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II. PROJECTIONS OF PUBLIC ECONOMIC POWER IN PRIVATE FORM: CONTEXTUALIZING SOVEREIGN WEALTH FUNDS ?FORM, FUNCTION AND POLICY.

Sovereign wealth funds represent a new form of an ancient type of a traditional state activity?the management of public funds. Jason Buhi nicely summarizes this history:

Between 1945 and 2001, the world?s preferred investment instruments were United States Treasury Bonds. Underwritten by the then overwhelming strength of the American economy and liquid enough to be sold in time to prevent a currency crisis, these bonds were rightly considered a safe investment vehicle. Most central banks were content to settle for their security and liquidity. The exceptions were a few Middle Eastern emirates with more petrodollars than they knew what to do with. Realizing that oil wealth is not eternal and unsatisfied with the relatively low rate of return on bonds, these nations began innovating new investment vehicles and formed the first major SWFs. The desire for diversification spread in the early years of the 21st century with an increasingly negative prognosis of the American economy.56

For nearly half a century, these funds were not of much interest to the scholarly or policy community. It was considered merely another form available to states to manage their reserves, especially for developing states with substantial assets from natural resources exploitation.57 That outlook is still quite strongly held; sovereign wealth funds are viewed as primarily a special form of the traditional sovereign activity of managing reserves, essentially a sovereign, rather than a commonplace commercial activity.58 But they have become noteworthy not merely because they have grown larger, but also because they have begun to invest more aggressively.59 ?SWFs recently have chosen to invest instead in long-term equity positions ad in other more risky financial assets not traditionally associated with foreign exchange investments of central banks in order to seek higher long term returns and thereby establish greater fiscal revenue stability and intergenerational savings.?60

But the new form also represents a substantial departure from traditional models precisely because the sovereign seeks to assert a traditionally public activity in a manner traditionally used by non-state actors. Having created a global framework for private activity through markets, in which the role of the sovereign has been primarily regulatory, sovereigns now seeks to participate within the markets they have helped create, but which none of them individually can control through the use of sovereign regulatory power. The difference is substantial enough to produce regulatory contradiction. If sovereigns invoke private frameworks, does that activity lose its sovereign character, or if not, what is the regulatory framework within which such activity be undertaken? More important, what are the political consequences when these activities that appear to invoke private processes extend the reach of sovereign power from its own into the territory of other sovereigns? The standard histories of sovereign wealth funds suggest the assumption that such funds must be tied to the context from which they originated, rather than to the forms through which their activities are undertaken.61 And that suggests that the public character of the fund?s ownership, rather than its form and operation, that are privileged in the conceptualization of the sovereign wealth fund,62 but not as strongly in the conceptualization of the regulatory framework through which they may operate in host states.

Much of the discussion of sovereign wealth funds is colored by unstated assumptions about their character. This is one area in which the self-referential character of the study of the object has produced more ambiguity than clarity. Those who are suspicious of sovereign participation in markets oppose their growth and tend to privilege their public aspects--principally that they are owned by states--adopting a formalist approach to their analysis. Legal responses consequently have a public law flavor and the limitations usually imposed on states are suggested as appropriate to these entities as well. Others, who are not so suspicious of sovereign wealth funds tend to privilege their private aspects--that they operate like and are subject to regulation outside their home jurisdictions by public regulators--adopting a functionalist approach to regulation. For them legal frameworks that vest states exercising regulatory power with authority to reach all forms of vehicles that seek to invest in domestic economic markets ought to be sufficient regardless of the character of the investor.

Like pornography in the United States,63 it appears that many commentators are content with a definition of sovereign wealth funds that relies on their power to ?know it when they see it? rather than on something less technically arbitrary. But a lack of consensus about the definition of sovereign wealth funds actually reveals two sources of dissonance. The first, discussed briefly in Section A, is focused on efforts are formally defining sovereign wealth funds as distinct from other sovereign interventions in economic markets. The second, discussed in Section B, is focused on the forms that sovereign interventions may take. The first tends to privilege the sovereign element of the creation; the second tends to elevate the forms those creations take and the objects of their activities. Elaborations of both shape the policy discourse in significant ways. That is discussed in Section C.

A. Form in Sovereign Wealth Fund Definition and Operation.64

Formal definitions of sovereign funds by governmental or international organizations tend to focus their ownership element.65 Large private actors with significant stakes in global financial markets take a similar approach.66 That focus on the sovereign aspect of ownership tend to produce the most important policy consequence?the possibility that such investment tools might operate as a disguised arm of the sovereign owner through which such sovereigns could intervene abroad in ways that would be more difficult if done directly and as sovereigns.67 The focus on the sovereign element is important because of the disguise element of the vehicle?a entity or operation that appears to be one thing but is actually quite another, and one that appears to use private markets for sovereign aims. The sovereign aims might not be objectionable in themselves?the element of disguise, though, is another matter.

