AG Reyes Dismisses Lawsuit Against NAAG After it Makes Significant Governance and Financial Oversight Changes in Response to Utah Lawsuit

Today, Utah Attorney General Sean D. Reyes announced the settlement and dismissal of a lawsuit he filed in early 2023 on behalf of the State of Utah against the National Association of Attorneys General (NAAG). The complaint asked a Utah court to determine whether NAAG's handling of $100 million in assets on behalf of various states violated Utah's State Money Management Act. Those funds are held by NAAG as part of a decades-old settlement between the states and large tobacco companies. In filing the lawsuit, AG Reyes expressed serious concerns over the investment of assets by NAAG in Environmental, Social, and Governance ("ESG") funds or any other investments made contrary to the "Fiduciary Rule" or "Prudent Financial Investor Rule" which requires maximizing return to beneficiaries.

At the time of filing, AG Reyes, who formerly served on NAAG's Executive Committee and multiple terms as a co-chair of both NAAG's Human Trafficking Committee and Civil Rights Committee, also expressed concerns over fiscal soundness and fairness, impartiality and representation in governance between Democrat and Republican AGs as well as control over the use of funds. Many Republican AGs expressed similar concerns for years, leading to several of them withdrawing their states from membership in the organization. This unrest also led to the resignation of NAAG's former Executive Director ("ED") and the hiring of former Idaho Chief Deputy AG, Brian Kane, as the new ED.

Articulating his concern in 2023, AG Reyes stated, "For decades NAAG has been caretaker of significant funds for the states, and no one has dared ask a court whether the use of such funds complies with state laws or if it's time for NAAG to divest such funds. I am asking it now. Unless NAAG changes some fundamental policies, it will be up to a court to determine the answer."

In dismissing the case this week, AG Reyes stated: "I don't believe the lawsuit is necessary any longer. NAAG has made significant changes and now appears to comply with Utah law on handling funds-whether those assets belong directly to the state or Utah is solely a beneficiary. I give great credit to NAAG ED Brian Kane. Without his leadership and our trust in him, I don't think this settlement would have happened. I also commend the AGs leading NAAG for being responsive. They listened to the concerns that I and other AGs have long held. But, more importantly, NAAG did something about it. The many new bylaw and organizational changes give me more confidence and hope for less partisanship in governance, investments and use of funds, and in balancing leadership power. And I'm pleased we were able to suspend the dues requirement for at least another year."

The following significant governance and financial management changes are just some that have been adopted by NAAG following the filing of Utah's lawsuit:

• The president of the Association rotates every year by political party ("party");
• The Executive Committee has a majority that is different than the party of the president of the Association;
• The Finance Committee is chaired by a member that is different than the party of the president;
• All Association committees with access to funds have an even party split including co-chair positions;
• Only Attorneys General or their designated staff can make funding decisions, or set the budget for the Association; and
• Multistate efforts must be bipartisan with at least two members of each party as sponsors, or the effort must be approved by the Executive Committee;

In addition, the following financial oversight changes have been made:

• The Finance Committee is evenly balanced between the parties;
• NAAG's financial advisors have been reviewed and replaced following a transparent RFP process led by a special bipartisan committee of Attorneys General;
• An Audit Committee has been established that includes party balance as well as a committee member from outside the Association to ensure transparency and objective oversight;
• The Association's auditors have been replaced following a transparent review and RFP process led by the Audit Committee;
• All investment policies are currently under review and revision in consultation with the Association's new investment advisors;
• Any investments not meeting the requirements of the Attorneys General are subject to review and replacement through the Finance Committee, the Executive Committee and Investment Advisors;
• No investments are currently made for any ESG purposes or in any other type of investment that is motivated by a partisan political purpose;
• All funds are invested according to the Fiduciary Rule or the Prudent Financial Investor Rule;
• In the NAAG 2025 budget, there is a suspension of state dues requirements for another year. A request for a further extension or permanent suspension can be brought by any AG before the NAAG Executive Committee for consideration;
• A Dues Committee will be convened to assess the needs of the Association as well as its member Attorneys General individually and collectively.

Finally, the Association has undergone other important operational and governance changes following the hiring of Director Kane making NAAG leaner, more responsive and accountable to its members. For example, Mr. Kane significantly reduced the total number of employees while increasing the output and offerings of the Association.

Recognizing the significant changes adopted through the Association, as well as the receptivity of the current Executive Director and membership to address the concerns of Attorney General Reyes and his fellow AGs, the most prudent course forward was to dismiss this lawsuit and continue to work within the Association.

Attorney General Reyes would like to extend thanks to his fellow Attorneys General, the members of his team who worked so diligently on this effort, and the NAAG team and outside counsel. In conclusion, he stated, "I am pleased we could settle this matter, remedy substantial issues and strengthen the organization. Again, if not for the leadership of Brian Kane and support of the Executive Committee, we could not have resolved this without full blown litigation. Any ideas for further improvements can be brought forward by me or any other member to the Executive Committee of NAAG."