Corporate Governance

Sovereign Wealth Funds and Investment in the United States

By Frank Tsu

Sovereign Wealth Funds (SWFs) have drawn increasing attention with their growing role as significant investors collectively managing assets estimated at totals of $2-3 trillion.  Most economists forecast that assets under management will only continue to increase.  When taking into account the recent, much needed injections of capital SWFs provided to both Citigroup and Merrill Lynch, the global impact of investment by SWFs is considerable. 

Most SWFs can be classified as either commodity or non-commodity funds with the key difference being their asset liability structure. As formal government backed investment vehicles SWFs not only have tremendous investment power, but also the potential to extend political decisions far across the global economy.  This raises issues with respect to their investment in companies within the United States, including some involving national security.   

On February 25, 2008 in Key Biscayne, Florida Treasury Assistant Secretary for International Affairs Clay Lowery spoke at a Conference sponsored by Barclays Capital about considerations relevant to the future impact of SWFs on the global economy.  Assistant Secretary Lowry suggested four guiding policy principles. 

• First, SWFs should investment solely on economic grounds and never political.
• Second, SWFs should be transparent to the extent that comprises world-class institutional integrity. This guiding policy principle encourages SWFs to have transparent investment policies, strong risk management systems, robust corporate governance structures, and effective internal controls.
• Third, SWFs should maintain fair competition with all private sector investors and strive to avoid having any unfair advantage, specifically as it relates to financing and market rates.
• Finally, SWFs should comply with and subject themselves to all regulatory and disclosure requirements of the host countries in which they decide to invest. Respect for the host country and its laws will help to ensure prosperous developing relationships between SWFs and all economic participants.

In addition, Lowry also re-iterated comments made by Treasury Deputy Secretary Kimmit in the January issue of Foreign Affairs magazine about policy considerations for countries that are the potential investment destination for SWFs.  First, countries receiving investment from SWFs are encouraged to avoid protectionism and all policies that would be counterproductive barriers to foreign investment and promoting a global economy.  Second, countries should uphold fair and transparent investment frameworks characterized by public, clearly articulated, predictable and non-discriminatory policies. Third, fair and transparent investment frameworks should respect the investment decisions of SWFs and never dictate how their assets should be invested.  Finally, all investment frameworks should treat all investors fairly in their application of tax and regulatory policies so as not to discriminate between foreign and domestic entities.

On March 20, 2008 the United States Treasury Department announced that it had reached official agreement on SWF investment with Singapore and Abu Dhabi highlighting several policy principles that mirrored those discussed by Lowry at the conference in Florida. The three countries issued a joint statement embracing five policy principles for SWFs and four policy principles for countries receiving SWF investment. 

Policy Principles for SWFs:

1. SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government.  SWFs should make this statement formally as part of their basic investment management policies.
 
2. Greater information disclosure by SWFs, in areas such as purpose, investment objectives, institutional arrangements, and financial information – particularly asset allocation, benchmarks, and rates of return over appropriate historical periods – can help reduce uncertainty in financial markets and build trust in recipient countries.

3. SWFs should have in place strong governance structures, internal controls, and operational and risk management systems. 
 
4. SWFs and the private sector should compete fairly.
 
5. SWFs should respect host-country rules by complying with all applicable regulatory and disclosure requirements of the countries in which they invest. 

Policy Principles for Countries Receiving SWF Investment

1. Countries receiving SWF investment should not erect protectionist barriers to portfolio or foreign direct investment.

2. Recipient countries should ensure predictable investment frameworks.  Inward investment rules should be publicly available, clearly articulated, predictable, and supported by strong and consistent rule of law.

3. Recipient countries should not discriminate among investors.  Inward investment policies should treat like-situated investors equally.

4. Recipient countries should respect investor decisions by being as non-intrusive as possible, rather than seeking to direct SWF investment.  Any restrictions imposed on investments for national security reasons should be proportional to genuine national security risks raised by the transaction. 

SWFs are not going away and it is clearly important that market regulators develop an effective system for welcoming further investment by SWFs. The agreement shared by the United States Treasury Department, Singapore and Abu Dhabi represent a meaningful step towards cohesive global action ensuring stable global financial markets.

The text of Assistant Secretary Lowry’s speech an be viewed at http://www.ustreas.gov/press/releases/hp836.htm
The text of the announcement from Treasury on the agreement reached with Singapore and Abu Dhabi can be viewed at  http://www.ustreas.gov/press/releases/hp881.htm

Full post as published by The Race to the Bottom on April 04, 2008 (boomark / email).