Among sovereign wealth fund operating states the conceptual framework is not much different. Fund operators have advanced a basis for self-conception emphasizing both the tie between the sovereign and the fund, and the connection between macroeconomic objectives of the fund owners and fund operations.68 The Santiago Principles trumpet a general rule that appears to limit the objectives of the fund ?to maximize risk adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.?69 However, the Santiago Principles make clear that this principle is not so much a restriction as a trigger for the application of transparency rules. Thus, use of funds for every purpose, from application of political embargoes and national policy projected abroad is permitted if disclosed.70

The focus on the character of the ownership of these investment vehicles produces an identity between the sovereign and the investment vehicle. Because the state is the owner, the fund is the state. ?SWFs are, by definition, extensions of the state. They are therefore viewed as maximizing their country?s long-term strategic interests rather than as profit-maximizing actors.?71 That judgment produces a willingness to assume away the autonomy among juridical persons, even where the investment vehicle is separately constituted.72 Norway has been particularly explicit about this in the construction and operation of its Fund.73 It also suggests that, assuming sovereigns do not act like private entities or individuals,74 their funds might be presumed to serve as flow-through entities, at least with respect to fund objectives.75 In the case of sovereign wealth funds, the critical assumption is that, unlike private actors, the owners of sovereign wealth funds are not constrained by a ?profit? motive, though sovereigns might agree to such commercial purpose limits as and to the extent it suits them.76 The Santiago Principles, in particular, serve as a conscious effort to excise sovereign investing from other forms of sovereign activity and, in return for the adoption of mild restrictions on the sovereign element of these funds, to avoid restrictions on flows of sovereign capital in global markets.77

This history, and the perception of the close ties between state sovereign activity and the investment of its assets through a variety of vehicles?including sovereign wealth funds?fuels the understanding of the taxation and sovereign immunity effects of sovereign wealth funds in host states. The American approach is instructive. The United States has long treated investment on an equal footing, whatever the character of the investor, in accordance with a framework geared to private investment.78 But, in important respect, the means used to arrive at this equivalence is sourced in two different approaches to regulation?for private enterprises starting from an assumption of the legitimacy of regulatory power, and for public sources activity from the opposite assumption. The former is based on a framework that assumes application of regulation and seeks exemptions and exceptions.79 The latter is based on a framework that assumes exemption from application of regulation unless an exception applies.80

Consistent with a broad understanding of sovereign power, and its unique character, some nation-states view exceptions as inherently grounded in the objectives of the sovereign?that objective becomes an important factor in determining the character of the activity.81 Yet, under the American Foreign Sovereign Immunities Act, the most useful exception, for commercial activities,82 commercial activity is defined by reference to the activity rather than to the identity or objectives of the public actor.83 And courts have become increasingly proficient in sorting through the character of an activity for purposes of applying the commercial activities exception.84

Mirroring the formula for foreign sovereign immunity, the American regulatory approach under the Bank Holding Company Act85 distinguishes between states and the corporations through which states may operate on the basis of the character of the activity rather than the objectives of the ultimate sovereign owner.86 But it only does so with respect to foreign rather than domestic sovereigns. With respect to the Bank Holding Company Act (BHC) for example, Scott G. Alvarez, then General Counsel Board of Governors Federal Reserve System noted:

The BHC Act specifically excludes from its coverage a corporation controlled by the United States or by a state government. Thus, investment companies controlled by the states of Alaska and New Jersey, for example, are specifically excluded from the requirements of the BHC Act. The exclusion does not, on its face, apply to companies controlled by foreign governments and . . . the Board has not extended this exclusion to companies controlled by foreign governments that make investments in U.S. banks and bank holding companies. Foreign governments to date have primarily invested through sovereign wealth funds that are companies controlled by the foreign government.87

The consequences are instructive?where private economic activity is permitted, all actors participating within those markets are essentially presumed to be private actors, and treated as such, irrespective of the character of their ultimate owners. Where states seek direct entry into private markets, then regulatory frameworks change. The essence of the distinction is grounded in the character of the participation.88

American tax rules follow a similar path.89 Sovereigns, in their sovereign capacities are treated as a special category.90 Their investments, to the extent they represent the actions of sovereigns as such are not by their nature income.91 But commercial activities are treated differently.92 For sovereigns operating sovereign wealth funds, of course, this means they might have it both ways. If they use their funds for sovereign purposes?which entitles for the protection of reserves and other traditionally sovereign activities, then perhaps treatment as a sovereign applies with its benefits and detriments.93 Otherwise, the sovereign might choose treatment as a private actor by changing the behavior of the fund.

These approaches amplify a certain amount of dissonance. Yet, if sovereigns are to be treated as participants in the market (and not regulators) when they invest in companies on an equal footing with individuals, then it seems that whether or not they operate directly or indirectly (through a corporation or other entity), they ought to be treated, not as a public sovereign entity, but as a private sovereign entity. Moreover, the character of the activity, and the constitution of the actor, rather than the objectives of the ultimate owner, ought to be determinative. For that purpose, regulatory frameworks might abandon distinction between private sovereign entities and other juridical persons, but instead focus on the legal actor involved and the character of the activity. To the extent that sovereign owners present political or other risks because of their unique nature, that ought to serve as its own basis for regulation, rather than the source of the approach to activity conducted in form and through markets open to both public and private actors.

