This is the fifth 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.
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Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment
Larry Catá Backer*
II. Conceptual and Regulatory Framework: Public Actors, Private Action
III. The Norwegian Funds
A. HistoryIV. The Norwegian Funds in Action
B. Legal Structure
C. Investment Principles
A. Corporate Social ResponsibilityV. Regulatory Implications
B. Development and Use in Macroeconomic Policy: the 2008 Financial Crisis
A. The role of Investment and the Utility of the Idealized Private investor Model.VI. Conclusion.
B. The importance of approaches in conceptualization of regulatory options:
C. Participation versus regulation as an alternative to the Public/private model.
A. The role of Investment and the Utility of the Idealized Private Investor Model.
An important element of the debate about regulatory approaches to sovereign wealth funds relates to the character of the funds’ owners. The fear expressed by some is that funds serve as a covert mechanism for extending state power.278 More importantly, there is a suggestion that the integrity of private markets themselves are threatened when they cease functioning as economic fora and begin to serve as another vehicle for the advancement of state political and regulatory activity. What are the roles of investment? Does the Norway SWF act as a private/public investor under the idealized private investor model? How is the wealth maximization described for the Norway SWF? Is it different than private investments? If it is different, should it matter?
For the Norwegian Fund, the answer appears simple enough—the funds ought to be treated as purely private and participatory vehicles of state investment.279 That position is worth considering in more detail. It starts with the principle of free movement of capital and open capital markets, 280 and suggests that the participation of sovereign wealth funds might contribute to the functioning of those markets.281 “They may therefore act as a stabilizing factor in financial markets by dampening asset price volatility and lowering liquidity risk premia.”282 Norway concedes only a limited set of restrictions “concerning national security.”283 It suggests itself and its operations as the model for sovereign wealth funds in a restrictionless environment.284 It points to several operational factors that reinforce the idea that the funds are essentially private and participator, rather than regulatory:
Key factors in the management of the Fund include a high degree of transparency in all aspects of its purpose and operation, the Fund’s role as a financial investor with non-strategic holdings, an explicit aim to maximise financial returns, and clear lines of responsibility between political authorities and the operational management. The management aims for international best practice, and the exercise of ownership rights is based on internationally accepted principles such as the UN Global Compact and the OECD Guidelines of Corporate Governance and for Multinational Enterprises.285
And it suggests that transparency not only serves to assuage fears but also positively contributes to market stability.286 Having created a model of a private participatory institution, the Norwegians assert that there is no reason to treat these funds differently from other private funds.287 Indeed, Norway’s position appears to be that a SWF is sufficiently functionally private if it maintains a separation of ownership from control of the fund. As long as the political branches are not directly in control, the SWF is sufficiently insulated to be treated like a private fund.288 In a sense they are right—to the extent that private funds also seek to regulate behavior through investment activity. Yet that sort of targeted regulatory investment contradicts the essence of SWF’s as non-political and thus safe. SWFs are quite political in their objectives—but that does not make them different from other private funds.289 It makes them different from the ideal private investor behavior model that has been put forward to make them seem non-threatening. Yet they are threatening, but only in the same way that large private funds are threatening to national economies.
In this respect they mirror the conclusions of influential academics as well as the framework within which important voluntary codes have been drawn. Lurking beneath these notions is the idea that, to the extent that sovereign funds mimic private funds in objectives and operations, to the extent that a wall can be erected between the political/regulatory function of the state and its private/regulatory activities, then at least with respect to those private activities, the state owned funds ought to have the same rights (and be burdened with the same obligations) as private funds. For that purpose, of course, both the sovereign wealth funds and their supporters within academic and business circles have embraced a resumption usually unstated, that there are sets
of presumptions and behaviors that can serve to define the ideal private investor (among which equal treatment is logical and fair), and that be distinguished from the behavior characteristics of other types of investors (states and other public entities. It presumes that a state can shed its sovereign character under certain circumstances and behave like other juridical persons (corporations and the like).
Those were the ideas underlying the basic framework of the Santiago Principles. The resulting “deal” presupposes the possibility of distinguishing public from private investment objectives, and political from financial motivations.290 European Union law has moved much further in defining the contours of this notion that most other jurisdictions. The context has been the efforts to harmonize traditional state authority to invest in national industry with the strengthened obligations under the European Community Treaty to foster free movement of capital and restrain states in subsidizing their own businesses for competitive advantage within the European market. European law has tended to regulate quite closely state activity that is deemed sovereign and permit only a very narrowly drawn area of activity where states can demonstrate actions that mimic those of a “private investor.” Thus, for example, the European Court of Justice “that the purchase by a Member State of equity interests in a company might be characterized as a ‘state aid’ under the competition provisions of the EC Treaty, and its compatibility with the common market must be assessed on the basis solely of the criteria laid down in that provision under the competition provisions of the EC Treaty.”291
The European Court of Justice has applied a private investor test in that context, explaining that “it is appropriate, in the present case, to apply the test of a private creditor in a market economy.”292 The framework is meant to be grounded in parity between state and private investors. The distinction is between action that can be characterized as private and that which is sovereign and regulatory, albeit indirectly. . . . “[W]hen injections of capital by a public investor disregard any prospect of profitability, even in the long term, such provision of capital must regarded as aid within the meaning of Article  of the Treaty.”293 Treaty restrictions on the regulatory activities of Member States, then, might not apply where the actions are what one might expect form a purely private actor in private markets. For that purpose, it requires a determination “whether, in similar circumstances, a private industrial group might also have made up the operating losses of the four subsidiaries between 1983 and 1987.”294
Yet the Norwegians, in their documents, also suggest that this picture is not entirely accurate.295 The Fund is operated as a private concern, but the Funds’ owner has been quite vocal about the use of its funds, and the construction of an investment strategy, as part of the political agenda of the Norwegian state as it seeks to leverage its voice in global affairs—from the conduct of the Burmese state apparatus, to the resolution of the Israel-Palestine wars, to the construction of global corporate governance cultures.296 Indeed, the Fund itself is understood as a vehicle for regulation without law, for governance beyond a state.297 The wealth maximization or sound investment principles, then, serve merely as the framework boundaries within which political activity can occur.298 As long as, within appropriate time horizons, the Funds invest soundly, a host of other factors may come into play to determine the specific manner of investment. The opportunity to use the Funds, then, to project power, especially regulatory power, directly into markets, is great. That projection of power was baldly asserted by the Funds’ Director General in testimony before the American Congress in 2008.299 But it is also finessed within the language of traditional financial management: “The ethical guidelines for the management of the Fund are premised on high returns over time being dependent on sustainable development, in the financial, ecological and social sense.”300 Thus reframed, there is no space for the political in the actions of the Global Fund. Indeed, all actions can be understood in their financial and economic sense, since all actions have economic effect.
