Saturday, April 25, 2009

Sovereign Wealth Funds and Public Power: The Case of Norway Part II (Concepts and Regulatory Framework)

This is the second of a series of five (5) essays in which the nature and character of sovereign wealth funds are considered. Specifically the essays explore whether a sovereign wealth find can form itself to the ideals expressed in emerging regulatory regimes, like the Santiago Principles, one based on the idea that states may be treated like private entities with respect to their enterprises, formally sovereign but functionally private, as long as they conform to a set of behavior expectations which are said to distinguish sovereign from private behavior. The focus of that study is the "socially responsible" SWF, using as its model the Norwegian SWF, proffered by many as the model an an ideal form of sovereign wealth fund.

Part I provides an introduction to the issues to be considered and a framework for analysis. Part II explores the conceptual and regulatory framework currently arising for the transnational regulation of SWF grounded in the idea of a critical distinction between public actors and private action for constructing a system of SWF regulation. Part III focuses on the Norwegian Funds themselves: history, legal structure, and investment principles. It looks particularly at the role of the Ethics Council in SWF investment decisions. Part IV examines the Norwegian Funds in action. It explores the nature of the Norwegian SWF's engagement with corporate social responsibility through its investments, as well as its engagement with two political situations: the Israel-Palestine conflict, and the political situation in Myanmar. Lastly it examines the use of the Norwegian Fund for purposes of promoting development and its application to issues of Norwegian macroeconomic policy in the face of the economic crisis of 2008, especially with respect to investment in India. Part V looks to the regulatory implications of the relationship between the idealized framework within which regulation is constructed and the reality of the operation of the Norwegian SWF. In particular, the following are examined: (1) The role of investment and the utility of the idealized private investor model; (2) the importance of approaches in conceptualization of regulatory options; and (3) participation versus regulation as an alternative to the Public/private model.

The entire work can be accessed here by Clicking HERE.

Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment
Larry Catá Backer*

Abstract:The character of global regulation has changed dramatically over the last decade. Today, multinational corporations sometimes assert substantial regulatory power across borders, and states sometimes enter markets as participants rather than as regulators— especially when they engage in economic activity outside their borders through sovereign wealth funds (SWFs). In both cases the current transnational ordering has settled on voluntary principles based approaches to regulation. SWFs are controlled by states but seek to participate in private markets in the same way as private investment vehicles. But the difficulty has been the need to overcome the inherent sovereign character of state investment, central to the definition of SWFs. SWFs thus proceed from definition to conundrum. If SWFs are grounded in the reality of their formal connection to states, and if states are deemed sovereign in their actions, then it might be reasonable to assume that such funds could not be treated like private investment funds. To bridge that gap, it was necessary to find a way to disconnect SWFs from the state and sovereign activity, and to model private activity in a way that made it possible to construct a set of behavior principles that might produce an equivalence between SWFs and private investment vehicles. The first was accomplished by creating a functional distinction between state and SWF, a distinction unnecessary for traditional sovereign investment. The second was grounded in the presumption that there is a way of distilling the essence of private investment behaviors sufficiently precisely to distinguish those behaviors from sovereign conduct. Both are nicely captured in the Santiago Principles. Both are problematic as either as concept or in application. This paper looks closely at one example of this rising phenomenon—the socially responsible sovereign wealth fund. It focuses on a close review of one of the most influential funds, the Norwegian Government Pension Fund—Global (Statens pensjonsfond - Utland). It is among the largest and most influential SWF in the world, and the largest in Europe. The Norwegian SWF provides a particularly useful case study of the issues that are now at the center of reconceptualizations of the relationships between state and corporation, between economic and political regulation,between national and transnational legal frameworks, and between public and private legal regimes. The paper first describes conceptual and regulatory frameworks on which current policy discussions of sovereign wealth funds are undertaken. It then turns to the Norwegian funds, focusing on the history of the Norwegian fund, its legal structure and the development of its investment principles. It then looks to the way those principles were used in two distinct areas—the creation of incentives to produce changes in the behavior and culture of corporations and the response to the global financial crisis of 2008. The Norwegian SWF suggests that the rising model of SWF governance, grounded on an assumption that a state organization formally public but functionally private, acting like an idealized private investor does not work either for private investors who seek to use investment for political ends or state investment entities that purport to refrain from that sort of activity.



I. Introduction

II. Conceptual and Regulatory Framework: Public Actors, Private Action

III. The Norwegian Funds
A. History
B. Legal Structure
C. Investment Principles
IV. The Norwegian Funds in Action
A. Corporate Social Responsibility
B. Development and Use in Macroeconomic Policy: the 2008 Financial Crisis
V. Regulatory Implications
A. The role of Investment and the Utility of the Idealized Private investor Model.
B. The importance of approaches in conceptualization of regulatory options:
C. Participation versus regulation as an alternative to the Public/private model.
VI. Conclusion.