The distinction between public and private activities of sovereign entities would not be hard to figure out--the guidelines are already fairly well established in the Foreign Sovereign Immunities Act and the jurisprudence it has generated.94 The Federal Reserve Board has essentially taken this position, though in a more roundabout and formal manner. "The Board has long taken the position that while foreign governments themselves are not companies subject to the BHC Act, foreign government-owned corporations such as sovereign wealth funds are companies. Thus any proposed controlling investment in a U.S. bank or bank holding company by a sovereign wealth fund would be subject to Federal Reserve approval."95 Yet, with respect to the objects of sovereign wealth fund activities, regulators continue to fall back on the sovereign character of the funds? ultimate owners and the objectives of the sovereign. In a sense, this approach rejects the ?commercial activities? approach of the courts in implementing the Foreign Sovereign Immunities Act. It substitutes an approach based on the assumption that such funds are necessarily regulatory in character on the basis of the connection between these funds (and state owned enterprises to some extent) and the presumption that they exist principally for the sovereign purpose of managing reserves or otherwise as instruments of public policy projected outside the national territory.

B. Function in Sovereign Investing.

While SWFs have been defined by reference to their sovereign character, there has been some effort to distinguish among them by reference to their functional elements. The functional elements that tend to serve this purpose include their organization, and the sources of their funding from their sovereign owners. By focusing on organization or sources of funds, SWFs definitions tend to de-emphasize the sovereign character of the vehicle and turn attention to the characteristics they share in common with similar non-sovereign entities. The International Monetary Fund identifies five types of funds distinguished by their function and objectives. Thus, for example, International Monetary Fund studies have distinguished among these funds on the basis of their objectives.96 They include stabilization funds,97 savings funds,98 reserve investment corporations,99 development funds,100 and contingent pension reserve funds.101 Others have suggested broader categories, for example, distinguishing between ?(i) central banks, (ii) stabilization funds, (iii) public pension funds, (iv) government investment companies and (v) state-owned enterprises.?102 These, too, emphasize funding sources as well.103 The World Bank has sometimes emphasized investment strategy rather than the form through which investment is made. It has suggested that these entities are ?long-term investment fund, typically for both income and intergenerational wealth transfer??104 Others distinguish among foreign exchange reserve funds, sovereign wealth funds, and public pension funds.105

This focus on the functional tends to minimize the connection between state and fund and emphasize the similarities between these funds, however operated, and private investment vehicles organized and operated in like fashion. Formal organization is meant to serve as a structural impediment to the assertion of the sovereign, and sovereign governance, in entities organized along conventional commercial lines. Function, it is assumed, will follow organizational form.105A

The activities of sovereign wealth funds suggest the dissonance between regulatory systems and the reality of SWF performance. This section briefly considers the operations of some of the more financially significant SWFs in the context of investment decisions during the financial downturn of 2007-08.

1. Libya. The Libyan sovereign wealth fund is relatively new,106 the product of the reengagement of Libya with the world in 2007.107 It had invested small portions of its funds through portfolio managers, but suffered significant losses during the economic downturn.108 The Libyan sovereign wealth fund, though, appears to have maintained a more liquid position.109 ?The fund is mainly seeking fair returns for its investments over the long term but will take board seats in companies when entitled because of the size of their shareholding, said Zlitni, who also is Libya's planning minister.?110 But the Libyans have not been focusing so much on the developed world as on sub-Saharan Africa. In addition, ?$155 billion of that would be spent in Libya on projects related to housing, energy, and telecoms reminiscent of the days when Libya was a primary state sponsor of terror.?111 In response to growing expressions of concerns about its lack of transparency, the Libyan fund announced in early 2009 that it will provide limited disclosure about its investment strategy.112 This moves it closer to accepting the forms of the ideal private investor model for sovereign wealth funds. ?By laying out its investment philosophy in some form, the LIA wants to assure lawmakers in foreign countries its intentions are purely commercial and not for political advantage, said Layas, a former chairman of the Libyan Arab Foreign Bank.?113 The purpose is to permit greater access to investments in equities in developed state enterprises without intervention by host states.114 But there remains an identity between the state ownership and state direction.

2. Singapore. Singapore operates two sovereign wealth funds. One of them is the Government of Singapore Investment Corporation (GIC).115 ?GIC's mandate is to enhance the international purchasing power of Singapore's reserves. To achieve this, GIC invests globally through systematic diversification across multiple asset classes. This requires a robust and coherent investment process, comprising three levels of decisions.?116 Equity Investment is undertaken through GIC Special Investments (GIC SI).117 The object is to invest both for return on investment118 and also to operate a diversified group of entities with respect to whose management GIC-SI participates.119 The other fund is operated through Temasek Holdings Pte., ?Governed by the Singapore Companies Act, and also designated a Fifth Schedule Company under the Singapore Constitution in 1991, Temasek is an autonomously managed and professional investment house guided by an independent board.?120 The company, describes itself as ?an active shareholder and investor in diverse industries covering banking & financial services, real estate, transportation & logistics, infrastructure, telecommunications & media, bioscience & healthcare, education, consumer & lifestyle, energy & resources, engineering as well as technology.?121 Temasek emphasizes its autonomy from its state shareholder. ?While we are state owned we are not state directed in our investment, divestment or other business decisions.?122 The focus is in responsible investing and corporate social responsibility in the context of maximizing wealth creation. To protect their assets, both GIC and Temasek ?reduced equity holdings amid the global downturn last year ?early in the crisis,? helping the funds to post smaller losses than the MSCI World Index, Finance Minister Tharman Shanmugaratnam said on Jan. 19.?123 Temasek was one of the global sovereign wealth funds that invested in the American sector at the time of the its initial implosion in September 2008, a move that has produced financial losses.124

