that brokers are required to “have a reasonable basis to believe that a recommendation is suitable for a particular customer based on that customer’s investment profile.” When sending the organization your investment policy, be sure to be specific as to your investment profile. There are variations on this theme for the options provided. Keep in mind that the execute of a sale and purchase of an investment security is a contract, and all investing entities have contracting authority under state law and may exercise that authority in structure the terms

• f the acquisition of an asset such as an investment security. Prior to amendments enacted by

HB 1701, the Public Funds Investment Act provided certainty between buyers (the investing entity) and sellers (brokers) as to what was necessary to certify to as to an investment made.

Now, for almost all investment transactions, this will become a matter of negotiation between buyer and seller. BILLS PENDING ACTION BY THE GOVERNOR HB 1238 HB 1238 revises the investment training requirements under the Public Funds Investment Act by permitting investment officers of housing authorities to receive at least five hours of training in a two-year period roughly coinciding with the authority’s fiscal year. If the bill becomes law, it will be effective on September 1, 2017. [UPDATE: SIGNED BY THE GOVERNOR 6/15] HB 2647 This bill clarifies current law by making it clear that interest-bearing deposits insured by the Federal Deposit Insurance Corporation or the Federal Credit Union Share Insurance Fund, or funds invested in banking deposits through a broker with an office in Texas or a branch office in Texas and the entity selected invests the funds in one or more banks such that the full amount of principal and accrued interest is guaranteed by the United States or an instrumentality of the United States. HB 2647 also addresses the entities that are eligible to act as custodian of the funds so invested. This approach is similar to current law as it relates to shared certificate of deposit programs. If the bill becomes law, it will become effective immediately, as it passed by a two-thirds recorded vote of each house of the Legislature. [UPDATE: SIGNED BY THE GOVERNOR 6/15] HB 2829 HB 2829 clarifies that obligations of the Federal Home Loan Bank are obligations, including letters of credit, of the United States or its agencies and instrumentalities, and are eligible investments governed by Section 2256.009, Government Code. HB 2829 also addresses the provisions of the Public Funds Collateral Act that allow letters of credit to be eligible as collateral to include Federal Home Loan Bank letters of credit. This legislation was enacted to address an Attorney General opinion which called into question whether Federal Home Loan Bank obligations were eligible investments under the Public Funds Investment Act. If the bill becomes law, it will be effective on September 1, 2017. [UPDATE: SIGNED BY THE GOVERNOR 6/15]