Like much else about sovereign wealth funds, there is little like consensus on a definition.51 The differences in definition reflect the ambiguity of the instrument itself—formally sovereign yet functionally private. It also reflects the further ambiguity even with respect to function—again traditionally sovereign but now also more aggressively private.52 But underlying the ambiguities, and the means to overcome them, is a fidelity to a strict distinction between public and private law and actors. It is this combination of fidelity to the public/private divide combined with an exploitation of the formally public-functionally private character of sovereign wealth funds, that serves as the foundation for regulatory approaches to sovereign wealth funds. This section explores the connection between the definition of sovereign wealth funds that privilege its sovereign character, the positing of an oppositional entity—the private wealth investment entity, the extraction of a set of characteristics that distinguish the private investment entity from regulatory investing, and the proffering of a rule that would forego special regulation of functionally private sovereign investment entities. Critical to this regulatory enterprise is the construction of an idealized private investor, against which sovereign wealth management can be assessed.

The simplest definitions pick up the first thread of this regulatory construction, reflecting as well the conservative inertia of this conceptual framework. “What I have in mind is a government investment vehicle that manages foreign assets with a higher risk tolerance and higher expected returns than for central bank foreign currency reserves.”53 American officials have sought to define these entities by emphasizing their public nature of these investment instruments. An SWF has been understood to include "a government investment vehicle which is funded by foreign exchange assets, and which manages those assets separately from official reserves."54 This definition has won some acceptance in the private American financial community.55 The IMF also focuses on the public character of the ultimate owner of the fund. Thus IMF studies would define sovereign wealth funds to include "government-owned investment funds, set up for a variety of macroeconomic purposes. They are commonly funded by the transfer of foreign exchange assets that are invested long term, overseas."56 Work produced through the OECD has also emphasized the public character of the entity. For example, “Sovereign Wealth Funds (SWFs) are defined as pools of assets owned and managed directly or indirectly by governments to achieve national objectives.”57 More to the point is a definition that looks only to the responses these entities have on states: “Sovereign wealth funds (SWFs) are government-controlled investment vehicles which recently have stimulated protectionist sentiments in some OECD countries.”58

But the definition most likely to be influential in the coming years is that of the International Working Group of Sovereign Wealth Funds,59 the group that produced the Santiago Principles.60 The International Working Group of Sovereign Wealth Funds (IWG) defines Sovereign Wealth Funds as:

special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.” 61

The IWG was clear that the definition contained three key elements: ownership, investments, and purposes and objectives.62 Ownership provides the basis for establishing the character of the entity, investments provide the trigger for regulation—the projection of fiscal power abroad—and purposes and objectives provides the framework for regulation based on functional performance.

The principal common feature of all sovereign wealth funds is their ultimate connection to a public sovereign, understood to be a nation state, but not necessarily limited to such an organization.63 The key connection is between that state and its need to manage its assets. That management implies both a need for diversification, among risk pools, and a strong connection to macroeconomic (and sovereign) concerns. The characteristics of the entity are then derived from that owner, the most fundamental of which is the objective of the fund, for macroeconomic purposes. This suggests a crucial and perhaps insurmountable distinction between private funds and public funds. The former are presumed to be grounded ultimately in wealth maximization objectives for its owners. The latter is hardly constrained by such objectives, though they may provide a subset of objectives, based in part on the source of funds—excess funds not to be spent immediately to fund government operations or programs. Thus, the potential implication that sovereign wealth funds may well be regulatory vehicles operating in the private sector is softened. The definition also suggests that this fundamental macro economic objective is in fact, limited to achieve financial objectives, though not necessarily commercial objectives. Yet the object is to ensure that such funds are not treated differently than similarly constituted funds held by private interests.64

Public ownership, bent to some ill-defined scope of public purpose and tied to the desires of the public owner, serves as the framework from which forays into more elaborate definitions of the entity are attempted. Indeed, assuming both the public character of the ownership, and the identity of purpose between entity and owner, that most analysis commences. Better put, perhaps, at this point the routine of categorization often substitutes for engagement with definition in discussion of sovereign wealth funds. The categories are also well established. Sovereign wealth funds tend to be defined with more precision by reference to their specific investment purpose (beyond the generic obligation to satisfy their owners), their organization, the sources of their funds, or some combination thereof. Thus, for example, International Monetary Fund studies have distinguished among these funds on the basis of their objectives:
Five types of SWFs can be distinguished based on their main objective: (i) stabilization funds, where the primary objective is to insulate the budget and the economy against commodity (usually oil) price swings; (ii) savings funds for future generations, which aim to convert nonrenewable assets into a more diversified portfolio of assets and mitigate the effects of Dutch disease; (iii) reserve investment corporations, whose assets are often still counted as reserve assets, and are established to increase the return on reserves; (iv) development funds, which typically help fund socio-economic projects or promote industrial policies that might raise a country’s potential output growth; and (v) contingent pension reserve funds, which provide (from sources other than individual pension contributions) for contingent unspecified pension liabilities on the government’s balance sheet.65

