Virginia Advisory Opinions August 16, 2024: AGO 23-062
Collection: Virginia Attorney General Opinions
Docket: AGO 23-062
Date: Aug. 16, 2024
Advisory Opinion Text
The Honorable Nicholas J. Freitas
Member, House of Delegates Post Office Box 693 Culpeper, Virginia 22701
Dear Delegate Freitas:
I am responding to your request for an official advisory Opinion in accordance with § 2.2-505 of the Code of Virginia.
Issue Presented
You inquire whether the Board of Trustees of the Virginia Retirement System is authorized to make investment decisions based on environmental, social, and/or corporate governance policies rather than financial considerations exclusively.
Response
It is my opinion that Virginia law imposes fiduciary duties on the Board of Trustees that preclude it from basing investment decisions on environmental, social, and/or corporate governance policies rather than financial considerations.
Applicable Law and Discussion
Article X, Section 11 of the Constitution of Virginia provides for the creation of a retirement system for government employees. It specifically directs the General Assembly to "maintain a retirement system for state employees and employees of participating political subdivisions and school divisions." Although "[t]he retirement system shall be subject to restrictions, terms, and conditions as may be prescribed by the General Assembly[,]" the Constitution further provides that the retirement system funds "shall be deemed separate and independent trust funds ... and shall be invested and administered solely in the interests of the members and beneficiaries thereof." The retirement trust funds "shall be invested as authorized by law" and are strictly prohibited from being used "for any purpose other than as provided in law for benefits, refunds, and administrative expenses . . .," In addition, "benefits shall be funded using methods which are consistent with generally accepted actuarial principles."
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Pursuant to its constitutional directive, the General Assembly "establishe[d] the Virginia Retirement System as an independent agency of the Commonwealth" to "be administered in the best interests of the beneficiaries thereof." The Virginia Retirement System (VRS) was further designed specifically for "the purposes of providing adequate benefits and pensions to members, encouraging stable employer contribution rates, and ensuring the overall soundness of the Retirement System[.]" Administration of the VRS is vested in a Board of Trustees (the Board), upon which the General Assembly has conferred numerous statutory powers and duties. In administering the VRS, the Board serves as the trustee of all VRS funds, and the law recognizes that the Board has a "fiduciary duty" in fulfilling its role as fund trustee. Board members are subject to removal for neglect, misuse of office, or incompetence in the performance of their duties.
Pertinent to your request, the Board is expressly empowered "to invest and reinvest [VRS] funds as authorized by law." You inquire regarding the Board's authority to make investment decisions based on environmental, social, and/or corporate governance (ESG) policies. As commonly understood, ESG-based investment involves "investors seeking] out socially conscious companies and try[ing] to facilitate change in companies to achieve ESG-related goals[,]" and "ESG investment is an umbrella term for an investment strategy that emphasizes the corporate governance structure or the environmental or social impact of a company's products and practices."
Although the administrative powers of the Board generally are not limited to those explicitly set forth in the Code, the Board's investment of trust funds is "governed exclusively" by Article 3.1 of the Code chapter governing the VRS, which article contains Code § § 51.1-124.30 through 51.1-124.40. None of these statutory provisions grants the Board specific authority to make investments according to ESG policies.
Rather, consistent with Virginia's Constitution, Code § 51.1-124.30 directs that the Board "shall discharge its duties with respect to the Retirement System solely in the interest of the beneficiaries thereof." Both the constitutional and statutory provisions thus codify and impose on the Board a common
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law fiduciary duty of loyalty to VRS beneficiaries. Adherence to this duty requires the Board to "exclude all selfish interests and all consideration of the welfare of third persons."