But Sovereign investors are not the only investment entities with these goals and programs. Consider something as innocuous as the TIAA CREF Social Choice Equity Fund,301 created in 2006 within a few years of the imposition of the Ethics Guidelines framework for the Norwegian Funds.302 The TIAA CREF Social Choice Fund “seeks a favorable long-term rate of return that tracks the investment performance of the U.S. stock market while giving special consideration to certain social criteria.”303 The Fund invests in a pool of roughly 3,000 U.S. companies that pass a set of screens for corporate governance and social responsibility factors.304 The factors include many that mirror those of the Norwegian Fund’s Ethics Guidelines: “strong stewards of the environment; devoted to serving local communities and society in general; committed to high labor standards; dedicated to producing high-quality, safe products; and managed in an ethical manner.”305 And like the Norwegian Guidelines, the Social Choice Fund also excludes certain industrial sectors.306 Yet few of the companies excluded from investment under the Norwegian Ethics Guidelines are also excluded under the TIAA-CREF Social Choice Fund guidelines.307 Moreover, the TIAA CREF Social Choice fund acknowledges that some exclusions have a negative effect on performance.308 But there are differences as well. The TIAA CREF fund criteria are not applied using a transparent set of procedures. There are no mandatory rules for exclusion. And discretion is vested entirely in the managers.309 On the other hand, the owners of the Fund can withdraw their funds at virtually any time.
TAA CREF is not unique. It can be understood as a proxy for a large number of similar funds, distinguishable only by the focus of their political agendas.310 These funds remain a growing factor in international investing, even in the course of the financial crisis of 2008.311 Like SWFs, private socially responsible investing remains a small part of the overall market, though not insignificant.312 In other respects, socially responsible private funds resemble SWFs like that of Norway,313 including a focus on ethics, aggressively applied.314 This is particularly the case in the way in which these funds stress the combination of financial and political interests.315 The point is not that these funds exit, but that they operate in ways that would be considered political, and suspect under the Santiago Principles, were they operated like this by a sovereign. The problem is not that the Norwegian SWF advances political agendas through interventions in private markets (while seeking to maximize returns as they understand the meaning of that notion)—they do. The problem is that private investors engage in substantially similar conduct.
The similarities and differences between the Norwegian Fund and a private fund constructed along similar lines suggests the value of grounding regulatory analysis on the private character of the investment activity. If public and private funds act the same way, and privilege the same behaviors, then it makes sense to treat them the same. The real role for regulation in this context ought to be to ensure that private funds are acting like private actors, and to devise systems to police that behavior. That, in essence is the basis of voluntary efforts like the Santiago Principles.316 Yet it also suggests the difficulties of the simple arguments made with respect to the regulatory framework for sovereign wealth funds. It is to those difficulties that the article turns to next.
B. The importance of approaches in conceptualization of regulatory options:
For all the similarities, for all of the conceptual congruence, it is clear that the two funds are very different, and yet they appear to function to the same ends. It is also clear that though the objectives of the two funds may be quite similar, they are deployed differently. Moreover, fundamentally similar investment objectives clearly emerge—the private fund and the Norwegian fund both mean to make money for their owners and they both seek to further agendas grounded in substantive values that are deemed to be attainable through a program of strategic investment. It is true enough that the Norwegian investment program is substantially more elaborate, institutionalized and supported by a bureaucracy, but the functions are similar enough.
On the basis of these similarities, of course, the Norwegians and influential academics and government regulators have all argued for the treatment of both sorts of funds substantially the same. Because they behave alike, because they are both close to the notion of the ideal private actor, the public character of one of them ought not to make a difference. As long as the actors continue to behave like private actors, that ought to be enough of a basis on which to ground a regulatory regime. But the idealized private investor standard at the heart of the usual approach to sovereign wealth fund regulation masks more ambiguity than it resolves. There is still something that nags, or ought to, something that pulls at the corners of analysis. While public and private funds act alike, they are not the same.317
That “something” might be understood in one of two ways. First: The current formulation masks regulatory implications of distinctions between functionalist and formalist analysis. Formalist analysis has as its critical marker the manner of intervention. There is a distinction between formal lawmaking and the regulatory effects of participatory actions. Form may be dispositive. If the state owns a fund, the state is the fund and the fund is a sovereign apparatus.
In contrast, a functionalist analysis looks to effects, rejects the idea of a difference between law and regulatory effects. Form is not dispositive. But what ought to be the governing law when one state seeks to invest in the economy of another state? This question has become particularly acute since the rise, over the last decade of a number of large funds controlled by states, the purpose of which is to invest in economic entities wherever they may be domesticated. On the surface, this might suggest the best case for the equal treatment of states with private entities. In this case, unlike that in which the state always has the potential to legislate changes to its corporate law, the state stands in the same shoes as a private investor. On the other hand, the state, even as a private investor, has the power to reach deeply into the economic affairs of other states by implementing its legislative program through shareholder activism.