This is a framework used in other studies as well. For example, such entities have been defined as “a state-owned or influenced fund that obtains its funding from foreign-currency reserves or commodity export revenues, though in certain instances, government budget surpluses and pension surpluses have also been transferred to SWFs.”66 The World Bank has suggested that these entities are “long-term investment fund, typically for both income and intergenerational wealth transfer...”67 More starkly put, sovereign wealth funds are defined by reference to the greatest difference between the public and private sectors—the need to maximize the wealth of shareholders. “An SWF is a global investment fund owned by a government. Unlike a private international investment fund, which is governed by profit motives, SWF's might have national strategic objectives that have made them controversial investment vehicles.”68

Most broad, perhaps, is the approach of the United Nations: “Sovereign wealth funds seek to diversify foreign exchange assets and earn a higher return by investing in a broad range of asset classes. Typical asset classes are longer-term government bonds, asset backed securities, corporate bonds, equities, commodities, real estate, derivatives, alternative investments, and foreign direct investment.”69 American officials have distinguished between two large categories of SWFs, commodity and non-commodity funds.70 Yet as we can now better understand, the large variety of forms that sovereign wealth investing can take does not alter the fundamental characteristic of the entity as sovereign.71 And, indeed, quibbles over the form or organization of funds tend to be viewed as incidental.72 Yet, it is well to remember, though, that the organization of sovereign wealth funds can be as complicated as any other global economic enterprise. The sovereign wealth fund can serve as the single investment entity, organized as a corporation or similar enterprise under the general law of its sovereign owner73 or more typically organized pursuant to special legislation.74 But sovereign wealth funds can themselves serve as the holding company for any number of vertically or horizontally organized sub-funds, through which the actual operations of the entities are realized. These sovereign wealth enterprises can include any form of economic enterprise, from investment to operating entities.75

From these forays through thin thickets of definition, it is possible to discern a common set of assumptions that are shared about the nature of the creature defined—the sovereign wealth fund—and the assumptions that the definition is meant to embrace. The first is the focus on ownership. The organization of the fund itself is not interesting—its owners are. The emphasis is on the sovereign, less on its wealth, and only later on the fund.76 They are a form of state sovereign activity, the preservation of public wealth. “In contrast to these other forms of government assets, SWFs typically seek riskier investments and a higher rate of return. Ostensibly, they are run purely to increase the wealth of the state, not to pay off any specific debt.”77 This focus leads to conceptual conundrums, a principal one of which is the character of state owned enterprises. These entities are operating companies. But they are owned by states. When they purchase other businesses, or invest in them abroad, they appear to function like sovereign wealth funds—but only if you privilege the ownership aspect over everything else.78

The second is the conflation of ownership and the entity itself. In a sense the focus on fund objectives serves to cement the unity of ownership and entity. The owners of sovereign wealth funds are joined to the funds they own in ways that would be a matter of indifference where owners are non-state actors. And, indeed, legal distinctions—including the distinctions between legal persons and sovereign persons—ought to be disregarded.79 There is an assumption that the owner and fund are joined in ways that, in other circumstances, might suggest a viable case for piercing the corporate veil.80 This assumption can be understood as part of a larger transnational law project that has as its aim the substitution of notions of complicity and regulatory guardianship for the independence of juridical persons and the limits of their role to purely private economic activities.81 This is evident in regulatory constructs like the OECD’s Risk Awareness Tool for Multinational Enterprises in Weak Governance Zones.82 But however characterized, the role envisioned in regulatory rather than participatory. The entity, in effect is presumed to be required to substitute its apparatus for that of the (missing) state. An inverse relationship of sorts applies to states seeking entry into private markets. The state’s expression as a juridical personality perhaps separately constituted from its instruments, as they proceed abroad, is also amalgamated with its instruments, however constituted. And, indeed, there is a sense that the owner, the state, is itself merely a fiduciary for the greater or ultimate owner—the citizens of each state. Sovereign wealth fund definitions are not focused merely on the sovereign owners. They are also focused on the character of the funds that these funds manage. The funds, like its owners, are “special” in the sense that neither conforms to the default characteristics of the usual actors in markets for investment in non-sovereign entities. In this sense, under emerging notions of transnational governance, both states and multinational corporations are treated similarly—both become bound up in significant regulatory networks of complicity.

