Tuesday, February 19, 2008

Australian Regulator Adopts Principles for Sovereign Wealth Funds

As the debate rages in the EU and US about the best way to achieve transparency for sovereign wealth funds, the Australian Treasurer has adopted principles for sovereign wealth fund investments. The principles embody transparency and sound corporate governance for sovereign wealth funds. If the Treasurer decides, after applying the principles, that a sovereign wealth fund investment would be inconsistent with Australia's national interest, it may be blocked or made subject to conditions to address any identified problems.

Generally, proposed investments by sovereign wealth funds are assessed on the same basis as private sector proposals, with national interest implications determined on a case‑by‑case basis. However, the fact that these investors are owned or controlled by a foreign government raises additional factors that must also be examined.

One principle emphasizes the independence of the sovereign wealth fund investor from the foreign government. In considering issues relating to independence, the regulator will focus on the extent to which the prospective investor operates at arm's length from the relevant government. Also to be considered is whether the prospective investor's governance arrangements could facilitate actual or potential control by a foreign government, including through the investor's funding arrangements. Any partial privatization of the sovereign wealth fund would be considered as it impacts independence.

Another principle mandates the consideration of the extent to which the sovereign wealth fund has clear commercial objectives and has been subject to adequate and transparent regulation in other jurisdictions. Under this rubric, the corporate governance practices of the fund would come into play, as well as its investment policy and how it proposes to exercise voting power in relation to Australian companies. Sovereign wealth funds already operating on a transparent and commercial basis are less likely to raise additional concerns than those that do not.

Yet another principle dictates a weighing of whether investment by the sovereign wealth fund could hinder competition or lead to undue concentration or control in the industry or sectors concerned. More broadly, there must be a consideration of the extent to which investments might affect Australia's ability to protect its strategic and security interests. Finally, there must be a determination of how much Australian participation in ownership, control and management of an enterprise would remain after a sovereign wealth fund investment, including the interests of employees, creditors and other stakeholders.

Sovereign wealth funds have exploded into the regulatory consciousness. The US Treasury and the SEC have called for best practices for these opaque vehicles. US regulators will work through the vehicle of the President's Working Group on Financial Markets to develop bi-lateral and multilateral initiatives to achieve greater transparency for these sovereign investment pools. As part of this effort, the SEC and European Commission are trying to increase the transparency in the funds while avoiding protectionism. Both SEC Chairman Christopher Cox and EU Commissioner for the Internal Market Charlie McCreevy have pledged to work together to make the funds more transparent.

With respect to transparency, Commissioner 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.

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, while others are incorporated as private companies with at least some degree of independence. There is no single, universally accepted definition of a SWF, but the US Treasury defines them as government investment vehicles funded by foreign exchange assets managed separately from the official reserves of the monetary authorities.

1 comment:

thedealsleuth said...

European state-owned banks are not exactly a model for transparency, either. Maybe it would be more expedient for the EU to fix problems closer to home. See http://thedealsleuth.wordpress.com/2008/02/29/beware-of-litigious-state-owned-banks/