Both the ideal investor model, and the substantially equivalent effects rhetoric of regulatory reform that seeks to avoid a more vigorous regulatory intervention by host states is grounded on a privileging of functionalist analysis. Formal distinctions are of little moment. Functional equivalence is all that is necessary. For that purpose, a principles approach touching on disclosure, an approach also applied to private pools of capital, including hedge funds in the United States.318
But equally important, in this case formalist distinctions matter. And they matter for the equally important reason that formal differences do signal substantive differences that a functional analysis would hide. The critical difference is grounded in notions of coercion and in whether or not the ultimate investors have a choice in the manner in which they are represented and their funds invested. In both the public and private fund, individuals are the ultimate stakeholders and investors. It is for their benefit that these funds are created and it is their interests that they ultimately serve.
Let us consider from the perspective of differences between the Norwegian Fund and the TIAA CREF fund. The Norwegian Fund’s institutional holder is the state apparatus of Norway, but the ultimate beneficiaries are the citizens of Norway on whose behalf the government acts. The TIAA CREF funds are administered directly for the investors on whose behalf the fund managers operate. But TIAFF CREF investors are free to exit the Social Choice Fund at will (or at least in accordance with the procedures therefore agreed to when they first invested their funds).319 Norwegian citizens have no such right. They are bound by the choices made for them by the state apparatus. They are at least one critical step removed from the Fund.320 As a consequence, the TIAA CREF fund has to be more careful and conscious of the wishes of its ultimate investors than does the Norwegian Fund. The Norwegian state is accountable to the people, but the Fund is accountable only to the state.321 The difference is important because at this point we come back to where we started—the critical differences between a state as an autonomous institutional actor, and non-state actors.
Perhaps the Europeans are right—the state can never shed its character as state, as sovereign, and this character infects everything it does. If that is the case, then the arguments for asymmetric control of sovereign funds becomes stronger. On the other hand, consider the nature of the difference between the TRIAA CREF and Norwegian Fund relationship to their ultimate owners. That difference might be understood better as one similar to that between shareholders of an operating company and those of a conglomerate or holding company. If the fund is the operating company, then, the direct relationship between investor and fund marks a difference between the two types of funds, again leaving the state exposed as a critical, and unique actor. But this is not satisfactory either—private investment also contemplates a conglomerate model, sometimes with disastrous results.322
The position of states with respect to SWFs, already complicated, appears to be getting even more interesting from a legal perspective. Beyond the usual arguments--that SWF activity is political (and indirectly regulatory) rather than participatory and essentially private) because investment decisions are made to maximize the political agendas of investing states rather than to maximize profit as more conventionally defined. But that distinction is itself highly dubious. Investors sometimes invest for strategic reasons with incidental profit effects--corporate social responsibility movements attest to the popularity and legitimacy of such private investment strategies. Certainly in the United States socially responsible investing similar to that followed by the Norwegian SWF are quite respectable as legitimate private investment aims. States sometimes invest strictly to make a quick return on their investment in the most narrow traditional sense. Private investors sometimes choose to invest to use their shareholder power to effect changes in corporate culture in accordance with their values. States sometimes do the same. States sometimes work through interests in private investment funds.
Private investment funds sometimes work in parallel with SWFs. This was the conundrum acing the Indian government:
At one level, it is easy to identify some SWFs, such as Norway’s Government Pension Fund. However, as the aim is to separate a standard foreign institutional investor driven by profit objectives from a sovereign investor with strategic objectives, complications come up. Some investors from West Asia, for instance, invest in their own capacity. However, loose governance standards can mean an individual’s money snakes in and out of the country’s SWF, making demarcation tough, the official said.323But the equation has changed a bit. No longer worried about either private self regulation models based on transparency, and adherence to some sort of idealized "reasonable private investor" model, nations are becoming more eager for the money held by SWF and will overlook more to attract investment.324 The Americans have led the way on this one as well.325 Need changes everything--even in law. The recent reluctance about SWF investment will give way to agreement to treat SWFs like other private investors, at least until the present crisis ends. And then we will see the expected great wave of calls for reform, regulation and distinct treatment for state investors. It is not clear, either now or later, that such distinction is necessary as a general rule.
This brings the conceptual discussion back to where it started: sovereign funds are different because states own them. The difference involves the nature of the power and function of states compared to private actors. But states assert diminishing sovereign power the farther beyond the its territory that state seeks to assert its political power. And it is possible for a state to limit its behavior to mimic that of private actors. Just as corporations now are vested with both the obligations and rights of sovereigns under certain circumstances, at least in certain soft law regimes,326 so states might be granted the obligations and rights of private actors when they seek to act in ways that mimic those of private actors outside their national territory. But they will never be private actors. And though they mimic an ideal private investor, they will invariably act in ways that necessarily are geared to the furtherance of state policy and the extension of state power beyond the state. The Norwegian Fund strongly evidences both tendencies—private conduct for regulatory purpose under a framework that is essentially private (wealth maximization). Ambiguity, in this case, brought by the conflation of public and private regulatory models, cannot breed regulatory certainty. But that uncertainty also breeds regulatory opportunity.
C. Participation versus regulation as an alternative to the Public/private model.
There is a parallel between the discussion of the regulatory framework of sovereign wealth funds and current interventionist activities of governments in response to the financial crisis at the end of the first decade of the 21st century. We are all well aware of the current financial crisis--a very slow train wreck almost a decade in the making, ignored (and indeed encouraged) by certain elements of the private sector with the collusion of states and now burst well beyond the capacity of any state to contain it. The brunt of reaction to the crisis has been traditional and conventional. States have sought to intervene directly in their markets and aid domestic enterprises. The American Emergency Economic Stabilization Act of 2008 is typical of these efforts.327 Other states have adopted similar measures, principally in Europe. In Asia, places like Hong Kong have moved to shore up confidence in its banks by guaranteeing all funds in Hong Kong Bank accounts. And the central banks of several Asian states have been intervening to the extent of their abilities.