And thus the third assumption: sovereign wealth funds are presumed to serve as flow-through entities, at least with respect to fund objectives.83 This becomes important because of the underlying assumption that sovereigns do not behave like non-state actors.84 Where sovereigns seek to participate in markets or other activities along with non-state actors, the assumption is that they do so for reasons and goals irrelevant to other actors. Where markets are founded on assumptions of common objectives, it might follow that the appearance of sovereigns in those markets might effectively subvert them. In the case of sovereign wealth funds, the critical assumption is that, unlike private actors, the owners of sovereign wealth funds are not constrained by a “profit” motive.85

These assumptions serve as the framework for regulatory approaches to sovereign wealth funds in host states, as well as in current efforts to create a transnational regulatory framework for sovereign wealth funds.86 Traditional sovereign investment practices were understood as both conservative and “political.” In the form of sovereign wealth funds, these instruments could be understood as more risk tolerant in their appetite for investment vehicles but also “political” in a similar way. Yet because the range of investments could be substantially broader, the consequences of the “political” objectives of the use of state assets, especially when projected abroad, could be viewed as invasive by host states.87 Or they can be understood as a proxy for dictatorship within home states.88 But in either case they might be feared as threatening in a way that private funds are not. And it all ties back into the sovereign requirements of the owners of those funds. “Certain international reserves are always needed. . . . However, sovereign wealth funds are something different. They reflect a paternalistic—and economically illiterate—notion that the ruler knows best while citizens are so irresponsible that they cannot be entrusted with their own savings. It would be more economical and democratic to cut taxes and let citizens save and invest themselves.”89

SWFs thus proceed from definition to conundrum. If SWFs are grounded in the reality of their formal connection to states, and if states are deemed sovereign in their actions, then it might be reasonable to assume that such funds could not be treated like private investment funds. To bridge that gap, it was necessary to find a way to disconnect SWFs from the state and sovereign activity, and to model private activity in a way that made it possible to construct a set of behavior principles that might produce an equivalence between SWFs and private investment vehicles. The first was accomplished by creating a functional distinction between state and SWF, a distinction unnecessary for traditional sovereign investment. The second was grounded in the presumption that private investment has no regulatory component and that there is a way of distilling the essence of private investment behaviors sufficiently precisely to distinguish those behaviors from sovereign conduct. Both are nicely captured in the Santiago Principles. Both are problematic as either as concept or in application.

Separation of sovereign from investment entity can be accomplished at something like a functional level. That requires the invocation of a legal framework in which there can be created some sort of legal separation between state and investment entity.90 This separation, though to some extent formally constituted, is essentially functional—states are as free to discard formal distinctions by legislative or other action as they are free to create them in the same way. This separation includes a disclosure91 and transparency92 element. “The governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities.”93 The state is to be treated more like a shareholder or investor participant in a private investment fund than as a regulatory sovereign.94

Once free of an intimate connection with the political apparatus of the state, the functionally private and privately rule SWF is meant to exercise its investment strategies according to a non-sovereign, apolitical, model. “The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy.”95 Likewise, SWF management, and especially “[d]ealings with third parties for the purpose of the SWF’s operational management should be based on economic and financial grounds.”96 Economic and financial grounds are set as the base line for SWF operation. “If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.”97 This suggests both the focus of functional operation, and the inability to completely eliminate the sovereign element from investment.98 The compromise is not regulation but disclosure.99

Functional separation suggests the possibility that a sovereign can structure part of its apparatus to operate like a private entity. A core element of that functionally private operation norm focuses on the privileging of the “economic and financial considerations” investment policy for SWFs, described above. There are three other parts. The first is information equality. “The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.”100 The second is the power of sovereign investment entities to participate in the governance of those entities in which it has invested. SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value.”101 Here again, the functional separation of sovereign and SWF is solidified by suggesting that such shareholder rights cannot be used to further the political agendas of the sovereign owner of the SWF. “If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments.”102 This requirement is deepened with a strong disclosure requirement.103 The object, of course, is to come close to mandating behaviors which mimic private funds.

The third part is perhaps the most important functional distancing of sovereign from fund. “SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate.”104 Compliance includes following all municipal laws generally applicable to private investment funds, including those in connection with investigations or any other regulatory actions.105 In return, the “SWF expects that host countries will not subject the SWF to any requirement, obligation, restriction, or regulatory action exceeding that to which other investors in similar circumstances may be subject.”106 The ultimate concession to private equivalence, of course, is loss of sovereign immunity and special tax status, both of which apparently now to be exercised in the discretion of host states, and subject to the balance of the needs of those states for SWF investment over its need to avoid losing that investment through unpopular legislation.

