No. 28228 (Amendment): R628-2. Investment of Funds of Member Institutions of the State System of Higher Education and Public Education Foundations established under Section 53A-4-205

DAR File No.: 28228
Filed: 09/14/2005, 01:00
Received by: NL

 

RULE ANALYSIS

Purpose of the rule or reason for the change:

Legislation passed in the 2005 Utah Legislative Session in H.B. 255, removed higher education endowment funds from the Money Management Council's oversight. The language referring to these funds is being removed. Additionally, language is being updated and the ability to use alternative investments is being removed as the public education foundation funds that the rule covers do not have the ability to utilize these types of investments. (DAR NOTE: H.B. 255 is found at UT L 2005 Ch 178, and was effective 05/02/2005.)

 

Summary of the rule or change:

The changes remove all references to higher education endowment funds and remove alternative investments for the remaining funds under this rule as they do not meet the criteria to invest in them. The rule will now cover public education foundations and any other funds held by a public treasurer that are required by statute to be invested according to Money Management Council rules. The language changes include a Morning Star rating of "3" on mutual funds and changes the rating on fixed rates securities to "investment grade".

 

State statutory or constitutional authorization for this rule:

Section 51-7-13 and Subsection 51-7-18(2)(b)

 

Anticipated cost or savings to:

the state budget:

None--The rule only provides investment criteria for public education foundations.

 

local governments:

None--Public education foundations have been investing under this rule before and they will not need to make changes to their procedures.

 

other persons:

None--This rule and the changes only affect public education foundations.

 

Compliance costs for affected persons:

There are no additional compliance costs for any persons as the public education foundations covered by this rule are already following the rule. The changes are only deletions of entities and securities that are no longer covered and that do not and did not apply to the foundations that the rule still covers.

 

Comments by the department head on the fiscal impact the rule may have on businesses:

The changes in the rule comply with the actions of the legislature by removing the endowment funds of institutions of higher education from the parameters of the rule and the Money Management Council. The rule as modified should not have a material effect upon those agencies and institutions subject to the jurisdiction of the Money Management Council. Bruce Cohne, Chair, Utah Money Management Council

 

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Money Management Council
Administration
Room E315 EAST OFFICE BLDG
STATE CAPITOL COMPLEX
PO BOX 142315
SALT LAKE CITY UT 84114-2315

 

Direct questions regarding this rule to:

Ann Pedroza at the above address, by phone at 801-538-1883, by FAX at 801-538-1465, or by Internet E-mail at [e-mail]

 

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

10/31/2005

 

This rule may become effective on:

11/01/2005

 

Authorized by:

Bruce B. Cohne, Chair

 

 

RULE TEXT

R628. Money Management Council, Administration.

R628-2. Investment of Funds of [Member Institutions of the State System of Higher Education and ]Public Education Foundations [e]Established [u]Under Section 53A-4-205 or Funds Acquired by Gift, Devise or Bequest.

R628-2-1. Authority.

This rule is issued pursuant to Section[s 51-7-13(2) and] 51-7-18(2)(b).

 

R628-2-2. Scope of Rule.

This rule relates to all funds of [member institutions of the state system of higher education and all funds of ]public education foundations established under Section 53A-4-205 and any funds held by a public treasurer which were acquired by gift, devise, or bequest and which are permitted by statute to be invested according to rules adopted by the Money Management Council.[or by private grant and the corpus of funds functioning as endowments. For purposes of this rule, funds functioning as endowments means funds whose corpus is intended to be held in perpetuity by formal institutional designation according to the institution's or public education foundation's policy for designating such funds.]

 

R628-2-3. Investment Directions Contained in Gift or Grant.

If any gift, devise, or bequest[ or grant], whether outright or in trust, is made by a written instrument which contains lawful directions as to investment thereof, the funds embodied within the gift, devise or bequest [or grant ]shall be invested and held in accordance with those directions. Common stock received by donation which is registered[lettered] stock, or which is otherwise restricted from sale because it is not registered with the Securities and Exchange Commission, may be retained until the restrictions lapse, expire, or are revoked[by a member institution and public education foundations] and shall be considered to be invested according to the terms of the donation. A gift, devise or bequest of closely held non-marketable securities, shall be purchased by the closely held entity within twenty four months of the gift, devise or bequest. Evidence of such put shall be furnished at the time of the gift, devise or bequest.

