April 14, 1994
Ms. Virginia Harris Administrator Burial Association Commission Dobbs Building 430 North Salisbury Street Raleigh, North Carolina
Re: Advisory Opinion – Pilot-Paul MFA, Inc.; Investment of Burial Association Funds in a Mutual Fund
Dear Virginia:
You stated in your letter of January 5, 1994 to Special Deputy Attorney General Tom Rosser that Pilot-Paul MFA, a mutual burial association, had deposited over $300,000 of its funds with Putnam Investment and asked whether it could lawfully do so in light of the language contained in G.S. § 143B-472.8, which regulates the deposit and investment of mutual burial association funds. Tom responded by letter of January 11, 1994, in which he requested more specific information concerning the nature of Pilot-Paul’s investment. You forwarded with your letter of April 6, 1994 brochures indicating that Pilot-Paul has invested its funds in a mutual fund managed by Putnam, known as the Putnam U.S. Government Income Trust.
The explanatory brochures and prospectus issued by Putnam with regard to this mutual fund state that the Fund invests exclusively in securities backed by the full faith and credit of the United States and in repurchase agreements and forward commitments with respect to those securities. While one of the chief objectives of the Fund is preservation of principal, Putnam states that although the securities in which the Fund invests are free from credit risk, the prices of the securities will fluctuate with changes in interest rates if sold before maturity. Thus, while the securities are insured against risk, the shares of the Fund are not. The prospectus discloses that:
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by, any financial institution and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
It is our opinion that a mutual burial association may not lawfully invest in such a mutual fund under applicable law. Seven categories of permissible investments are specified in G.S. § 143B472.8, including, inter alia, investments in (a) obligations of the United States, (b) obligations of any agency or instrumentality of the United States if payment of the principal and interest thereon is guaranteed by the United States, and (c) obligations of certain named Federal agencies or instrumentalities. Mutual funds are not among the investments specified. Further, although many of the securities held by the Fund may fall within the categories of permissible investments listed above, Putnam owns those securities; investors in the Fund have an ownership interest in the Fund, but they have no ownership interest in the securities purchased by Putnam for the Fund. Thus, the guarantees of the Federal government run to Putnam and not to investors in the Fund. In other words, the investments of the Fund are guaranteed, but the value of shares in the Fund are not, and the value of the shares will vary according to market forces.
We hope that this satisfactorily responds to your request, but if you have further questions or comments, please contact us.
Ann Reed Senior Deputy Attorney General
Henry T. Rosser
Special Deputy Attorney General