The regulatory “deal” becomes clear now. Sovereign wealth funds are formally sovereign. They may be detached from the state and, to the extent that they operate as functionally private, they may hope to be treated like other private investment vehicles and participate in global financial markets, especially those beyond the borders of their sovereign owners.107 The characteristics of behaviors constituting private investment activity are also described, at least in general terms. These include investment activity based on economic and financial grounds, a willingness to be subject to the general laws applicable to private investment entities of similar character, restriction on the use of privileged information not generally available to the market, and an assertion of shareholder rights consistent with maximizing economic and financial objectives. The behaviors are meant to describe the universe of conduct that defines private investment activity.

But the regulatory “deal” is dependent on two critical assumptions. The first is that sovereign wealth funds actually behave as formally sovereign and functionally private entities. The second is that the model of private investment fund behavior actually mirrors the reality of that behavior. The SWF that behaves in a way that projects state power—and effectively serves as an instrument of state political activity through private markets would suggest that the consensus model of SWFs as benign entities might not be accurate. Likewise, the private investment vehicle that acts politically—that is that does not conform to the model of investor behavior on which the Santiago Principles are based—suggests that a regulatory model based on depolitization of state activity using a private behavior model is unlikely to accomplish its goal. Yet that very expectation that private enterprises engage in regulatory or governance activity within the sphere of their economic activities has become a hallmark of the current consensus about the nature of private enterprises.108 That understanding of the wider role of economic enterprises has produced the start of a consensus that such private entities ought to be bound, like states, to a large body of hard and soft law traditionally applied only to states.109

So just at the time that regulators press on states a model of private behaviors that posit a narrow focus of objectives— centered on maximizing financial and economic value—regulators are also pressing on those very private actors a regime of regulation that posits that their behaviors must necessarily be considered in some important measure regulatory and sovereign. This tension between expectation and reality, between visions of conformity to private behavior arising under SWF regimes and other private governance frameworks suggests that regulatory models that presume that private actors behave solely to promote purely financial or economic goals might also no longer reflect reality accurately.

In Sections III and IV, which follow, we confront the socially responsible SWF and consider whether, in fact, it conforms to the spirit of the “deal.” In Section V we consider the socially responsible private investment fund as a non-state vehicle for regulatory interventions in private economic markets. Together, they will suggest that the simpleminded formula—formally public and functionally private plus conformity to a model of private non-political behavior equals suitability for regulation like a non-state market participant—may need re-examination.


51 See, e.g., Stephen Jen, Currencies: The Definition of Sovereign Wealth Fund, Morgan Stanley Research Global, Oct. 25, 2007.

52 Thus, “[r]ather than being well defined and distinct from other types of funds, there is a great deal of overlap between SWFs and their close cousins,” official reserves and pension funds. Stephen Jen, Currencies: The Definition of Sovereign Wealth Fund, Morgan Stanley Research Global, Oct. 25, 2007 at 3. As late as 2005, Andrew Rozanov could describe sovereign wealth funds as a by product “of national budget surpluses, accumulated over the years due to favourable macroeconomic, trade and fiscal positions, coupled with long-term budget planning and spending restraint. Usually, these funds are set up with one or more of the following objectives: insulate the budget and economy from excess volatility in revenues, help monetary authorities sterilise unwanted liquidity, build up savings for future generations, or use the money for economic and social development.” Andrew Rosanov, Who Holds the Wealth of Nations, Central Banking Journal (May 2005), available .

53 Sir John Gieve, Sovereign Wealth Funds and Global Imbalances, speech delivered at the Sovereign Wealth Management Conference, London, England, May 14, 2008 (the author was deputy governor of the Bank of England at the time of the speech).

54 U.S. Department of the Treasury, Press Room, Remarks by Acting Under Secretary for International Affairs Clay Lowery on Sovereign Wealth Funds and the International Financial System, (hp-471, June 21, 2007).

55 See, Stephen Jen, Currencies: The Definition of Sovereign Wealth Fund, Morgan Stanley Research Global, Oct. 25, 2007 (available ) (SWF are five ingredients, they are sovereign, a high foreign currency exposure, no explicit liabilities, a high risk tolerance, and a long investment horizon, id., at 2).

56 International Monetary Fund, Sovereign Wealth Funds--A Work Agenda (February 29, 2008 (prepared by the Monetary and Capital Markets and Policy Development and Review Departments and approved by Mark Allen and Jaime Caruana), at 4. Annex II to this document provides short definitions provided by other stakeholders in the financial system, from Deutsche Bank ("financial vehicles owned by states which hold, manage, or administer public funds and invest them in a wide range of assets") to Morgan Stanley ("An SWF needs to have five ingredients: sovereign; high foreign currency exposure; no explicit liabilities; high-risk tolerance; and long-term investment horizon"). Id., at Annex II, pp. 37-38.

57 Adrian Blundell-Wignall, Yu-Wei Hu and Juan Yermo, Sovereign Wealth and Pension Fund Issues, 25-Apr-2008. The OECD has been extremely active in the SWF front, including numerous articles; the above is one definition among many OECD published reports.