 

R628-2-4. Investment of Funds.

A. Funds within the scope of this rule, except funds described in Section R628-2-3, may be invested in any of the following:

1. in any deposit or investment authorized by Section 51-7-11 or 51-7-5;

2. in professionally managed pooled or commingled investment funds registered with the Securities and Exchange Commission with a Morningstar rating of "3" or higher.[or, if not registered with Securities and Exchange Commission as investment companies under the Investment Company Act of 1940, satisfy the conditions for exemption from registration under Section 3(c) of that Act, which:

a) have assets with a market value of at least $100 million; and

b) which conform with all investment limitations established by the Securities and Exchange Commission applicable to such funds; and

c) which assess no load factor or surrender charges for participation in the fund. Use of funds which assess a charge on the purchase or sale of shares is prohibited;and

d) whose advisers are registered as investment advisers with either the Securities and Exchange Commission or the state of Utah.]

3. in equity securities, including common and convertible preferred stock and convertible bonds, issued by corporations listed on a major securities exchange or in the NASDAQ[ National Market System], in accordance with the following criteria applied, on a total market basis, at the time of investment:

a) no more than 20% of all funds may be invested in securities listed in the NASDAQ[ National Market System];

b) no more than 5% of all funds may be invested in the securities of any one corporate issuer;

c) no more than 25% of all funds may be invested in a particular industry;

d) no more than 5% of all funds may be invested in securities of corporations that have been in continuous operation for less than three years;

e) no more than 5% of the outstanding voting securities of any one corporation may be held; and

f) at least 50% of the corporations in which equity investments are made under R628-2-4.(A)(3) must appear on the Standard and Poor's 500 Composite Stock Price Index and the Wilshire 5000[or the Dow Jones Industrial Average Index];

4. in fixed-income securities, including bonds, notes, mortgage securities and zero coupon securities, issued by corporations rated "investment grade"[A] or higher by Moody's Investors Service, Inc. or by Standard and Poor's Corporation in accordance with the following criteria applied, on a total market basis, at the time of investment:

a) no more than 5% of all funds may be invested in the securities of any one corporate issuer;

b) no more than 25% of all funds may be invested in a particular industry;

c) the dollar-weighted average maturityof fixed-income securities acquired under R628-2-4(A)(4) may not exceed ten years; and

5. in fixed-income securities issued by agencies of the United States and United States government-sponsored organizations, including mortgage-backed pass-through certificates, mortgage-backed bonds and collateralized mortgage obligations (CMO's).

6. [In alternative investments defined as assets or investment strategies other than those defined under R628-2-4(A)(3), R628-2-4(A)(4) or R628-2-4(A)(5). The following criteria shall apply to institutions at the time of investment:

a) Meet the requirements of Section 3(c)7 of the Investment Company Act of 1940 to be a "qualified purchaser" of these types of investments. The institutional size of all Rule 2 funds must exceed $25 million; or

b) Meet the requirement of Section 3(c)1 of the Investment Company Act of 1940 to be an "accredited investor" of these types of investments. The institutional size of all funds must exceed $5 million.

c) For institutions with funds greater than $50 million, no more than 30% of funds may be invested in alternative investment funds that derive returns primarily from high yield and distressed debt (hedged or non-hedged), private capital (including venture capital, private equity, both domestic and international), natural resources, and private real estate assets or absolute return and long/short hedge funds. No more than 20% of all funds may be invested at any one time in absolute return and long/short hedge funds.

d) For institutions with funds greater than $25 million but not greater than $50 million, no more than 15% of all funds may be invested in alternative investments meeting the requirements established under subsection R628-2-4(A)(2), and that derive returns primarily from high yield and distressed debt (hedged or non-hedged), private capital (including venture capital, private equity, both domestic and international), natural resources, and private real estate assets or absolute return and long/short hedge funds.

e) For institutions with funds of $25 million or less, no more than 10% of all funds may be invested in alternative investments meeting the requirements established under subsection R628-2-4(A)(2) and that derive returns primarily from high yield and distressed debt (hedged or non-hedged), private capital (including venture capital, private equity, both domestic and international), natural resources, and private real estate assets or absolute return and long/short hedge funds.]

