SWF Perspectives & Insights - Issue #9

The US Government Takes a Close Look at Sovereign Wealth Funds And Investments of US Regulated Industries & Transactions

Are you invested in or do you manage corporate enterprises in key categories that nation-states regulate…perhaps even own (partial ownership or wholly-owned)?  In Transportation, utilities, telecomm, defense manufacture, agriculture, real estate, and more?  Are Sovereign Wealth Funds invested in companies in these sectors…will they be invested?  Other sovereign governments are becoming interested in where and how the SWFs invest – and what the impact might be of such investments on their public policies..

The SWFs have become a better defined class of investors with holdings in various countries outside of their own borders – with growing investments in the host countries of North America, Europe, Asian, African, Pacific/Australia capital markets – and in virtually all types of investments.  US State Department official Clay Lowery defined SWFs in June 2007 and offered this description:  “A SWF is a government investment vehicle funded by foreign exchange assets, managed separately from official reserves…” (Source:  Morgan Stanley’s Stephen Jen)

There is a spectrum of SWFs and the definition can vary considerably.  Could be a traditional type of pension fund, a private equity fund, a stabilization fund, resource revenues surplus fund, some of the investment vehicles “owned” by the monarchical rulers (as in the Arabian Gulf), a VC investor, a joint-venturer, or even a joint stock company traded on an exchange.  (We take a more liberal view of what is a SWF in identifying sovereign investors and related institutions in our profiling, tracking and monitoring of SWFs in INSIGHTS-edge.)

With the funds to invest coming from official [nation-state-ruling family] investors of various types coming increasingly into the countries of the industrial capital markets – those of the United States of America, Australia, European Union – what should the host government be doing?  For example, the USA, very attractive to all investors, and with its regulated exchanges (NYSE, NASDAQ, etc.) and the companies (issuers) offering a smorgasbord of preferred and common equities, debt instruments, secondary offerings through syndications…etc.  What should the USA public policy leaders be looking at or doing?  Should there be an “official” policy in one country regarding another country’s investments in holdings in the “host” country?  Is this really possible in a globalized economy featuring the free flow of money, people, goods, capital, services?

USA Government Takes Closer Look at SWFs

The government of the United States seems to be wrestling with these and other questions.  The Government Accountability Office (GAO), a non-partisan, independent arm of the US Congress is charged with audit, evaluation and investigation [of public policy issues and actions] and is “committed to good government reflected in its [GAO’s] core values of accountability, integrity and reliability…”  Members of the Senate and House regularly call on GAO to pursue investigations on a variety of issues. 

And so US Senators Chris Dodd (D-CT) and Richard Shelby (R-Ala) of the Senate Committee on Banking, Housing and Urban Affairs last summer asked GAO to look into Sovereign Wealth Funds and the involvement and involvement of SWFs in US affairs (business, financial, political, etc.)  The result was a report in September 2008 – “SWFs – Publicly Available Data on Sizes and Investment for Some Funds Are Limited.”

This first official (and good) look at SWFs found that there is little publicly available information from official government sources for some SWFs.  SWFs have been around for 50+ years, but 28 of the 48 that GAO identified have been organized since 2000.  Increased oil revenues for some countries and swelling foreign reserves (think of China’s $2 trillion treasury) have spurred the growth and/or creation of SWFs.  Only four of the SWFs are “transparent” to the degree that their respective governments practice full disclosure. 

The government interest in SWFs is not isolated; the growth and increased investment activity of the SWFs is drawing the attention of other investors (asset owners and managers), financial analysts and corporate executives and boards.  Who are they…what are they up to…what do they want to invest in…what do they want to be, active or passive investors…how do we manage the relationship…etc.

The government of United States is addressing some of the questions – the September 2008 report set out a fulsome explanation of SWFs and explored the lack of uniform disclosure, the spectrum of SWF transparency, and other aspects of SWF operations.  Foreign interests hold USD$20 trillion of US assets (2007), and an increasing amount of that is held by SWFs or SWF-like investment vehicles.  With oil above $45 - $50 bbl range, the amount needed for building foreign exchanges by internal needs of the oil producing nations, we can assume that the SWF treasuries continue to build even in a slumped global economy. (As we write this, oil is at $70 bbl.)

The GAO’s 50-page report was issued as “one of a series,” and the second report was issued in May 2009 – “SWFs – Laws Limiting Foreign Investment Affect Certain US Assets and Agencies Have Various Enforcement Processes.”

Reading this latest report, it was clear that the GAO was signaling federal agencies to be aware of their responsibilities regarding foreign investment in industries or companies that the agencies oversee – including transportation, communications, natural resources, mining, energy, utilities, agriculture, real estate, securities, banking, and other sectors.  (The GAO found that about 28% of foreign direct investment holdings are in these regulated sectors.)

“While the US has a general policy of openness to foreign investment,” GAO authors state, “it does restrict foreign investment, including from SWFs, in certain US assets.”  They remind agencies o their responsibilities, including verifying foreign ownership and ensuring limits are not exceeded, the need to seek approval or licensing (for foreign ownership), monitoring changes in ownership, verifying key information, identifying new investments, monitoring press releases, receiving tips from competitors…and more.

SWFs have made key investments in foreign banks since August 2007, as banks and holding companies seek additional capital, GAO noted.

The report was not critical of SWF investments, and was thorough in the review of existing laws and regulations concerning foreign investment, including pages of data (“Legal Provision – Agency Responsible – Primary and Supplement Activities”) to clearly state the responsibilities of respective agencies.  “To enhance oversight of foreign investments,” GAO states, “FCC, Agriculture, and DOT should review the information they currently monitor to detect changes in ownership of US assets subject to restriction of disclosure and assess the value of supplementing [it] with information from other than government and private data sources on investment transactions.”

The editors will continue to monitor GAO activities; we anticipate additional reports in the series to follow.

You can read the full reports at the links:

September 2008 – “SWFs – Publicly Available Data on Sizes and Investment for Some Funds Are Limited.”

May 2009 – “SWFs – Laws Limiting Foreign Investment Affect Certain US Assets and Agencies Have Various Enforcement Processes.”

Perspectives & INSIGHTS is prepared by the Governance & Accountability Institute, Inc.

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