58 Helmut Reisen, How to Spend it: Commodity and Non-Commodity Sovereign Wealth Funds,

59 The International Working Group of Sovereign Wealth Funds “was established at a meeting of countries with SWFs on April 30-May 1, 2008 in Washington D.C: At the meeting it was agreed that the IWG would initiate the process, facilitated and coordinated by the International Monetary Fund.” Santiago Principles, supra note 9, at Introduction, pp. 1. The IWG consisted of 26 countries, most with SWFs, but also included the United States, Canada, the OECD, and the World Bank. Id., at n. 2.

60 See, International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices; “Santiago Principles, (October 2008), (hereafter the “Santiago Principles”).

61 Id., at Appendix I (Defining Sovereign Wealth Funds), at pp- 27 (emphasis in original).

62 Id. For that purpose sovereign ownership of assets invested abroad (that is not invested solely in domestic assets) for macro economic purposes. Id. The IWG defined the later as “financial objectives”. Id. It is this framework that will move us conceptually from state vehicle to acceptance as a private entity in function.

63 There is no reason to suggest that sovereign wealth funds lose their character as such merely because the owner of such fund is a public entity that is not a sovereign. An easy example would be a sovereign wealth fund owned by the European Union, a supra-national organization that is not a political sovereign in the traditional sense. For a discussion of the constitution of the European Union, see, e.g., J.H.H. WEILER, THE CONSTITUTION OF EUROPE: ‘DO THE NEW CLOTHES HAVE AN EMPEROR?’ AND OTHER ESSAYS ON EUROPEAN INTEGRATION 286-323 (Cambridge, Eng.: Cambridge University Press, 1999). More interesting would be a sovereign wealth fund owned by a different form of supra-national organization with recognized legal personality—for example a regional trade organization like ALBA. For a discussion of ALBA, see, e.g., Larry Catá Backer and Augusto Molina, Cuba and the Construction of Alternative Global Trade Systems: ALBA and Free Trade in the Americas, Working Paper (May, 2009).

64 Thus, for example, the co-chair of the International Working Group of Sovereign Wealth Funds Group, H.E. Hamad Al Hurr al-Suwaidi, declared: “Moreover, in the Santiago Principles, there are provisions confirming the IWG’s expectations that recipient counties will not subject the SWFs to discriminatory measures to which other foreign or domestic investors in similar circumstances are not subjected. We trust the recipient countries will support these provisions.” Statement by H.E. Hamad Al Hurr al-Suwaidi, Co-Chair of the IWG, Meeting of the International Monetary and Financial Committee, Washington, D.C., October 11, 2008, . This tension is discussed infra at Part IV.

65 International Monetary Fund, Sovereign Wealth Funds--A Work Agenda (February 29, 2008 (prepared by the Monetary and Capital Markets and Policy Development and Review Departments and approved by Mark Allen and Jaime Caruana, at 5. 66 See, e.g., Edward F. Greene & Brian A. Yeager, Sovereign Wealth Funds--A Measured Assessment, 3(3) CAPITAL MARKETS LAW JOURNAL 247, 248 (Advance Access Publication 10 June 2008) (distinguishing between “(i) central banks, (ii) stabilization funds, (iii) public pension funds, (iv) government investment companies and (v) state-owned enterprises.” Id., at 249).

67 See, World Bank Publication.

68 Sanjiv Shankaran, Norway Fund to Put $2 Bn in India, (India), Oct. 22, 2008), available

69 Key Economic Developments and Prospects in the Asia-Pacific Region 2008, United Nations, Economic and Social Commission for Asia and the Pacific.

70 U.S. Department of the Treasury, Press Room, Remarks by Acting Under Secretary for International Affairs Clay Lowery on Sovereign Wealth Funds and the International Financial System, (hp-471, June 21, 2007).

71 This might help explain the Santiago Principle’s focus on framework rather than form. See Santiago Principles, supra note 60, at GAPP 1 Principle. The Santiago principles identify three broad approaches—SWFs established as a separate legal identity, SWFs established as state owned corporations, and SWF’s established as a pool of assets without separate legal personality. “Provided that the overall legal framework is sound, each of these structures can be employed to meet the requirements laid down in this Principle.” Id., at GAPP 1 Principle, Explanation and Commentary.

72 Consider the discussion in Edwin M. Truman, A Blueprint for Sovereign Wealth Fund Best Practices, Peterson Institute Policy Brief No. PB08-3 (April 2008).

73 For example, the Abu Dhabi Investment company was founded “on February 24, 1977 as the first U.A.E. investment company in the capital, ADIC is a Joint Stock Company that specializes in providing investment and corporate finance in addition to advisory services. ADIC is jointly owned by the Abu Dhabi Investment Authority and the National Bank of Abu Dhabi (2%).” SWF Institute, Abu Dhabi Investment Authority.

