Sovereign Investing in Times of Crisis: Global Regulation of SWFs, SOEs and the Chinese Experience--Part IV, Regulatory Dissonance

This is the FOURTH of a multi-part series exploring the rise of a new form of integrated sovereign investing. The focus will be on the regulatory framework that is being developed in the West and the reality of innovative sovereign investing being implemented in China. A complete version of these materials will be published in the University of Iowa College of Law Journal, Transnational Law and Contemporary Problems. The manuscript of which may be accessed HERE.

The materials will be divided into the following parts:

Part I. Introduction

Part II. Projections of Public Economic Power in Private Form: Contextualizing Sovereign Wealth Funds--Form, Function and Policy.
A. Form in SWF Definition and Operation.
B. Function in Sovereign Investing.
C. Form and Function in the Policy Context on the Eve of Financial Crisis.

Part III. Complexity and Coordination in Sovereign Investing: The State Owned Enterprise as Sovereign Investment Vehicle.

Part IV. The Expression of Dissonance in Regulatory Responses.
A. National Approaches to Regulatory Reform.
1. The United States, Canada, Australia
2. Europe
B. Proposed Non-National Approaches to Regulatory Reform.
1. The European Union
2. American Bi-Lateralism
3. Santiago Principles.
4. OECD Soft Standard Setting

Part V. Coordination, Development, Opposition and the Challenges of Sovereign Investing in the Context of Global Economic Crisis: The Case of China.
A. “Go Global” Strategy and the Consolidation of Sovereign Investment
B. The Organization and Operation of Chinese Sovereign Investing.
C. Sovereign Investment as Cooperative Public-Private Networks: CIC and Its Subsidiaries.
D. Conformity to Current Regulatory Models and Policy Ramifications.

Part VI. Conclusion.




Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience

Abstract: The financial crisis of 2007 has brought into sharper focus a set of rising global financial actor—the sovereign investor. In the form of sovereign wealth funds (SWFs), sovereigns have become an important player in global financial markets and its stability. Over the last decade they have become more visible and more aggressive in the scope and form of their interventions in global finance. In the form of state owned enterprises, sovereigns have begun to operate indirectly through subordinate legal persons that operate like privately held multinational corporations. In that form, sovereigns are becoming a more significant presence in global markets as owners as well as investors. More importantly, sovereign owners have begun to coordinate their economic activities for economic and sovereign goals. Consequentially, crisis has produced a dynamic element in the evolution of the global economic system. These evolutionary elements now brought into sharper focus issues of law and policy that stretch current systemic conceptions into new and unchartered territory. If sovereign investors are understood as private actors participating in markets, then this might suggest the best case for the equal treatment of states with private entities, because it stands in the same shoes as a private investor. On the other hand, if sovereign investors, and their instrumentalities, are understood as an instrumentality of the state, then these entities can be understood as instruments projecting state power into the territory of other states, and a political solution becomes more likely. Yet, while governmental responses were at first wary—criticizing these funds as potentially dangerous to the sovereignty and independence of national markets, the increasing needs of national economic sectors quickly altered attitudes. Responses have focused on law and policy to protect the integrity and workings of the markets themselves—both domestically and internationally—by decentering the sovereign element of sovereign investment, but without much of a plausible conceptual center. This essay examines these fundamental issues of sovereign investing. Section I contextualizes the problem as a function of the character and control of large aggregations of wealth, Section II focuses on sovereign wealth funds as projections of public economic power in private form. It focuses on issues of the conceptual dissonance in the definition and operation of sovereign wealth funds. The section ends by connecting those issues to policy debates about sovereign investing, especially in the form of sovereign wealth fund activity. Section III then considers the expression of the conceptual dissonance of sovereign investment regulation. It considers national and supra national approaches to regulation and regulatory reform. Section IV considers state owned enterprises as another vehicle for sovereign investment abroad. It considers state owned enterprises (SOEs) as a fundamental component of innovative multi-vehicle deployments of sovereign wealth outside the national territory as part of the implementation of coordinated national development goals. Section V critically examines these issues in context. It considers the approach of China in the use of its state wealth through SWFs and SOEs. The Chinese efforts to coordinate sovereign investing directly by the China Investment Corporation and its principal subsidiaries, and indirectly through its subsidiaries and supported SOEs investing abroad, suggest a more complex organization of sovereign investing in which profit maximization is blended with a pronounced set of political objectives, grounded in development goals. This presents a potentially substantial advance in the integration of programs of sovereign investing, public policy and private markets. A responsive regulatory framework has not followed. The rise of sovereign market participatory entities, operating as both sovereign and private actors, will require a responsive regulatory framework substantially different from those currently in gestation. The Chinese experience suggests that while there is fundamentally little to fear from well operating public-private constructs, that model requires a different regulatory approach, and one that recognizes and rethinks the relationship of public and private sectors and the limitations of the state’s role in both in the context of protecting the integrity of global markets and the free movement of capital and economic activity.