Section 51.1-124.30 further establishes the standard of care the Board is to follow in executing its fiduciary duty: VRS assets are to be invested "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of cm enterprise of a like character and with like aims.' In construing this specified standard of care, the primary "objective is 'to search out and follow the true intent of the legislature[.]"' "Although our focus is generally on the plain meaning of unambiguous statutory language, we must also consider that language in the context in which it is used." Courts seek "to adopt that sense of the words which harmonizes best with the context, and promotes in the fullest manner the apparent policy and objects of the legislature." Accordingly, the prescribed standard of care must be read "not in a vacuum, but with reference to the statutory context, 'structure, history, and purpose.'"
Virginia law makes clear that the VRS is to be administered only on behalf of its members or beneficiaries. Other Virginians and society at large are not the intended beneficiaries of the VRS. Rather, the VRS was "established as a retirement system for teachers, State employees and employees of
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participating political subdivisions and other qualifying employers[.]" The sole purpose of the retirement system is to foster financial security for public employees upon their departure from public service. This purpose is reflected in the "enterprise" and "aims" referenced in the standard of care prescribed by § 51.1-124.30. Moreover, by limiting the permissible uses of funds to "benefits, refunds, and administrative expenses," the Virginia Constitution evinces that the Board is to administer the VRS only with fiscal considerations in mind.
Because the purpose of the VRS is thus limited, other public policy concerns and initiatives necessarily are beyond the scope of the Board's authority and role as trustee. Accordingly, a general public
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benefit, no matter how salutary, is insufficient to warrant investment by the VRS Board. Rather, as this Office previously has explained, potential VRS transactions are to be evaluated "solely on the basis of [their] benefits to the retirement system beneficiaries, under the fiduciary standard in § [51.1 -124.30],"
When a constitutional provision or statute confers a specific grant of authority, the authority exists only to the extent specifically granted by the law. Because this principle applies to action by the VRS Board, I conclude that the Board's investment authority must be exercised in the expressly established manner, and no other. Consequently, the fiduciary duties imposed on the Board under Virginia law direct that the Board make its investment decisions based on securing the best financial results for VRS beneficiaries and not in furtherance of environmental, social, and/or corporate governance policy goals.
Conclusion
Accordingly, it is my opinion that the VRS Board is subject to fiduciary duties that preclude it from basing its investment decisions on ESG policies rather than financial considerations.
With kindest regards, I am, Very truly yours, Jason S. Miyares Attorney General
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Notes:
VA. CONST, art. X, § 11.
Id.
Id.
Id.
VA. CODE ANN. §51.1-124.1 (Supp. 2023).
Id. ; VA. CONST, art. X, § 11.
VA. CODE ANN. § 51.1-124.1.
Section 51.1-124.22(A) (2020).
Id.
Sections 51.1 -124.24(A) (2020); 51.1-124.26 (2020) (requiring the Board, respectively, to employ a chief investment officer and to appoint an Investment Advisory Council to "assist the Board ... in fulfilling its fiduciary duty").
Section 51.1-124.20(J) (2020) (referencing removal pursuant to Code §§ 24.2-230 through 24.2-238).
Section 51.1-124.30(A) (2020) (emphasis added).
Eric C. Chaffee, Index Funds and ESG Hypocrisy, 71 CASE W. RES. L. REV. 1295, 1296 (2021).
Akio Otsuka, ESG Investment and Reforming the Fiduciary Duty, 15 OHIO ST. BUS. L.J. 136 (2021).
See § 51.1-124.22(A).
See also § 51.1-124.35 (2020).
Section 51.1-124.30(C) (emphasis added).
"[T]he common law . . . charges fiduciaries with a duty of loyalty to guarantee beneficiaries' interests: 'The most fundamental duty owed by the trustee to the beneficiaries of the trust is the duty of loyalty. ... It is the duty of a trustee to administer the trust solely in the interest of the beneficiaries.'" Pegram v. Herdrich, 530 U.S. 211, 224 (2000) (quoting 2A A. SCOTT & W. FRATCHER, TRUSTS § 170, p. 311 (4th ed. 1987)). See BOGERT'S THE LAW OF TRUSTS AND TRUSTEES § 543 ("Perhaps the most fundamental duty of a trustee is the trustee's duty of loyalty to the beneficiaries, often stated as the duty to act solely in the interests of the beneficiaries.").