74 The Norwegian funds were created in this manner. See, discussion, infra, at Section III.

75 Some have, for example, identified the China National Offshore Oil Corporation and the Dubai DP World as sovereign wealth enterprises. See KPMG, Sovereign Wealth Funds—The New Global Investors, Oct. 1, 2008. See also SWF Institute, Sovereign Wealth Enterprise (suggesting that SWEs may be created for flexibility. “A sovereign wealth fund could have a strict investment mandate in place; however, the sovereign wealth enterprise has its own rules. For instance, many public pension funds are unable to short stocks. To get around this they can hire an external manager to manage a portfolio that could have a long-short strategy. A second reason could be transparency. If a sovereign wealth fund has hundreds of sovereign wealth enterprises, it is harder to track their holdings. Lastly, is to avoid being lumped into the same category as a sovereign wealth fund and avoid the public spotlight.” Id). On the China National Offshore Oil Corp., see Company Description,; China National Offshore Oil Corp..

76 Thus, for example, the IWGSWF definition of SWFs incorporate these notions. “Sovereign wealth funds (SWFs) are special-purpose investment funds or arrangements that are owned by the general government. Created by the general government for macro-economic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies that include investing in foreign financial assets.” See International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices; “Santiago Principles, (October 2008), at 3.

77 Lee Hudson Teslik, Backgrounder: Sovereign Wealth Funds, Council on Foreign Relations (Jan. 29, 2009).

78 Greene and Yeager, supra, suggest that these vehicles "may be the most problematic from an investee-country's perspective, particularly when the acquirer and the target are infrastructure companies, because the investments may be seen as a means for gaining political leverage." Id., at 253. For examples, they point to the investment activities of Dubai Ports World and the China National Offshore Oil Company. Id., at 253-254.

79 American courts have articulated this idea nearly a century ago. See, Australian Central Bank O.D. 628, 3 C.B. 124 (1920) (using the language of corporate veil piercing to suggest that an Australian bank was effectively the mere instrumentality or alter ego of the chartering state).

80 For a discussion in the context of mixed field systems of corporate governance, see, Larry Catá Backer, Multinational Corporations, Transnational Law: The United Nation’s Norms on the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social Responsibility as International Law, 37 COLUMBIA HUMAN RIGHTS LAW REVIEW 287 (2006).

81 This is most evident in soft law regimes like that of the OECD. See discussion supra at text and notes 35-38.

82 See OECD, OECD Risk Awareness Tool for Multinational Enterprises in Weak Governance Zones (2006). The explanatory materials explain the relationship between people, state and entity in weak governance zones: “The Tool is based on the premise that a durable exit from poverty will need to be driven by the leadership and the people of the countries concerned – only they can formulate and implement the necessary reforms. Companies play important supporting roles and this Tool seeks to raise awareness of these roles and to help companies play them more effectively.” Id., Introduction, at 9.

83 There is an important distinction, of course, between the idea of flow through activity with respect to legal consequences such as piercing the corporate veil, and the idea of conflation of purpose that attaches to understandings of the operations of sovereign wealth funds.

84 Thus, as the New York Bar Association Tax Section Report noted, “Treasury’s recent advocacy of the SWF ‘Code of Conduct’ and renewed interest in strategically important assets suggest that the policy issues raised by the new prominence of SWFs are not that they are engaged in profit-maximizing investment activities that could somehow benefit unfairly from a tax exemption intended for ‘governmental’ activities, but rather that SWFs could be used to further governmental political agendas.” New York State Ba
OECD Policy Brief No. 38 (2008). Association Tax Section, Report on the Tax Exemption for Foreign Sovereigns Under Section 892 of the Internal Revenue Code (June 2008), at 10-16, available at , at 23.

85 See, e.g., Santiago Principles, supra note 60, at Introduction;
Robert M. Kimmett, Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy, 87(1) FOREIGN AFFAIRS 119 (2008)

86 The regulatory schemes are discussed in Larry Catá Backer, Sovereign Wealth Funds and Regulatory Responses to the Financial Markets Crisis, 19:1 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS – (forthcoming 2009).

87 This is nicely described in Robert M. Kimmett, Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy, 87(1) FOREIGN AFFAIRS 119 (2008).

88 One commentator sought to assuage the fears of sovereign wealth funds in host states by igniting fears of those instruments among citizens of home states:
In truth, such funds are nothing for Americans or Europeans to fear. If anyone should worry about them, it’s the people whose governments are amassing them. That’s because governments tend to be terrible at managing money that is best left in the hands of private citizens. And locking away billions of dollars in wealth can have pernicious economic side effects. Maybe that’s why sovereign wealth funds are popular with dictators and semi-authoritarian regimes, which don’t have to answer for the consequences when they make poor economic gambles.

