US Treasury Endorses Code of Best Practices for Sovereign Weath Funds

The US Treasury has endorsed a voluntary set of principles for sovereign wealth funds recently adopted by an international working group vetted by the IMF. In remarks at the Dubai International Financial Center, Deputy Secretary Robert Kimmitt said that the principles underscore the fact that sovereign funds have a decades-long track record of investing on sound economic and financial grounds, and are long-term investors that can tolerate short-term volatility. The official also noted that sovereign wealth fund investment is a two-way street and that recipient countries must facilitate the free flow of capital.

The principles developed by the working group embody sound governance, transparency, and risk management. The principles, called globally accepted principles and practices (GAPP) for sovereign wealth funds, were praised by the Treasury official as promoting a better understanding of the institutional and operational practices of the funds. The principles' effectiveness in reducing protectionist pressures and contributing to global financial stability will depend on their widespread adoption, he indicated. Thus, Treasury encourages all funds that invest in sovereign wealth to examine these principles closely and take steps to implement them.

Treasury’s goal is to promote a global paradigm for the free flow of capital, both from sovereign wealth funds and all other overseas investors. The principles for recipient countries identified by the OECD, transparency, predictability, proportionality, accountability, and non-discrimination among investors, add needed structure to the concept of open investment. And rather than presenting a piece of paper that may soon be forgotten, the OECD will move forward with peer reviews of each country's investment regimes and publish the results of these reviews to encourage greater openness to cross-border investment.

For the present, the European Commission and the SEC appear willing to allow the working group to take the lead in developing voluntary best practices for sovereign wealth funds. Ethiopis Tafara, Director of the SEC’s International Affairs Office, has praised the international effort to develop best practices for sovereign wealth funds.

Sovereign wealth funds are the investment arms of governments. 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.