In addition, there is talk of grand inter-governmental schemes to coordinate financial regulatory activity and even to replace the current intergovernmental transnational financial system and its star institution, the World Bank and the International Monetary Fund, at a grand convocation of powerful states to be held in November 2008.
"Pressed by European allies also to start work quickly on overhauling the financial system, Bush agreed to host the November 15 summit -- the first of a planned series. . . . The leaders will discuss progress in addressing the crisis, analyze its underlying causes, set principles for reforms and instruct working groups to begin developing recommendations for those solutions, White House spokeswoman Dana Perino said. . . . Invited will be leaders of the G20, which includes the Group of Seven major industrialized nations and key emerging economies like China, Brazil, Saudi Arabia and India. Leaders of the World Bank, International Monetary Fund, United Nations and the Financial Stability Forum have also been invited."328Much is up for discussion, and there is a chance that little will get done, if only because the consensus possible after 1945 will elude the emerging groups of nations that make up the current international politico-financial order.329 And more important, perhaps, any workable solution will prove elusive because key private stakeholders will not be actively participating directly.
And that may be a problem. Most of the schemes floated by desperate states are both highly regulatory and interventionist. "Welcoming the summit details, Sarkozy said the meeting would be "followed by several others aimed at rebuilding the international financial system and making sure the current crisis does not happen again thanks to better regulation and more efficient surveillance of all players.""330 Even in connection with national efforts to contain the financial crisis, such attempts tend to revolve around a willingness to provide ailing sectors of the economy with direct or indirect infusions of capital in return for acceptance of both macro and micro regulation.331 Micro regulation is taking the form of the petty and vindictive, though as
a post facto effort it serves merely as a gesture to assuage the public and preserve the images of politicians as somehow working in the public interest. Among the more publicized of these are the requirements that executive pay arrangements be reformed and specifically that golden parachute payments not be made.
Waiting in the wings are the social policy efforts to reform the terms of "bad" mortgages to keep people in their homes. Macro regulation is taking the form of changes in the regulation of banks and their financial arrangements.332 But there is an element of hybrid action as well. The governments will be taking interests in many of the entities they are "saving"--in the form of warrants from banks and other forms of equity stakes in other enterprises taking state largess.333 These arrangements will pose something of a conceptual difficulty for the future because the character of those investments--and the power of the state as "shareholder" rather than regulator remains nebulous at best. On the one hand, the state is, as a formal matter, investing in the market in the same way as any other private investor. To the extent it is participating in the market rather than regulating it, then the investment might be characterized as private rather than public. On the other and, this private investment is undertaken in entities over which the "investor" has strong regulatory authority. And indeed, the "investor" has utilized this regulatory power as a critical component of its private investment decision. On a substantive basis, then, the private investment appears to be incidental to the regulatory activity of the state.
But there have also been highly publicized private efforts to shore up confidence (and free up capital) for the debt markets. Among the more well known of these private efforts was tat of Warren Buffet to inject billions into the financial markets. The efforts by the larger and more stable investment houses to shore up its weaker members is another example. To date, though, these grand gestures have had little short term effect.334 But the effort might be viewed as a private effort not so much to shore up the private markets but to prod appropriate state intervention. "Billionaire Warren Buffett, calling turmoil in the markets an "economic Pearl Harbor,'' said his $5 billion investment in Goldman Sachs Group Inc. is an endorsement of the Treasury's $700 billion bank rescue plan. "I am betting on the Congress doing the right thing for the American public and passing this bill,'' Buffett said on cable channel CNBC today. "I certainly have a vote of confidence in Goldman and vote of confidence in Congress.''"335
But the critical difference between these efforts and those of Norway’s funds is important. Unlike activity, whether private or public, regulatory or participatory, sovereign activity is generally undertaken within the territory under its control. The more attenuated its control, the more attenuated the intervention. And within the sovereign territory of another state, intervention is at least conceptually problematical, though effected in one way or another. Where a state acts as a participant within the territory in which its sovereign power is greatest, it may be impossible to separate the public from the private (regulatory rather than participatory) functions of the state. That has been the position of the Europeans.336 The Americans, on the other hand, have embraced the idea that such distinctions can, indeed, be made.337
But Norway is not intervening in its own economy—it is projecting economic power abroad. And Norway is not seeking to extend it governmental power directly. It is protecting its wealth abroad like other private investors. But its objectives are its own. And the effects of its activities, whatever its form, may be distinctly felt. Moreover, the Norwegian state may be counting on that, so that the form of private investment is meant to mask the reality of political activity abroad.
And thus we come to the irony of regulatory approaches to sovereign wealth fund activities. The thrust of regulatory efforts neither reflect the realities of private fund behavior, nor the thrust of international regulatory consensus on the imposition of public obligations on private actors. In effect, the current approaches to SWF regulations appear to work at cross purposes with the current approaches to transnational regulation of private economic actors. The imposition of an idealized private investor model has the effect of forcing SWFs to act in a way that is substantially narrower than private investment entities. At the same time, the formally public/functionally private model suggests a division between public and private power that is belied by the reality of transnational regulatory behavior.
It is clear that the Norwegian Global SWF acts in a sovereign capacity. It deliberates seeks to project Norwegian policy preferences on a host of private actors otherwise beyond its reach. It seeks to use its investment strategies as a doorway to negotiate changes in foreign law, especially with respect to corporate social responsibility. But The Norway is acting as a sovereign through its Global Fund and in private markets, and is doing so aggressively, does not mean that SWFs ought to be viewed as a threat any greater than large private investment vehicles that also aggressively intervene in regulatory matters. The issue is the regulatory effect of interventions in private markets by public or private entities seeking to project power. A framework of regulation focused in this way may provide a greater congruence between SWF regulation frameworks and those emerging in related fields, especially the regulation of multinational corporations.338
Sovereign wealth funds have become powerful players in the global economy. They are instrumentalities of the state without direct regulatory power. They appear to function like private pools of investment funds. But the character of their owner— states—have tended to complicate regulatory approaches to their operations within the territory of other states. This article has explored the contours of some of those issues. It has suggested that while sovereign wealth funds do function like private funds, they may pursue wealth maximization strategies different from those of private investors. If one holds a broad view of regulation, including all direct and indirect actions with regulatory effect, then sovereign wealth funds can be seen as a powerful method of indirect regulation—regulation through participation in private markets. It provides a vehicle for extraterritorial application of municipal law impossible to effect directly. The antidote to this regulatory possibility is the creation of idealized private investors. The effect, of course, is to substantially circumscribe the power of States as states. Yet private individuals and large multinational corporations may act for the same indirect regulatory purposes of states—to increase their influence within states and among economic enterprises within those states, that may increase its power in those territories.