3. Norway. The Government Pension Fund of Norway is the second largest sovereign wealth fund (SWF) in the world, and the largest in Europe.125 Norges Bank Investment Management (NBIM), a division of the Norwegian Central Bank, administers Folketrygdfondet.126 Norges Bank is also responsible for the publication of quarterly and annual reports on the fund, which are made public.127 Up to 50% of the fund?s assets may be invested in shares, primary capital certificates, bonds, commercial paper, and deposits in commercial and savings banks.128 The fund is also subject to regional investment restrictions, with the majority of both fixed income and equity investments confined to Europe.129 Additionally, the fund is not permitted to own more than 5% of the equity shares, or exercise voting rights in excess of 5% of total voting rights in a single company.130 On November 19, 2004, the Ethics Council was established by Royal Decree. The Council?s primary function is to evaluate companies in which the fund might invest to determine whether those companies meet certain ethical standards.131 In December of 2005, the Council released ethical guidelines by which companies are to be evaluated.132 On the basis of the guidelines, the Fund has excluded a number of companies,133 prompting other states, principally the Americans, to complain that the Fund was acting for political rather than investment motives.134 The Council has also shown its willingness to exclude companies that deal with governments which have poor human rights records,135 as well as to use the fund?s investment objectives available for the making of political statements, or to put pressure on foreign states in the interests of Norwegian national policy.136

Norway has used its finances more proactively than other funds. By May 2008 the fund managers announced an increased commitment to equity purchases?all subject to the ethical and other guidelines of the fund.137 Its investment head stated ?"We regard volatile markets as ... an opportunity."138 Norway?s SWF like others, suffered losses in connection with the collapse of U.S. bank values, as well as those in the European sector.139 But they have been taking the position that because they are very long term investors, these short term downturns do not concern them.140

But the economic downturn has also forced the Norwegian government to dip into its SWF for domestic matters.141 In addition to using its sovereign wealth fund, the ?Norwegian government . . . unveiled a 100 billion kroner ($14.8 billion) plan to inject capital into the country's banks and lend directly to banks and other businesses by buying corporate bonds.?142

4. UAE.143 ?The UAE is home to the world's biggest sovereign wealth fund as the Gulf nation has kept massive oil windfall revenues to preserve wealth for the future generation. Analysts estimates assets at the Abu Dhabi Investment Authority [ADIA] are worth around $500 billion.?144 ADIA was established in 1976 by the Government of the Emirate of Abu Dhabi as an independent government investment institution145. According to its official website, ADIA?s mission is to secure and maintain the current and future prosperity of the Emirate of Abu Dhabi through the prudent management of the Emirate?s investment assets.146 As much as 75% of its assets are administered by external managers which includes around 60% that is passively managed through tracking indexed funds147. The investments made by the Abu Dhabi Investment Authority (ADIA) seem diversified over a broad spectrum of industries in foreign direct public and private investments. Some analyses include the following sovereign wealth enterprises under ADIA: Abu Dhabi Investment Company, Tasameem, Procific and Tamweelview European Holdings SA.148 Also, it has been reported that ADIA is the largest shareholder in two of UAE's largest banks, National Bank of Abu Dhabi and Abu Dhabi Commercial Bank.149 ADIA describes itself as having a ?long tradition of prudent investing, ADIA?s decisions are based solely on its economic objectives of delivering sustained long-term financial returns. ADIA does not seek active management of the companies it invests in?150. Historically secretive with regards to its investments and amid some international pressure for transparency, Abu Dhabi sent a letter to U.S. Treasury Secretary Henry Paulson early in 2008,151 which included the set of principles that guide ADIA?s investments. Though not seen as a guarantee or official commitment, the letter was a major development for SWFs.

At the turn of the 2007- global financial crisis, ADIA was one of the first sovereign investors that assisted one of the major U.S. financial institutions in raising capital152. However, ADIA is now rethinking its investment strategies153, but it is not entirely clear what kind of changes will be made. The UAE funds might be used to shore up the domestic banking sector.154 Also, ADIA ?may depart from its long-standing tradition and begin investing in the local market by buying bonds planned by the UAE Government and other institutions?155 following investment strategies increasingly aimed at domestic markets as other SWFs have done in the aftermath of the global financial crisis.

5. Russia. The National Welfare Fund was established in 2008 after the The Oil Stabilisation Fund was split into two: one section managing official reserves (Oil Stabilisation Fund) and the other becoming the National Welfare Fund. While the Oil Stabilization Fund, by law, may only be invested in foreign government bonds, the main purpose of the National Welfare Fund is to guarantee the voluntary pensions of the citizens, and to help balance the budget of the Pension Fund for the Russian Federation. It has ability to lend money to Russian banks, and it will serve to absorb excess liquidity156. At its inception, there seemed to be some disagreement as to the type of investments that should be made with the National Welfare Fund157. Russia has received some criticism for its investments in buying gas pipelines and storage facilities in Europe158. In the wake of the global financial crisis, it has become clear that Russia is reshaping its foreign investment strategies159, and it may be forced to tap into the National Welfare Fund to alleviate its budget deficit160.