McIver v. Salomonsky, 5 Va. Cir. 524, 528 (City of Richmond Cir. Ct. June 13, 1978); accord RESTATEMENT (THIRD) OF TRUSTS § 78 (2007) (quoting George T. Bogert, Trusts § 95 (Hornbook, 6th ed. 1987) ("The trustee owes a duty to the beneficiary to administer the affairs of the trust solely in the interests of the beneficiaries, to exclude from consideration his own advantages and the welfare of third persons."). The duty is not violated when aspects of a particular action also might benefit other parties incidentally. See Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982).
Section 51.1-124.30(C) (emphasis added). The Board generally is further instructed to "diversify such investments so as to minimize the risk of large losses . . . ." Id.
Thornton v. Commonwealth, 78 Va.App. 321, 330 (2023) (quoting Colbert v. Commonwealth, 47 Va.App. 390, 394 (2006)).
City of Hampton v. Williamson, 302 Va. 325,333 (2023) (quoting Potter v. BFK, Inc., 300 Va. 177,182 (2021)).
Thornton, 78 Va.App. at 330 (quoting Colbert, 47 Va.App. at 394).
Abramski v. United States, 573 U.S. 169, 179 (2014) (quoting Maracich v. Spears, 570 U.S. 48, 76 (2013)).
VA. CONST, art. X, § 11; VA. CODE ANN. §§ 51.1-124.1; 51.1-124.30. As a previous Opinion of this Office explains, the constitutional provision establishing the duty of loyalty originated during the 1969 Special Session of the General Assembly due to concerns over the practice of allowing state and local government borrowing from the Retirement System at low interest rates.... [This practice] was not in the best interest of the beneficiaries of the fund. During debate of the issue in the Senate, it was observed '"retirement funds are a trust and should be invested at the highest and best rate consistent with trust obligations,' and that it was unfair to public employees 'to permit their funds to be invested at less than the best interest rate available.'"
2003 Op. Va. Att'y Gen. 140, 142 (footnotes and citations omitted) (citing 2 A.E. DICK HOWARD, COMMENTARIES ON THE CONSTITUTION OF VIRGINIA 1135 (1974)).
See VA. CODE ANN. § 51.1-124.3 (Supp. 2023) (defining "beneficiary" to mean "any person entitled to receive benefits under [the VRS]").
1976-77 Op. Va. Att'y Gen. 225, 226.
See VA CONST, art X, § 11; VA CODE ANN § 511-1241; Lindsey v Gillmer , 188 Va 1, 18 (1948) (Hudgins, J, concur ring) (explaining that VRS funds are held and invested for a distinct purpose: "to guarantee social security to teachers and other State employees").
"The purpose underlying a statute's enactment is particularly significant in construing it[,]" 1998 Op. Va. Att'y Gen. 9, 10 (citing VEPCO v. Bd. of Cnty. Supvrs., 226 Va. 382, 388 (1983)); and "[w]e are required to give to the statute a reasonable construction—one which will, if possible, give effect to its obvious purpose." S. Ry. Co. v. Commonwealth, 205 Va. 114, 119 (1964) (quoting Norfolk S. Ry. Co. v. Lassiter, 193 Va. 360, 364 (1952)).
VA. CONST, art. X, § 11; see VA. CODE ANN. §51.1-124.1 (establishing the VRS "for the purposes of providing adequate benefits and pensions to members, encouraging stable employer contribution rates, and ensuring the overall soundness of the Retirement System"); §§51.1-152 to -169 (2020 & Supp. 2023) (describing calculation of benefits). Cf. Fifth Third Bancorp v. Dudenhoeffer , 573 U.S. 409, 420-21 (2014) (explaining that under ERISA, "the term 'benefits' . . . must be understood to refer to the sort of financial benefits (such as retirement income) that trustees who manage investments typically seek to secure for the trust's beneficiaries[; t]he term does not cover nonpecuniary benefits . . . (citation omitted)).