The Norwegian sovereign wealth funds evidence the complexities of any simpleminded regulatory approach to the regulation of sovereign wealth funds. At one level, the funds act no differently than other private participatory funds. And that provides a strong argument in favor of little special regulation—a position taken by many influential academics in the United States and Europe. On the other hand, the macro economic and ethics based actions of the funds suggest that Norway is consciously pursuing state policy indirectly through its funds. Investment is clearly meant to project Norway’s political power by other means, and to move policy in particular directions. That suggests a regulatory aspect to fund activity that belies that more benign characterization of fund activities at the heart of soft law efforts like the Santiago Principles. This was very much the case with respect to corporate social responsibility issues, where the examination focused on three actions—the implementation of responsible investor notions, the effectuation of a boycott of Israel through investment policy, and a reaction to the political situation in Myanmar through investment determinations.339 But it was also evident from an examination of the Global Fund’s responses to the financial crisis, where there was a shift of investment inward and the use of the fund (through adjustment of diversification rules) to aid hard hit developing states through investment decisions.340 Each of these represents a deviation from a model of indifferent private investment behavior norms, posited as fundamental to the treatment of sovereign investors like their private counterparts.
Ultimately the foundational issue touches on the increasing merger of public and private law. Multinational corporations now regulate and may be subject to public law obligations.341 States may participate in markets and are entitled to the privileges of the market.342 The easy separation of economic and political activity is now more difficult. Regulatory frameworks will have to reflect this complexity as well. The Norwegian funds provide 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 Norwegian SWF suggests that the rising model of SWF governance, grounded on an assumption that a state organization formally public but functionally private, the conduct of which is gauged non-political and non-threatening when adhering to an idealized private investor does not reflect the reality of private investor behavior, who seek to use investment for political ends, and it does not realistically contain state investment entities that purport to refrain from that sort of activity. 343
278 Paul Rose, Sovereigns as Shareholders, 87 N.C.L. REV. 83, 112 (2008).
279 Norway Ministry of Finance, Norway’s Position in the Debate on Sovereign Wealth Funds.
280 “The declaration from the G8-summit on 7 June 2007 expressed what would seem to be a sound principle: “...we remain committed to minimize any national restrictions on foreign investment. Such restrictions should apply to very limited cases which primarily concern national security.”” Id.
281 “A debate on SWF should also reflect these funds’ potential to positively influence international financial markets through enhancing market liquidity and financial resource allocation. Typical characteristics of SWF are long investment horizons, no leverage and no claims for the imminent withdrawal of funds.” Id.
284 “In relation to the current debate on SWF, the management of the Government
Pension Fund – Global is often cited as an example to be followed.” Id.
286 “Furthermore, openness about the fund management can contribute to stable international financial markets, as well as exert a disciplinary pressure on the management that improves its quality.” Id.
287 “However, we see no cause for regulations that would restrict the present investment activities of our Fund, or any regulation imposing restrictions on SWF over and above those applying to non-SWF investors.” Id.
288 See, Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007 (2008), at 35 (“The international debate on Sovereign Wealth Funds places a strong emphasis on a clear separation of roles between the owner (represented by the political authorities) and the asset manager, and openness to operational management.” Id).
289 See, id., at Part II, Box 2.5, at 60 (comparison of Global Fund with other investment funds). Though the focus there is on performance, there is a focus on investment strategy on this sort of comparative basis as well. See id., at 77, 100, 109 (focusing on the behavior of other large funds).
290 See discussion in Part II of this series, Conceptual and Regulatory Frameworks: Formally Public, Functionally Private.
291 Larry Catá Backer, The Private Law of Public Law: Public Authorities As Shareholders, Golden Shares, Sovereign Wealth Funds, And The Public Law Element In Private Choice of Law, 82(5) TULANE LAW REVIEW 1801 (2008) (referencing Art. 87(1) EC and Case 323/82, Intermills SA v. Commission ECR 3809).
292 The ECJ explained that in that case the public actor failed to “act as a public investor acting in a manner comparable to that of a private investor pursuing a structural policy – whether general or sectoral – and guided by the longer-term prospects of profitability of the capital invested. That public body had in fact to be compared to a private creditor seeking to obtain payment of sums owed to it by a debtor in financial difficulties.” Case T-198/01 Technische Glaswerke Ilmenau GmbH v. Commission  ECR II-2717, at ¶¶ 98-99.
293 Case C-303/88 Italy v. Commission  ECR I-1433 at ¶22.
294 Case C-303/88 Italy v. Commission  ECR I-1433 at ¶20 (determination to be made by the EU Commission).
295 See, e.g., Ministry of Finance-Norway, The Report from the Graver Committee (7-11-2003), (“The Petroleum Fund can also exert influence indirectly through the market. By explicitly communicating a decision not to buy a particular share, the Fund can send signals to company executives, other market participants and a company’s customers, particularly if the decision provides the market with information it did not have previously.” Id., at ¶3.2). The Graver Commission had this very much in mind in its conflation of fund and national proorities:
The fact that the Petroleum Fund is a Norwegian state-owned fund poses particular challenges. Norway has a high profile in international efforts to promote human rights, labour standards and the protection of the environment. This reputation can be both a strength and a weakness. On the one hand, the Petroleum Fund’s status as a Norwegian fund may make it easier to take a leading role in promoting a more responsible investment policy. At the same time, Norway’s reputation could easily be impaired if the Petroleum Fund appears to be delaying the work on developing ethical guidelines that support the Norwegian effort to promote the above values. The possibility of using, reinforcing or, in the event, damaging Norway’s standing may impose special obligations on the Fund.Id.