6. Brazil. The Fundo Soberano do Brasil. The fund was established in January 2009 by the issuance of 14.2 billion reals ($5.9 billion) bonds, equaling to .5% of Brazil?s GDP. The fund was created to guard Brazil from future financial crisis and assist Brazilian firms to increase trade and expand abroad. The fund will also help investments in Brazil by acting as an anti-cyclical mechanism161. Despite the fall in government revenues due to the continued effects of the global financial crisis, Brazil is has decided not to use its SWF but there is a possibility that the fund may be used in the future.162

This short review of the activities of the largest sovereign wealth funds suggests the ambiguities of the fund instrument. In the hands of some states, sovereign funds retained their essentially private character. In the hands of others, sovereign owners exerted stronger shareholder pressure to change the investment mix of funds to satisfy political needs. In either case, fund operation was grounded in principles of welfare maximization, but in the later case that welfare maximizing behavior deviated substantially from what might have been expected of the ideal private investor.163 Moreover, the financial crisis appears to have served to create a stronger inbound investment pressure.164 That appears to be especially acute in the Middle East,165 where the activities of sovereign wealth funds become merged with state owned enterprises.166 Form, then, does not appear to follow function. Yet, as I have suggested elsewhere, the inclusion of non-directly commercial profit maximization objectives is not unique to sovereign investment. Private investment vehicles have shown an increasing tendency to invest using long term principles based investing strategies that, like their sovereign counterparts, also are meant to project their power to affect behavior.167 This might suggest a regulatory framework that distinguished based on the regulatory or commercial objectives of investment irrespective of the ownership of the investment vehicle.168

C. Form and Function in the Policy Context on the Eve of Financial Crisis.

The focus on the sovereign element of these investment vehicles produces profound effects on regulatory policy debates. Sovereign wealth funds are viewed as another factor in international financial politics, even as a method for treating them like commercial enterprises is sought. As noted in a geopolitical context by Yoichi Funabashi, the Editor in Chief of the Asahi Shimbun, published in Tokyo, Japan:

Compounding the effects of its diplomatic fumbling, Washington is also losing economic clout in Asia. With the dramatic growth of sovereign wealth funds (SWFS) in recent years, Western economies have had a rude awakening to the rapidly shifting balance of global economic power: the line between political and financial power is becoming increasingly blurred.169

Yet for all that, the extent of the complexity of the issues that sovereign wealth funds produce requires an analysis beyond the fear--and the longing for money.170 That fear and longing is nicely expressed at times by the conflicting statements in influential political pronouncements and in public policy responses to sovereign investing in general, and the SWF in particular. These reflections are particularly important because they reflect the thinking of people who are most likely to fashion regulatory responses and cultural understanding of the phenomenon of sovereign investing.171 As important, these actors are likely to exercise their authority to translate assumption to practice.172

"The political response has run the gamut from fearful protectionism, to welcoming the funds as a source of stabilizing cash for businesses caught in a downturn. Most adept politicians are taking a ?wait and see? approach, while financial insiders tend to stress the importance of keeping markets open and welcoming the inflow."173 But for all that, the interventions are instructive, and will inform the debate about the regulatory future of SWFs. Those sources of authoritative or legitimate sources of opinion suggest fear, caution and enthusiasm. None seek to attack SWFs or their activities directly?all seek some sort of control over those activities consonant with the level of their fear, caution or enthusiasm. And, of course, those reactions can be tied to the way in which these actors think about SWFs.

Many influential members of the political class in the United States and Europe expressed fear of the power of SWFs, and suggested that the cure for that fear lay in regulation. The basis of that fear was the combination of state power and private power used to indirectly intervene in affairs of other states.174 "We need to have a lot more control over what they [sovereign-wealth funds] do and how they do it."175

This discomfort reflects the notion that wealth maximization may be more complex than a narrow vision of short term monetary wealth maximization, and that states are somehow special when they participate in markets they cannot directly control. Thus, Senator Jim Webb (D-VA) expressed it as a fear of mixed motive activity.

if SWFs begin flexing the power they would wield as shareholders in foreign corporations?for instance, what if Middle Eastern or East Asian SWFs banded together to oust the CEO of a U.S. corporation? In corporate governance terms, this would be seen as positive shareholder activism, but when governments are involved, experts are left to guess at whether such clout would be used for financial gain or for political purposes.176

Yet it is far from obvious why this constitutes a special fear. Senator Webb would appear to have little problem, were he a shareholder, to use his shareholder power to oust a CEO merely because he was detested, or liked labor unions, as long as it could be properly clothed in the appropriate language of commerce--that the ousted CEO's relationships with shareholders was detrimental to the long term growth of the company. Yet a sovereign shareholder might also have strong feelings about the value of a particular CEO, or of labor unions and other corporate activities, and seek to act on them. And those strong feelings may reflect an assessment of the effect of that CEOs actions on the interests of the sovereign investor, including but not limited to the investment in that particular enterprise.177

Still, there are differences between sovereign and individual shareholders. The individual can regulate only herself. A sovereign shareholder, on the other hand, can legislate. But sovereign shareholders do not legislate effectively outside the territory under their control. Likewise sovereign shareholders directly participate in governance in their role as shareholders, like other shareholders. In that role, sovereign shareholders are in the substantially similar position as the individual. In these roles both would seek to act through rather than on the entity. And both individual and sovereign have been known to invest, assert shareholder power within the corporation and divest their holding for reasons that maximize their respective welfares as shareholders, including their values and in the context of their aggregate positions.178

Of course, individuals would arrive at his value maximizing policy determinations by debating with themselves; the sovereign shareholder, like the corporate shareholder, would arrive at its value maximizing decision by application of either fiduciary duty (corporate shareholder) or democratic accountability or its functional equivalent (sovereign shareholders). In that sense, their actions can be viewed as regulatory. States translate the political will of the state through its activist activities as a shareholder (either by the way in chooses to buy and sell shares or the way it seeks to actively participate in the governance of the company. Still, viewing sovereign objectives as distinct from private objectives (even if the latter may not be entirely commercial in character) leads inevitably to the regulatory crossroad grounded in a fundamental assumption--that states can act as private market participants. If the assumption has value, then SWFs would have to forego their own wealth maximizing behavior in favor of some mythological construct--the reasonable private investor constructed by host states and based on a notion that private investment behavior is purely commercial.

