North Dakota Attorney General opinion allows Legacy Fund investments to remain opaque

North Dakota Attorney General Drew Wrigley has issued an opinion stating the Retirement and Investment Office is not required to disclose the specifics of where some Legacy Fund dollars are invested.

Bismarck attorney Tory Jackson requested an opinion from the Attorney General’s Office in early 2024 after he received a response to an open records request about which countries the state’s Legacy Fund is invested in. In the Retirement and Investment Office’s response, large sums of invested money were organized by “Emerging Market Region,” “Global Region” and “International Region” without any further explanation of where these funds had been invested. Jackson was also denied a breakdown based on the assets of individual money managers used by the RIO.

Wrigley said the RIO did not violate open records law by not providing a further breakdown of investments by country because the records do not exist.

The funds under these categories are primarily commingled funds, according to the RIO. These funds are not limited to a single country and the RIO does not “have a view into these holdings,” according to Friday’s attorney general opinion, meaning the RIO has not been provided any record that indicates which countries the commingled funds are invested in by the banks managing the funds. And because there is no record of where the funds are invested by country, the RIO is not legally obligated to create one under open records law.

The RIO has said that investing in commingled funds allows the office to leverage less money for greater returns by pooling it with other funds under the control of external money managers.

“We don’t own the underlying holdings. We are essentially a shareholder in a commingled fund,” the office told the Tribune.

Roughly $3.2 billion of Legacy Fund money is invested in 11 public markets commingled funds, according to the RIO. That means the state does not know specifically where roughly one out of every four dollars in the Legacy Fund is invested — a concerning proposition for some lawmakers, including Sen. Sean Cleary, R-Bismarck.

“I’m sure there are reasons why they choose to invest in these commingled funds, but as a state, I think we need to have a very serious conversation about ‘Do the benefits outweigh the downside?’” he said. “Because these are tax dollars and to not be able to tell the public how their Legacy Fund is invested is a serious concern.”

He said the discussion around Legacy Fund investment transparency sprang from revelations that the state was investing in Russian bonds at the same time Russia was invading Ukraine, as well as in Chinese companies with ties to the Chinese Communist Party. He said the opaque funds make him concerned that the state could still be invested in places that it should not be.

Cleary said he has approached North Dakota’s Legislative Council about possible legislative solutions to the problems he sees with transparency in the state’s investing. He also said he thinks at least one bill will be necessary next legislative session to address the issues he sees.

“I think the Legislature and state government as a whole needs to be very clear on where our Legacy Fund and our pension dollars are invested,” Cleary said. “And so it is really concerning to me that there’s not more information on these investments, whether it’s commingled or otherwise … I just really think that it highlights the need for further reform, something I’m actively going to work on next session with my colleagues, and it’s something that we have a responsibility to taxpayers to get right.”

Wrigley also determined that the RIO did not violate open records law by not disclosing the specific financial investments of money managers the RIO is contracted with because doing so would harm the RIO’s ability to obtain necessary information from its money managers and would cause “competitive injury” to the office’s investments.

The RIO pays $100 million a year in manager fees to receive financial information from its money managers. The office says that this information relating to the buying and selling of securities shows the money manager’s investment strategy and is confidential.

Jackson said in an opinion article recently published by the Tribune that the idea that disclosing the specific positions of money managers would cause a strategic disadvantage or competitive injury to investment firms was “overblown.”

“If you picked a bunch of money managers at random, you likely would find their investment strategies are nearly identical,” Jackson wrote. “If there is one industry that exemplifies herd mentality, it is the financial services industry.”

The RIO has recently also come under scrutiny for a planned incentive policy that uses the performance of external fund managers in determining the distribution of $1.3 million in bonuses among 12 employees involved in the office’s in-house investment program, which manages only 15% of the RIO’s total holdings.

(Editor’s note: Jackson is a regular “Speaking Out” columnist on the Tribune’s Opinion page).