Anders Åslund, The Truth About Sovereign Wealth Funds, Foreign Policy (Dec. 2007). See also Shai Bernstein, Josh Lerner and Antoinette Schor, The Investment Strategies of Sovereign Wealth Funds, HBS Working Paper Number: 09-112, March 2009.

89 Id.

90 See, e.g., Santiago Principles, supra note 60, at GAPP 1-5 Principles. 91 See, GAPP 4 Principle, which encourages the public disclosure of “policies, rules, procedures, or arrangements in relation to the SWF’s general approach to funding, withdrawal and spending operations.” Santiago Principles, supra note 60, GAPP 4 Principle.

92 See, id., GAPP 1-5 Principles.

93 Id., GAPP 6 Principle (the object is to “facilitate accountability and operational independence in the management of the SWF”). The explanatory notes emphasize the importance of functional separation of entity/investment pool from the state apparatus even where the SWF does not have a separate legal personality under municipal law. “In such cases, it is important that there be a clear distinction between the owner/governing body(ies) and the agency responsible for the operational management of the SWF.” Id., GAPP 6 Principle Explanation and Commentary.”

94 “The Owner should set the objectives of the SWF . . . and exercise over SWF operations.” Id., at GAPP 7 Principle. The governing bodies are meant to act in a way similar to that of a board of directors of a private enterprise. “The governing body(ies) should act in the best interests of the SWF, and have a clear mandate and adequate authority and competency to carry out its functions.” Id., at GAPP 8 Principle.”

95 Santiago Principles, supra note 60, at GAPP 19 Principle.

96 Id., at GAPP 14 Principle.

97 Id., at GAPP 19.1 Subprinciple.

98 “The SWF’s operations can have a significant impact on public finances, monetary conditions, the balance of payment, and the overall sovereign balance sheet. Thus, operations of the SWF that have significant macroeconomic implications should be executed in coordination and consultation with the competent domestic authorities.” Santiago Principles, supra note 9, at GAPP 3 Principle, Explanation and Commentary. ”

99 Disclosure is a powerful element in this case, shifting power to the host states to regulate such nonconforming SWFs in ways that would not be warranted for other conforming SWFs. Again, the idea is to establish a model functionally private entity, entitled to a privileged regulatory framework, but permitting non- conforming SWFs to be created, but regulated separately. “The core principle that SWFs’ overarching objective is to maximize risk-adjusted financial returns, given the risk tolerance level of the owner.” Id., GAPP 19 Principle, Explanation and Commentary.

100 Santiago Principles, supra note 60, at GAPP 20 Principle. “This principle promotes the fair competition of SWFs with private entities. For example, SWFs should not seek advantages such as those arising from privileged access to market sensitive information.” Id., at GAPP 20Principle, Explanation and Commentary.

101 Santiago Principles, supra note 60, at GAPP 21 Principle.

102 Id. “To dispel concerns about potential noneconomic or nonfinancial objectives, SWFs should disclose ex ante whether and how they exercise their voting rights. Id., at GAPP 21 Principle Explanation and Commentary.

103 Id., at GAPP 21 Principle Explanation and Commentary.

104 Santiago Principles, supra note 9, at GAPP 15 Principle

105 Id., at Explanation and Commentary.

106 Id., at GAPP 15 Principle, Explanation and Commentary.

107 See, OECD, Sovereign Wealth Funds and Recipient Country Policies, Report by the OECD Investment Committee, April 4, 2008 (“Although the OECD work focuses on host country policies, observance by SWFs of high standards of transparency, risk management, disclosure and accountability can affect the political and policy environment in which recipient countries act.” Id., at 6).

108 See, John Ruggie, Protect, Respect and Remedy: a Framework for Business and Human Rights Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, A/HRC/8/5, 7 April 2008 available www.reports-and- (accessed Jan. 30, 2009). “With power should come responsibility, and international human rights law needs to focus adequately on these extremely potent international non-state actors.” David Weissbrodt & Muria Kruger, Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises With Regard to Human Rights, 97 Am. J. Int’l L. 901, 901 (2003) (emphasis added) (referencing in part Mary Robinson, High Comm’r for Human Rights, Second Global Ethic Lecture (Jan. 21, 2002)).

109 As one prominent commentator put it:
“First, legal compliance is inherently problematic at the global level due to the absence of centralized enforcement mechanisms. . . . Second, no less of an authority than Amartya Sens warns against viewing human rights primarily as what he calls ‘proto legal commands’ or ‘laws in waiting.’ . . . Third, individual legal liability regimes alone in any case connote solve the structural problem of inadequate protection and fulfullment of human rights.”
John Ruggie, Voluntary Principles on Security and Human Rights, Remarks at Annual Plenary, Harvard University and United Nations, Washington, D.C., May 7, 2007.

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