SEC and European Commission Seek More Transparency for Sovereign Wealth Funds
As sovereign wealth funds grow larger than all of the world's hedge funds combined, the SEC and European Commission are trying to increase the transparency in the funds while avoiding protectionism. In recent remarks, both SEC Chairman Christopher Cox and EU Commissioner for the Internal Market Charlie McCreevy said they will work together to make the funds more transparent.
Sovereign wealth funds are the investment arms of governments. They also encompass a broad range of funds and a variety of investment strategies and management. For example, several sovereign wealth funds are directly managed through the central bank or the finance ministry, such as in Norway and Qatar. Others are incorporated as private companies with at least some degree of independence, such as Dubai International Capital.
According to McCreevy, sovereign wealth funds should be transparent in their operations, preferably on the basis of an international code of best practices. The EC is working with international organizations and bilaterally with the SEC to bring this about. An agreement has been reached to launch an investment dialogue to promote open investment regimes globally in a fully safe environment.
With respect to transparency, McCreevy would like to see sovereign wealth funds publish their investment strategies, detail their investment conduits and agents and provide an audited yearly report of their holdings in every company. Interested parties would then know which shares the fund holds and its investment strategy.
From the SEC's standpoint, working to ensure the transparency of sovereign business and investment will be of paramount importance. The mutual trust and investor confidence that transparency would establish will address many of the special concerns these activities raise. To the extent that sovereign investing is conducted through professional management of these funds, Cox said that it could help to depoliticize the process both in practice and in perception.
Cox also pointed out that the SEC currently has the power to pursue enforcement actions against sovereign wealth funds for violating U.S. securities laws. Neither international law nor the Foreign Sovereign Immunities Act renders these funds immune from the jurisdiction of federal courts in connection with their commercial activity conducted in the United States.
When a foreign private issuer is suspected of violating U.S. securities laws, the SEC can almost always expect the full support of the foreign government in investigating the matter. However, if the same government from whom the assistance is sought is also the controlling person behind the entity under investigation, Cox said that a considerable conflict of interest would arise.
Another concern is the conflicts of interest that arise when the government is both the regulator and the regulated. When the government becomes both referee and player, Cox said, the game changes dramatically for every other participant. He fears that rules rigorously applied to private sector competitors will not necessarily be applied in the same way to the sovereign who makes the rules.
Investors and regulators alike have to ask themselves whether government-controlled companies and investment funds will always direct their affairs in furtherance of investment returns, or will use business resources in the pursuit of other government interests. If the latter is the case, Cox questioned the effect on the pricing of assets and the allocation of resources in the domestic economies of other nations. Cox cautioned that the track record of transparency to date of most sovereign wealth funds does not inspire confidence.