Neutralization of the sovereign in sovereign investing is thus at the crux of assumptions underlying regulatory policy.179 Former Treasury Secretary Lawrence Summers, an American economist and now heading the White House National Economic Council for President Barack Obama180 echoed these themes. "The logic of the capitalist system depends on shareholders causing companies to act so as to maximize the value of their shares. It is far from obvious that this will over time be the only motivation of governments as shareholders. 'Imagine that a SWF makes an investment in a major bank of another nation that goes bad.' 'Is there anybody in the world that can assert that, with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations."181 This national security concern has been echoed by others as well,182 including President Obama when he was a candidate for the Presidency.183 Thus, that fear is grounded in the idea that SWF are both the instrumentalities of the states that own them (even if they are operated as separate legal persons) and that states are presumed to act in their regulatory capacity when they engage in investment activities, irrespective of its form and the place of the investment.184 Others have been more cautious,185 sometimes suggesting a heightened application of American regulatory models based on disclosure and transparency, but now pointed to the investing entities.186

There is a certain intuitive appeal to the argument that not all shareholder objectives are equally valid. The logic of that argument might be even more appealing when the shareholder is a state. Two chestnuts from the more ancient history of American law point out a good starting point for consideration of limits. One suggests the limits of director discretion in acting in the name of the entity--looking to institutional welfare maximization for the benefit of its constituent community.187 The other suggests similar (though more broadly put) limits on shareholder discretion to exercise her rights as represented by her stake in the entity.188 Both essentially point to limitations based on duties of loyalty to the entity--duties that can at times sound like those extracted from the German constitutional conception of Bundestreue.189 And, indeed, states would be unable to act like private investors because they are also required to maximize welfare, but public welfare maximization is not the same as private welfare maximization. As such, the argument suggests is not merely an implausibility of converging public and private law where entities seek to participate in markets. Instead, the real objective is to privilege a single view of those factors that together constitute appropriate considerations for welfare maximizing behavior by shareholders. And for that purpose, the desires of popular sovereigns, expressed through their political representatives or their agents within the governance organization of sovereign wealth funds, is recategorized as NOT legitimately welfare maximizing for purposes of asserting rights as shareholders.

Thus recast, these ideas suggest what may be emerging from out of one strand of potentially applicable jurisprudence of the European Union,190 one I have criticized before.191 In the form of the Santiago, principles, of course, this position also suggests the illegitimacy of sovereign welfare maximization as an objective of sovereign wealth funds.192 The consequences are a greater toleration of direct regulation of sovereign investing that projects sovereign economic power into hoist states. Thus, for example, the French finance minister has suggested that SWFs are welcome to invest in France, while the French President suggests that SFWS are in need of substantial control.193 French president Nicolas Sarkozy, explained, "In the face of the increasing power of extremely aggressive speculative funds and sovereign funds which do not obey economic logic (France is taking) the political and strategic choice to protect its companies, to give them the means to defend and develop themselves."194 He also suggested that domestic corporations could not compete against privately deployed state power.195

Similarly, the German leadership has suggested a law to regulate SWFs, while the German finance minister tries to lessen the implications of regulation by saying ?nobody wants to block investment, that would be crazy?.196 European Commissioner for Economic and Monetary Policy Joaquin Almunia, '"There are situations that are quite striking when the investor is a sovereign fund, a foreign state. This requires transparency. We need to set out European principles because we can't fulfill the internal market and its roles if each member state has different principles."197

Yet elites are mindful of the importance of inbound investment, especially in hard times. David Lewis, Lord Mayor of the City of London noted that ?We open our arms to hug them. If they wish to conduct acquisitions in London, there will be no problem if the acquisitions are in accordance with British supervisory laws.?198 Germany?s Finance Minister Peer Steinbrueck has previously described the German plans to defend domestic firms as modest compared to those of other countries, including Britain, France and the United States.199 By the middle of June 2008, Peter Mandelson declared "A state acting like a business--throwing the resources of government behind a company that competes with others--is a different proposition from a state looking to invest its surplus capital in the most commercially advantageous way."200 Mandelson suggests the mechanism by which such finds might remain above suspicion?to copy private funds by adopting an appropriately formulated voluntary code of conduct.201 Critically, Mandelson appeared willing to accept the proposition that sovereigns might act like, and be treated as, private investors under certain circumstances (those involving conformity to OECD or IMF transparency rules). "So long as its capital is invested for no other goal than a good commercial return, a sovereign wealth fund is not different from a pension fund, and its investments are likely to be much longer-term."202

When one moves beyond political actors, though, the policy context becomes more ambiguous. Western financial managers, for example, are more enthusiastic, emphasizing the participatory aspects of SWF operation. Peter Weinberger, former CEO of Goldman Sachs Int. explained that