296 See discussion, supra at text and notes --.
297 This position has also generated criticism, precisely because of the private character of what appears in effect to be public regulation.
The appearance of regulation may, in some circumstances, be worse than no regulation at all. The turn to ethics as a means of improving behaviour of multinational corporations offers an opportunity but also an opportunity cost: ethics can be a means of generating legal norms, through changing the reference points of the market and providing a language for the articulation of rights; yet they can also be a substitute for generating those norms. The Norwegian Council on Ethics demonstrates both tendencies.
Simon Chesterman, Laws, Standards or Voluntary Guidelines, Norges Finansdepartmentet, Editorial article, Ministry of Finance, 20.12.2007. Professor Chesterman proposes instead that the Council either act in secret or that Norway explicitly at in its sovereign capacity through the enactment of positive law. See, id. 298 The Norwegians put it differently, emphasizing the framework and deemphasizing the political effect.
Two policy instruments – the exercise of ownership rights and exclusion of companies – are prescribed as tools to promote the ethical commitments of the Fund. It is emphasized that ownership interests in the companies in which the Fund invests are exercised with a view to safeguard the long-term financial interests of the Fund. The guidelines are based on the view that there is a link between sustainable economic development and sustainable social and environmental development, so that the Fund in the long run as a very diversified investor with a long time horizon will benefit from companies respecting fundamental ethical norms.
Statement by Director General Martin Skancke, Asset Management Department, Norwegian Ministry of Finance Before The subcommittee on Domestic and International Monetary Policy, Trade and Technology and the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises The Committee on Financial Services U.S. House of Representatives Hearing on “Foreign Government Investment in the U.S. Economy and Financial Sector” March 5th 2008, at 4.
299 Id. (“Norges Bank notes progress on some corporate governance issues it has raised with US authorities, but simultaneously expresses concern about lack of progress in other areas. I trust that you will interpret this as a gentle encouragement of further strengthening the already high standing of US financial markets.” Id., at 7).
300 Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On the
Management of the Government Pension Fund (Preliminary and Unofficial Translation, at 16.
301 Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), Social Choice Equity Fund.
304 TAIAA-CREF Social Choice Equity Fund, Dec. 31, 2008).
305 Id., compare the more general framework of the Norwegian Ethics Guidelines, described in Part III of this essay series.
306 “A company’s involvement in the alcohol, tobacco, gambling, firearms, military and nuclear power industries is also reviewed and integrated into the process. Because of the negative social and environmental consequences of these products and services, companies with substantial involvement are unlikely to be included in the fund.” TAIAA-CREF Social Choice Equity Fund (Dec. 31, 2008). Of course the sectors chosen for exclusion are different than those under the Norwegian Ethics Code. See discussion supra at text and notes, --.
307 Thus, for example, TIAA-CREF excludes Citigroup, Inc., General Electric Co., Schlumber, Ltd., JPMorgan Chase & Co., Merril Lynch & Co., Inc., Dow Chemical Co., Exxon Mobil Corp., ATT &T, Chevron Corp., Pfizer, Inc., Wal Mart Stores, Inc. and Annheuser-Busch. Id. The Norwegian Fund excludes, among others, Barrick Gold Corporation (Canada), Vedanta Resources Plc, Sterlite Industries, DRD Gold, Ltd. (Canada), Wal-Mart Stores Inc. (US), Wal- Mart de Mexico, Madras Aluminum Company (India), Dongfeng Motor Group Co. Ltd. (China), GenCorp Inc. (US), Textron, Inc., (US), BAE Systems Plc, Boeing Co., Finmeccanica Sp.A., Honeywell International Inc., Northrop Grumman Corp., Safran SA and United Technologies Corp.
308 TAIAA-CREF Social Choice Equity Fund, Dec. 31, 2008).
(accessed March 12, 2009) (identifying for the period ended December 31, 2008, Exxon Mobil Corp., ATT &T, Chevron Corp., Pfizer, Inc., Wal Mart Stores, Inc. and Annheuser-Busch. Id.
309 Marla Brill, The Ethical Edge, Financial Advisor (April 2009) (“Investing with socially respon-sible criteria has long been viewed as a way to align one’s principles and pocketbook. But as the economic clouds darken, it’s also important to consider that improved ethics might also improve the bottom line, benefiting shareholders in the long run. At least that’s the belief of Todd Ahlsten, manager of the Parnassus Equity Income Fund.” Id.).
310 “If specific political issues are important to you, it is possible to check out investment companies that cater to them. The Women’s Equity Fund (www.womens-equity.com) invests in stocks that advance women in the workplace, for example. Portfolio 21 (www.portfolio21.com) and Sierra Club funds (www.sierraclubfunds.com) focus on companies they consider environmentally progressive.” Alina Tugend, Picking Stocks that Don’t Sin, The New York Times, March 17, 2007.
311 “The Socially Responsive Fund is still seeing investor inflows despite the global economic downturn, Ms. Dyott says. Hard times can bring out the best in investors and companies, she said, noting that funds didn't yield to pressure after the terrorist attacks on Sept. 11, 2001, when some called for screens blocking investment in weapons companies to be dropped.” Brian Baskin, Hard Times Still See Social Responsibility, The Wall Street Journal, April 13, 2009 (reporting on the Neuberger Berman Socially Responsive Fund, ).