Moreover, when applying the constitutional and statutory language, courts "consider 'the evil sought to be corrected by the legislature' when it adopted the pertinent language." GEICO Advantage Ins. Co. v. Miles, 301 Va. 448, 455 (2022) (quoting S. Ry. Co., 205 Va. at 117). The language limiting fund usage was added to the Constitution as part of a recommended VRS reform initiative in the 1990s. As originally adopted in 1971, Article X, § 11 contained only the following language: "The General Assembly shall maintain a state employees retirement system to be administered in the best interest of the beneficiaries thereof and subject to such restrictions or conditions as may be prescribed by the General Assembly." Effective January 1, 1997, the provision was amended to its current version after a majority of voters assented to a referendum presenting the question, "Shall the Constitution of Virginia be amended to provide that the funds in the governmental employees retirement system shall be trust funds and be invested and administered solely in the interests of the members and beneficiaries of the system?" See 1996 Va. Acts ch. 4. Although the General Assembly retained some power over the administration of the VRS, the amendment not only maintained the prescribed duty of loyalty, but also enshrined the limitation on the use of funds. Id . The constitutional amendments, as well as additional statutory amendments, to the VRS were adopted in response to recommendations made by the Joint Legislative Audit and Review Commission in a 1994 report; the General Assembly commissioned the report because "concerns ha[d] been raised about the independence of the Virginia Retirement System and about the soundness of investments made on its behalf[.]" 1993 H.J. Res. 392. Among the concerns was the appearance of undue influence of political considerations. See JOINT LEGISLATIVE AUDIT &REVIEW COMMISSION, REVIEW OF THE VIRGINIA RETIREMENT SYSTEM, House Doc. No. 52, at iii, 2,15,19,23,25 & 56 (1994), https://rga.lis.virginia.gov/Published/1994/HD52/PDF.
See 1990 Op. Va. Att'y Gen. 1, 5-6 nn. 2 & 4 (noting that an executive order directing that state agencies divest from companies invested in South Africa did not alter the VRS Board's scope of investment authority or fiduciary duty).
1992 Op. Va. Att'y Gen. 138, 141 ("A toll road may have a valid public transportation purpose that would justify direct expenditure by the General Assembly or some other public body, but such a purpose alone is insufficient to justify the VRS Board's investment of retirement system funds.").
Id. at 142. I note that federal law, ERISA, imposes similar, but not identical, fiduciary duties with respect to private sector pension funds. See 29 U.S.C. §§ 1101 to 1114; 29 C.F.R. § 2550.404a-la.
1997 Op. Va. Att'y Gen. 101, 103 (citing Tate v. Ogg, 170 Va. 95, 103 (1938)); accord 1999 Op. Va. Att'y Gen. 44, 45 (citing 2A NORMAN J. SINGER, SUTHERLAND STATUTORY CONSTRUCTION, § 47.23 (5th ed. 1992 & Supp. 1999)).
See 2002 Op. Va. Att'y Gen. 233 (concluding, based on a lack of statutory authority, that the VRS could not undertake certain actions).
See, e.g., Evelyn v. Commonwealth, 46 Va.App. 618, 634 (2005) ("When a legislative enactment limits the manner in which something may be done, the enactment also evinces the intent that it shall not be done another way." (quoting Grigg v. Commonwealth, 224 Va. 356, 364 (1982))); 1980-81 Op. Va. Att'y Gen. 209, 210 ("A statute, limiting things to be done in a particular manner, implies that it shall not be done otherwise.").
Attorneys General of States with similar pension fund fiduciary provisions have reached the same conclusion. See 2022 Op. Ky. Att'y Gen. 22-05; 2022 Op. Ind. Att'y Gen. No. 3.
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