It is hard to see why these investments have harmed Americans. . . . In each case, the entities receiving the capital decided that the price and terms were superior to what they could secure elsewhere. More important, this is how the markets are supposed to work... it is only a matter of time before SWFs are represented on boards of companies in which they invest ? and they should be.203

The circularity of money flows and the SWF place in that great circle of finance was also emphasized.204

The SWF responses reflect the importance of the market participatory aspects of their business (minimizing the sovereign element). They also suggest the growing importance of SWFs for the operation of global financial and credit markets. But mostly there are threats and hurt feelings. Mohamed Al-Jasser, vice governor of the Saudi Arabian Monetary Agency suggested "It's like the sovereign wealth funds are guilty until proven innocent."205 In a similar vein, Sultan Ahmed Bin Sulayem, chairman of Dubai World explained: "If somebody comes with regulations that make it difficult for someone from certain geographical locations to invest in Europe or the west, people will take their investment somewhere else. If you put a politician in charge of an investment, believe me, that investment fund will not last for a very long time."206 And the Chinese were skeptical of even a voluntary code of conduct regime.207 This was a view reflected by other SWF sovereigns.208

Thus one has the makings of an interesting conversation about sovereign wealth funds at the level of which public policy is culturally produced. At the root is uneasiness about the character of sovereign wealth funds in a regulatory context in which politics and economics remain separate spheres. If states are inherently regulators, their participation in markets might not merely create unfairness in transactions against private interests, they may also destabilize the markets themselves. But it is clear that these older nostrums about the division of economics and politics, and its effects of the construction of law are no longer reflective of any reality "on the ground."209 A more subtle analysis suggests that the difference is not in behavior?states easily mimic the behavior of other legal persons?it is that the motivations, objectives and values structures of sovereign and non-sovereign investors tend to diverge, as do their respective power over rather than in markets.210 It suggests that just as there is a convergence of public and private law, so there appears to be a similar convergence between law as a formal and institutionalized set of tools over which public entities exercised a monopoly power (on the one hand), and governance as private, contractual, and informal methods of controlling or regulating behavior available to any community with sufficient power to assert it.211 Law, like the state, might be harder to detect within the globalized institutional environment of soft and hard multi-level and polycontextual regulation.212 Yet, the real problem remains. Yet, it is not a fear of xenophobia--as Lawrence Summers suggests213--but the need to confront the changing landscape of power and regulation at the supra national plane that informs the discussion about SWF regulation. In the next sections, both its complexity, with the introduction of multiple instruments of sovereign investing, and its regulatory shortsightedness will be explored.

ENDNOTES:

56 Jason Buhi, Negocio De China: Building Upon the Santiago Principles to Form an Effective International Approach to Sovereign Wealth Fund Regulation, 39 CITY UNIVERSITY OF HONG KONG 197 (Fall 2009) (at Part 1).

57 ?In 1953, eight years before its independence form the United Kingdom, Kuwait established the Kuwait Investment Board to invest its surplus oil revenue. That was perhaps the first ever ?sovereign wealth fund? (SWF), although the term would not exist for another 50 years.? Robert M. Kimmett, Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy, 87(1) FOREIGN AFFAIRS 119 (2008).

58 New York State Bar Association Tax Section, Report on the Tax Exemption for Foreign Sovereigns Under Section 892 of the Internal Revenue Code (June 2008), at 10-16. The Report notes: As foreign exchange reserves of many foreign sovereigns have increased dramatically in recent years, those sovereigns have established or expanded SWFs to invest their excess reserves in a broader range of investments than traditional investments, which have been U.S. Treasuries and other bonds of the governments of developed countries. Id., at 22.

59 On the growth and size of aggregate SWF investment, see, Asset Backed Insecurity, THE ECONOMIST, Jan. 17, 2008. Additionally, ?Experts say the emergence of sovereign wealth funds represents a fundamental shift in the reasons governments invest money. "To the extent governments have traditionally held investment assets, it was to protect domestic currencies and banks from crisis," writes the Economist. Modern sovereign wealth funds go well beyond this basic agenda.? Lee Hudson Teslik, Sovereign Wealth Funds, COUNCIL ON FOREIGN RELATIONS, January 28, 2009. Also, ?One reason that SWFs have received a lot of attention in the popular press is because of their recent high-profile investments in developed countries? financial institutions? These investments have helped a number of systemically important financial institutions raise critical new capital. They have also heightened the scrutiny of SWFs and raised concerns about the desirability of these investments.? Anna L. Paulson, Raising Capital: the role of sovereign wealth funds, CHICAGO FEDERAL RESERVE BANK, Number 258 (January 2009).

60 New York State Bar Association Tax Section, Report on the Tax Exemption for Foreign Sovereigns Under Section 892 of the Internal Revenue Code (June 2008), at 22.

61 Thus, for example, Robert Kimmitt speaks of sovereign wealth funds in the context of the forms of sovereign investment. Robert M. Kimmett, Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy, 87(1) FOREIGN AFFAIRS 119, 120 (2008) (international reserves, public pension funds, state owned enterprises, and sovereign wealth funds); Edward F. Greene & Brian A. Yeager, Sovereign Wealth Funds--A Measured Assessment, 3(3) CAPITAL MARKETS LAW JOURNAL 247, 248 (Advance Access Publication 10 June 2008) (same).