312 “Although socially responsible investments have grown substantially over the last 10 years, they still represent a small part of the world of investments under professional management: 9.4 percent, according to a report by the Social Investment Forum, a trade group for the industry” Alina Tugend, Picking Stocks that Don’t Sin, The New York Times, March 17, 2007. The Social Investment Fund ““identifies $2.71 trillion in total assets under management using one or more of the three core socially responsible investing strategies—screening, shareholder advocacy, and community investing.” Social Investment Fund, 2007 Report on Socially Responsible Investing Trends in the United States, at Sec. 1c.
313 See Douglas Cumming and Sofia Johan, Socially Responsible Institutional Investment in Private Equity, 75 J. BUS. ETHICS 395-416 (2005) (socially responsible investing more common among institutionalized funds with international focus and least common among fund of fund equity investments ).
314 See, e.g., Parnassus Investments, How We Invest, available . Note the similarity to the approach of the more elaborately structured Norwegian SWF:
At Parnassus, purchasing a company's stock is owning that business. We take our duty of ownership seriously and only invest in companies who act responsibly. Socially Responsible Investing. The screening process to select our universe of companies. Our Social Investment Principles talk about our stance on specific issues. Parnassus Community Development. Our investments into community development financing. Shareholder Advocacy. Working with management to factor in social values in business decisions to effect positive change. We also use our proxy votes on corporate resolutions to impact companies' policies. Read our Case Studies for examples of our shareholder advocacy impact.
315 Consider, as one example, the Amana Mutual Funds Trust, created to provide a vehicle for investment that complies with Islamic law. See Amana Mutual Funds Trust, Fund Features (“To ensure that investments meet the requirements of the Islamic faith, the Adviser (Saturna Capital) follows guidelines established by the Fiqh Council of North America (FCNA), a non-profit organization serving the Muslim community.” Id.).
316 See, International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices; “Santiago Principles" (October 2008). For a discussion, see Larry Catá Backer, Sovereign Wealth Funds and Regulatory Responses to the Financial Markets Crisis, 19:1 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS – (forthcoming 2009).
317 Much has been made of a similar insight with respect to the market participatory activities of states within their own private sectors. For a thoughtful analysis on that basis in the context of state ownership of economic interests in private entities, see, Opinion of Advocate General Poiares Maduro in Federconsumatori v. Comune di Milano, Cases C-463/04 & 464/04.
318 See, President’s Working Group Releases Common Approach to Private Pools of Capital Guidance on hedge fund issues focuses on systemic risk, investor protection, Feb. 22, 2007, HP-272. These bear some similarity to the Santiago Principles generally accepted principles and practices. See Santiago Principles, supra note 316.
319 Prospectus, TIAA-CREF Funds: Institutional Class, 27, (February 1, 2009).
320 “The Fund belongs to the people, and the Storting has in the Act relating to the Government Pension Fund resolved that the Ministry of Finance is responsible for the management thereof.” Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007, 76 (2008). “What constitutes a good investment strategy for the Government Pension Fund is determined by the characteristics of the Fund, the purpose of the investments, the owner’s (the people of Norway, represented by the political authorities) tolerance of risk, and assumptions about how the financial markets work. See Chapter 2 for a more detailed discussion.” Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On the Management of the Government Pension Fund (Preliminary and Unofficial Translation, at 4-5.
321 The Norwegians, however, assert that democratic principles provide an adequate safeguard. “Institutional funds in general, and funds owned by governments in particular, face specific challenges. While individual shareholders may sell their holdings of individual assets or funds they do not find ethically acceptable, the citizens of Norway have to accept to be the ultimate owners of the companies that the Fund invests in.” Statement by Director General Martin Skancke, Asset Management Department, Norwegian Ministry of Finance Before The subcommittee on Domestic and International Monetary Policy, Trade and Technology and the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises The Committee on Financial Services , U.S. House of Representatives Hearing on “Foreign Government Investment in the U.S. Economy and Financial Sector” March 5th 2008, at 4.
322 The recent scandal involving the layered fund investments controlled by Bernie Madoff is a case in point. See Repex Ventures, S.A. v. Bernard L. Madoff, Civ. Action No.: 09-cv-289-RMB, Amended Complaint for Violations of the Federal Securities Laws (Jury Trial Demanded) (accessed April 25, 2009). “After Madoff was arrested, numerous investment funds disclosed that they were little more than feeder funds for Madoff and BMSI. Such funds included the Herald, Primeo, and Thema Funds. They each sought funds directly from investors, and delivered, or fed the investments they received to Madoff. Medici controlled the Herald, Primeo, and Thema Funds, and caused these funds to be fed to Madoff.” Stanford Law School, Securities Class Action Clearinghouse, Bernard L. Madoff Investment Securities: Herald USA Fund, Herald Luxemburg Fund, Primero Select Funds and the Thema International Fund, (Accessed April 25, 2009).
323 Sanjiv Shankaran, Centre Puts SWFs Under the Scanner, supra. (“Similarly, if a state-owned firm motivated by strategic aims uses a private multinational investor to invest money in specific Indian companies, identification becomes difficult, he added.”).
324 But sometimes is has taken unusual form, especially as national desperation increases. See, e.g., Kavaljit Singh, Nicolas Sarkozy and Sovereign Wealth Funds, SPECTREZINE, Nov. 3, 2008 (“In a hard-hitting speech to the European Parliament in Strasbourg (France) on October 21, French President Nicolas Sarkozy proposed that European countries should create their own sovereign wealth funds to protect national companies from foreign "predators." Id.). The French leader argued, "I'm asking that we think about the possibility of creating, each one of us, sovereign funds and maybe these national sovereign funds could now and again coordinate to give an industrial response to the crisis," he told members of the European Parliament.” Id.
325 See Larry Catá Backer, Sovereign Wealth Funds And Hungry States: Adjusting the Borders of Public and Sovereign Activity Across Borders, LAW AT THE END OF THE DAY, June 6, 2008.
