Investment of Public Funds – Unraveling Layers of Regulation

Financial Institutions Law Alert

 

The matter of James J. Thole et al. v. U.S. Bank NA et al., case number 17-1712, has made its way to the Supreme Court. The case questions whether participants in U.S. Bank’s pension plan can sue for alleged fiduciary breaches even though the plan was overfunded, and thus the retirees were not “harmed” because the plan could meet its obligations. In October, the Supreme Court requested the Solicitor General to opine whether the Court should grant cert to the matter filed by retirees, to which the Solicitor General responded in the affirmative.

The retirees allege that U.S. Bank breached its fiduciary duties by engaging in prohibited transactions under ERISA, which in turn caused considerable losses to their defined benefit pension plan. Whether the Court grants Cert and how the Court decides the circuit split remains to be seen; it’s the underlying matter that captured our attention. In the context of non-ERISA public pension plans, and public funds in general, where there is no federal guidance, how are prohibited and permissible investments determined?

The answer is a bit like peeling back the layers of an onion. Every state has its own statutory scheme to address the investment of public funds, the investment of public pension funds, how the custody of those funds is handled, and who may invest the fund. Adding another layer (and continuing the onion analogy), counties, municipalities, public agencies, and authorities may also have their own codes, ordinances, and regulations that address these same issues. Sometimes they are more expansive, in the case of home rule states, and sometimes they are more restrictive. And they are all unique.

We have been exploring these matters, and the risks and pitfalls that are inherent with investing public funds. Over the coming months we will address these issues in a series of alerts discussing the layers of regulation from state to local levels and the hazards for wealth management teams in advising public entity clients on how to invest.