A.[B.] Investments made under this rule shall observe the following investment percentages on a total market basis as of the most recent quarterly review, for specified subsections;

1. no more than 75% of all funds may be invested in equity securities (Subsection R628-2-4(A)(3) investments).

2. no more than 5% of all funds may be invested in collateralized mortgage obligations (CMO's) (Subsection R628-2-4(A)(5) investments).

B.[C.] The selection criteria established in Section 51-7-14 shall apply to investments permitted by this rule.

C.[D.] Professional asset managers may be employed to assist in the investment of funds under this rule. Compensation to asset managers may be provided from earnings generated by the funds' investments.

 

R628-2-5. Disposition of Nonqualifying Investments.

A. If at any time securities do not qualify for investment in accordance with this rule, investments shall be disposed of within a reasonable time. In determining what constitutes reasonable time for the disposition of assets, the following factors, among others, shall be given consideration:

1. the legality of sale under the rules and regulations of the Securities and Exchange Commission and the Utah State Securities Commission;

2. the size of the investment held in relation to the normal trading volume therein, and the effect upon the market price of the sale of the investment; and

3. the wishes of the donor respecting the sale of the investment.

B. If, in the opinion of the custodian or investment manager of the funds, an orderly liquidation of a nonqualifying investment cannot be accomplished within a period of two years, a request may be made to the Council for approval of a specific plan of disposition of nonqualifying investments. Nothing contained in this paragraph shall make an investment nonqualifying, if the retention of the investment is specifically authorized or directed under terms of the gift, devise, or bequest[ or grant], or if the security is restricted from sale as provided in this rule.

 

R628-2-6. Nonqualifying Investments Held on Effective Date.

Any nonqualifying investments held on November 1, 2005[July 3, 1995] shall be treated as having been received on the effective date and shall be disposed of as provided in Subsection R628-2-5.

 

R628-2-7. Multiple Funds.

If a public treasurer[an institution] or a public education foundation has more than one fund or investment pool in which funds covered by this rule are managed, the following rules apply in determining investment percentages:

A. If the investment of any funds is covered by a direction in the instrument creating a gift, devise, or bequest[ or grant], or if the donation consists of securities restricted from sale, the funds shall be excluded from any computation of permitted investments.

B. All other funds within the scope of this rule shall be consolidated for determining the propriety of investments. Any restrictions as to investment percentages shall be determined as provided for in Subsection R628-2-4(B).

 

R628-2-8. Investment Policy Approval.

[Each member institution of the state system of higher education and ]E[e]ach public education foundation or public treasurer[,] having funds acquired by gift, devise, or bequest [or grant and funds functioning as endowments ]shall have their investment policies approved by their respective board of trustees or governing body.

 

R628-2-9. Reporting by [Institutions and ]Public Education Foundations and Public Treasurers.

Each [member institution of the state system of higher education and each ]public education foundation and public treasurer, having funds acquired by gift, devise, or bequest [or grant ]and funds functioning as endowments shall file a written report with the Council on or before July 31[September 30] and January[March] 31 of each year containing the following information for investments held on June 30 and December 31 respectively:

A. total market value of funds held under gifts, devise or [,] bequest [or grant ]and funds functioning as endowments;

B. amount invested under this rule;

C. amounts invested under this rule indicating the carrying value and market value of each category of investment; and

D. a list of all nonqualifying assets held under this rule containing the date acquired, the carrying value and market value of each asset.

E. The board of trustees or governing body shall review the portfolio at least quarterly, and shall receive the certification from the [institution's ]public treasurer that the portfolio complies with [the current text of ]the Money Management Act, Rules of the Money Management Council and the prudent person rule in section 51-7-14 of the Act.

 

KEY: public investments, higher education, public education

[September 3, 2003]2005

Notice of Continuation July 10, 2002

51-7-11(4)

51-7-13

51-7-18(2)