• U.S. Welcomes Best Practices for Sovereign Wealth Funds, Possibly Easing the Way for More Investment in the U.S.
  • November 2, 2008 | Author: Adrianne L. Goins
  • Law Firms: Vinson & Elkins LLP - Washington Office ; Vinson & Elkins LLP - Houston Office
  • On October 11, 2008, an international working group established by the International Monetary Fund released an agreed set of principles to guide the practices of state-owned investment funds known as Sovereign Wealth Funds (SWFs). In recent years, SWFs have emerged as major sources of foreign direct investment. The U.S. Treasury estimates that SWFs currently control between $2 and $3 trillion and projects that these funds will control as much as $7 to $11 trillion by 2013.

    Even though SWFs are a rich source of foreign direct investment, their affiliations with foreign governments have created a debate in the United States and other countries about whether the funds may make politically motivated investments in strategic assets and thereby threaten national security. A top U.S. Government official has signaled, however, that the adoption of these best practices “will help allay concerns that SWF investments are politically motivated” and create an environment of greater openness towards investments by SWFs in U.S. businesses.

    The international working group includes representatives from 23 IMF-member countries with SWFs, and it has been working to develop best practices since it was established in late April 2008. A number of countries receiving investments from SWFs, such as the United States and Canada, commented during the deliberations. The group’s goal was to create a transparent set of principles that would help allay the fears associated with foreign direct investment by SWFs. The 24 principles, known as the “Santiago Principles,” are based on four “guiding objectives”:

    • To help maintain a stable global financial system and free flow of capital and investment;
    • To comply with all applicable regulatory and disclosure requirements in the countries in which they invest;
    • To invest on the basis of economic and financial risk and return-related considerations; and
    • To have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability.

    There is an expectation that the SWFs’ commitment to invest for economic and financial reasons – rather than to advance strategic national objectives – will lead to higher numbers of transactions involving SWFs in the United States.

    On Monday, October 13, Deputy Treasury Secretary Robert M. Kimmitt welcomed the Santiago Principles, noting that they represent “a milestone in enhancing the openness and transparency of the global financial system and in promoting open investment worldwide.” Kimmitt drew a link between the Principles and the U.S. Government process for reviewing foreign acquisitions for national security concerns. That review is conducted by the Committee on Foreign Investment in the United States (CFIUS), of which Treasury is a leading member. He explained that CFIUS will continue “to focus solely on genuine national security concerns” and “transaction-specific risks.” Kimmitt signaled that the U.S. will consider fairly investments by SWFs, noting that “openness to capital from abroad is a source of economic strength not economic vulnerability.” If Deputy Secretary Kimmitt’s reaction is shared by other member agencies of CFIUS, SWFs should face less resistance when voluntarily notifying their transactions to CFIUS.

    The Santiago Principles could not have been issued at a better time. One of the key concerns in the current global financial situation is the lack of liquidity. Paving the way for investment by SWFs may ameliorate some of the liquidity concerns in the United States and around the world. As Kimmitt explained, “[a]llowing capital to flow freely is vital for economic growth and will enable healthy institutions to emerge from the current turmoil.”

    The Santiago Principles may be found at www.iwg-swf.org/pubs/santiagoprinciples.pdf.