326 See Case Note: Rights And Accountability In Development (Raid) V Das Air (21 July 2008) Global Witness V Afrimex (28 August 2008): Small Steps Toward An Autonomous Transnational Legal System For The Regulation Of Multinational Corporations, MELBOURNE JOURNAL OF INTERNATIONAL LAW (forthcoming 2009).
327 For an analysis see Larry Catá Backer, The Emergency Economic Stabilization Act in Its Own Words: Complexity, Confusion and Open Questions, LAW AT THE END OF THE DAY, October 15, 2008.
328 See Jeremy Pelofsky, Financial Crisis Summit Set for November 15: White House, Reuters, October 22, 2008.
329 The difficulty centers on the inversion of power represented by sovereign wealth funds. Developing states are the owners of the great majority of the wealth represented by sovereign wealth funds. Host countries are generally developed states. But developed states tend to control the agendas and framework for financial regulation. And they tend to be wary of the intentions of newly enriched states that had, for the greater part of the past several centuries, been exploited by them. That feuled the approach of the International Working Group of Sovereign Wealth Funds and the construction of the Santiago Principles, supra note 9 (e.g., “For that purpose, it will be important to continue ot demonstrate—to home and recipient countries, and the international financial markets—that the SWF arrangements are properly set up and investments are made on a an economic and financial basis.” Id., at 4). The threat, made from host countries, is protectionism and shutting SWFs off from important sectors of the global financial market, though one that governments of host states also sought to manage. David McCormick, Testimony Before the Joint Economic Committee, Feb. 13, 2008, HP-823 (“Yet, sovereign wealth funds also raise potential concerns. Primary among them is a risk that sovereign wealth funds could provoke a new wave of investment protectionism, which would be very harmful to the U.S. and global economies.”) (Mr. McCormick was then the Under Secretary for International Affairs).
330 Jeremy Pelofsky, Financial Crisis Summit Set for November 15: White House, supra.
331 That, of course, is the essence of both stimulus packages enacted at the end of the second Bush Administration and the beginning of the Obama administration, See Matthew Hadro, Government Can Influence Banks With $250 Billion Stock Buy, Say Economists, CNS News.com, October 30, 2008 (“The Emergency Economic Stabilization Act of 2008, passed by Congress and signed into law by President Bush on Oct. 15, includes a $250 billion government purchase in “senior-preferred shares” in U.S. banks. The purchase is designed to infuse capital into the banks so they can keep credit flowing and apparently help stabilize the market.” Id.). The relationship of AIG to the government is a widely publicized case in point. See, Matthew Karnitschnig, Deborah Solomon, Liam Pleven And Jon E. Hilsenrath, U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up, THE WALL STREET JOURNAL, Sept. 16, 2008 (“It puts the government in control of a private insurer -- a historic development, particularly considering that AIG isn't directly regulated by the federal government.” Id.).
332 See Matthew Hadro, Government Can Influence Banks With $250 Billion Stock Buy, Say Economists, CNS News.com, October 30, 2008.
333 This is not merely an American phenomenon. See, e.g., V. Phani Kumar, Japan Considering Direct Share Purchase, Report, The Wall Street Journal: Market Watch, Feb. 24, 2009 (“The government is considering direct market purchases amid concerns that falling share prices would boost losses among securities held by domestic financial institutions and companies, aggravating conditions in a deteriorating economy, the report added.” Id.).
334 See Erik Holm, Buffett Buys Goldman Stake in 'Economic Pearl Harbor' (Update2), BLOOMBERG.COM: WORLDWIDE, September 24, 2008. 335 Id.
336 See Larry Catá Backer, The Private Law of Public Law: Public Authorities As Shareholders, Golden Shares, Sovereign Wealth Funds, And The Public Law Element In Private Choice of Law, 82(5) TULANE LAW REVIEW 1801 (2008).
337 See, Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976); Wisconsin Dep't of Indus., Labor & Human Relations v. Gould Inc., 475 U.S. 282, 289 (1986); Reeves, Inc. v. Stake, 447 U.S. 429, 437 (1980).
338 See, e.g., Simon Chesterman, The Turn to Ethics: Disinvestment from Multinational Corporations for Human Rights Violations - The Case of Norway's Sovereign Wealth Fund, 23 AMERICAN U. INT’L L. REV. 577-615 (2008) (considering the effectiveness of the Norwegian ethics scheme to regulate the behavior of multinational corporations along ethical lines).
339 See discussion, supra, at Section IV.A (The Norwegian Funds in Action— Corporate Social Responsibility).
340 See discussion supra at Section IV.B (The Norwegian Funds in Action— Development and Use in Macroeconomic Policy: The 2008 Financial Crisis).
341 See Larry Catá Backer, Case Note: Rights And Accountability In Development (Raid) V Das Air (21 July 2008) Global Witness V Afrimex (28 August 2008): Small Steps Toward An Autonomous Transnational Legal System For The Regulation Of Multinational Corporations, MELBOURNE JOURNAL OF INTERNATIONAL LAW (forthcoming 2009). See also Statement By The United Kingdom National Contact Point (NCP) For OECD Guidelines For Multinational Enterprises (NCP): Das Air, available (accessed Dec. 29, 2008); Final statement by the UK national contact point for the OECD guidelines for multinational enterprises: Afrimex (UK) Ltd (Global Witness v Afrimex (28 August 2008).
342 See, Robert M. Kimmett, Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy, 87(1) FOREIGN AFFAIRS 119 (2008).
343 See, Philip Whyte and Katinka Barysch, What should Europe do about sovereign wealth funds?, Centre for European Reform Bulletin (Oct./Nov. 2007) (“Even if SWFs tried to buy majority stakes, it is not clear that host countries should necessarily prevent them from doing so. After all, state- owned companies have been allowed to make cross-border takeovers within the EU: Electricité de France entered the UK's liberalised energy market by acquiring a handful of companies already competing in it. In most cases, a host country's response to a mooted takeover by an SWF should be confined to ensuring that it poses no threat to domestic competition.”).