62 As Mr. Kimmitt suggests, ?since SWFs are an outgrowth of domestic and international financial policies, it makes sense to consider them in terms of their potential impact on financial security.? Kimmitt, supra, note --, at 122.

63 Jacobellis v.Ohio, 378 U.S. 184 (1964) (Stewart, J., concurring) (?I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.?).

64 The materials considered in this sub section were explored in more detail in Larry Catá Backer, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment, 41(2) GEORGETOWN JOURNAL OF INTERNATIONAL LAW ? (forthcoming 2009).

65 The Americans have sought to define these entities by emphasizing their public nature of these investment instruments. An SWF has been understood to include "a government investment vehicle which is funded by foreign exchange assets, and which manages those assets separately from official reserves." U.S. Department of the Treasury, Press Room, Remarks by Acting Under Secretary for International Affairs Clay Lowery on Sovereign Wealth Funds and the International Financial System, (hp-471, June 21, 2007). Compare the approach of the International Monetary Fund: "government-owned investment funds, set up for a variety of macroeconomic purposes. They are commonly funded by the transfer of foreign exchange assets that are invested long term, overseas." International Monetary Fund, Sovereign Wealth Funds--A Work Agenda (February 29, 2008 (prepared by the Monetary and Capital Markets and Policy Development and Review Departments and approved by Mark Allen and Jaime Caruana), at 4. The Organization for International Cooperation and Development (OECD) takes a similar approach. ?Sovereign Wealth Funds (SWFs) are pools of assets owned and managed directly or indirectly by governments to achieve national objectives.? Helmut Reisen, How to Spend it: Commodity and Non-Commodity Sovereign Wealth Funds, OECD Policy Brief No. 38 (2008), available http://www.oecd.org/dataoecd/41/3/41412391.pdf . See also, Adrian Blundell-Wignall, Yu-Wei Hu and Juan Yermo, Sovereign Wealth and Pension Fund Issues, 25-Apr-2008.

66 Deutsche Bank suggested that sovereign investment entities could be defined as "financial vehicles owned by states which hold, manage, or administer public funds and invest them in a wide range of assets.". International Monetary Fund, Sovereign Wealth Funds--A Work Agenda (February 29, 2008 (prepared by the Monetary and Capital Markets and Policy Development and Review Departments and approved by Mark Allen and Jaime Caruana), at Annex II, 37; and Morgan Stanley ("An SWF needs to have five ingredients: sovereign; high foreign currency exposure; no explicit liabilities; high-risk tolerance; and long-term investment horizon"). Id., at Annex II, pp. 37-38.

67 Sanjiv Shankaran, Norway Fund to Put $2 Bn in India, LiveMint.com (India), Oct. 22, 2008) (?An SWF is a global investment fund owned by a government. Unlike a private international investment fund, which is governed by profit motives, SWF's might have national strategic objectives that have made them controversial investment vehicles.?).

68 Sovereign wealth funds are defined as

?special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.?

Santiago Principles, supra, note 27, at Appendix I (Defining Sovereign Wealth Funds), at pp- 27 (emphasis in original). The elaboration of macroeconomic purposes as financial objectives, id., at 27, does little to suggest limitations of sovereign objectives (precisely because the use of investment fundsa necessarily must have financial objectives)

69 Santiago Principles, supra note 27, at GAPP 19 Principle, at 22.

70 Id., at GAPP 19.1 Subprinciple. ?Some SWFs may exclude certain investments for various reasons, including legally binding international sanctions and social, ethical or religious reasons (e.g. Kuwait, New Zealand and Norway). More broadly, some SWFs may address social, environmental, or other factors in their investment policy. If so, these factors should be publicly disclosed.? Id., at Explanation and Commentary.

71 Daniel W. Dezner, Sovereign Wealth Funds and the (In)security of Global Finance, Testimony Before theU.S: House of Representatives, September 10, 2008, at 3.

72 This is not merely a problem of sovereign wealth funds. It has also become a method of thinking about the relationship of multinational corporations and their supply chain. See, e.g., Larry Catá Backer, Rights and Accountability in Development (Raid) V Das Air and Global Witness V Afrimex: Small Steps Toward an Autonomous Transnational Legal System for the Regulation of Multinational Corporations, 10(1) Melbourne Journal of International Law 258 (2009).

73 See, Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On the Management of the Government Pension Fund in 2008, at 12 ( ?The Government requires that responsible management of the Fund is arranged in such a way that support is ensured among the population of Norway and legitimacy among market players.? Id. As a consequence, ?To meet these goals, the Ministry wants to integrate the goals of good corporate governance and consideration of environmental and social aspects into all parts of the management to a greater extent than they are at present? Id., at 47.).

74 ?Even defenders of sovereign wealth funds as responsible financial actors acknowledge that some SWFs might have strategic objectives in their pattern of acquisitions. The funds themselves have repeatedly insisted that they merely seek to maximize their rate of return. Nevertheless, the perception among financial actors diverges from the self-perception of SWFs.? Daniel W. Dezner, Sovereign Wealth Funds and the (In)security of Global Finance, Testimony Before the U.S: House of Representatives, September 10, 2008, at 3. See also, New York State Bar Association Tax Section, Report on the Tax Exemption for Fore

Full post as published by Law at the End of the Day on July 26, 2009 (boomark / email).