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IV. THE EXPRESSION OF DISSONANCE IN REGULATORY RESPONSES.

The dissonance between formal and functionalist approaches to sovereign investing, in both definition and policy debates are mirrored in current and proposed regulatory approaches to the phenomena and the forms through which it has been manifested. Especially among host states, those states into which sovereign wealth fund activities are directed, have tended to a wary openness in constructing regulatory frameworks affecting SWF activity.

A. National Approaches to Regulatory Reform.

The conceptual ambiguities and the policy debates that SWF activity has sparked have been magnified in the context of the global financial crisis that started in 2007. On the one hand SWFs have been viewed as a critical factor in the recovery from the global economic downturns of 2008.265 On the other, they are viewed as a threat to the integrity of global markets because SWF’s do not play by the same rules applicable to private investors and on which the markets are constructed.266 In the face of these fears and desires, national governments have begun to look to reform of their rules for inbound investment that seek to target sovereign wealth funds without cutting off the flow of funds into national private markets. This is a tall order and has produced loudly trumped but essentially anemic responses. Much of the legislative responses have tinkered with current legislative approaches. The efforts in the United States, Germany, and France are representative of responses in developed states.

1. The United States, Canada and Australia. “Existing U.S. policies are designed to prevent foreign investors—including sovereign investors—from buying assets that would jeopardize U.S. national security. These policies do not address the full range of issues raised by the development of sovereign wealth funds and growing external investment of state firms.”267 In the United States, the Committee on Foreign Investment in the United States (CFIUS)268 has been reviewing foreign investments for national security purposes since the mid-70s. It was originally the sole province of the executive branch and was not subject to congressional review.269 After the Dubai Ports World270 purchase of British P&O looked to place many US ports under their control, the regulatory framework for foreign investment was altered. After enactment of the Foreign Investment and National Security Act in 2007,271 the CFIUS apparatus was brought under more stringent scrutiny, including Congressional oversight. The Congressional intent was clear enough.272

The Foreign Investment and National Security Act, was a direct response to the Dubai Ports World affair. The Act codified existing, and created new, processes for the CFIUS. The CFIUS was originally established in 1975 by President Ford273. The more significant changes include: 1)requiring more stringent investigations for cases involving state-owned transactions that would normally be completed before the 45-day review window; 2) expanding the factors required to be considered when reviewing mergers; 3) strict Congressional oversight.274 Specifically, FINSA reconstitutes the multi-agency Committee on Foreign Investment in the United States (CFIUS), composed of the Secretaries of the Treasury, Homeland Security, Commerce, Defense, State, Energy, Labor, and National Intelligence, as well as the Attorney General and heads of the other executive agencies as the President deems appropriate.275 It requires the President acting through CFIUS to review all covered transactions to determine the potential effects the transaction will have on national security.276 Covered transactions are defined as any merger, acquisition, or takeover that is proposed or pending after August 23, 1988, by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.277 The Act requires CFIUS to conduct an investigation on the effect of the transaction on national security if the covered transaction is a foreign government-controlled transaction, threatens to impair national security, or results in the control of a critical piece of U.S. infrastructure by a foreign person.278 The investigation must be completed within 45 days of being started, and submitted to Congress.279 The Act vests a power in CFIUS or in the lead agency (on behalf of CFIUS) to negotiate, enter into or impose, and enforce any agreement or condition with any party to the covered transaction in order to mitigate any threat to the
national security of the United States that arises as a result of the covered transaction.280 Lastly, it requires the President to determine a course of action regarding a covered transaction within 15 days after the investigation is completed281

Moreover, under amendments to the Defense Production Act,282 the President can exercise this authority under section 721 (also known as the "Exon-Florio provision") to block a foreign acquisition of a U.S. corporation. This authority may be exercised only if he finds: (1) there is credible evidence that the foreign entity exercising control might take action that threatens national security, and (2) the provisions of law, other than the International Emergency Economic Powers Act do not provide adequate and appropriate authority to protect the national security.

In addition, sovereign tax immunity, and its extension to SWFs, is also being reviewed.283 Beyond Bank Holding Company Act provisions,284 the IRS treats sovereign governments differently with respect to immunity.285 In section 892(a)(1) of the IRC, the income of foreign governments received from stocks, bonds, or other domestic securities are exempt from taxation.286 However, there is an exception made in (a)(2) that the immunity does not apply to any income derived from a commercial activity. 287

In 2008, Sen. Max Baucus, then chairman of the Committee on Finance, and Sen. Chuck Grassley, then the ranking member, requested the non-partisan Joint Committee on Taxation to describe and analyze the history, current rules, and policy underpinnings of the U.S. tax rules applicable to U.S. investment by foreign governments, including investments made by Sovereign Wealth Funds288:

“The U.S. has long exempted passive investment from foreign governments on sovereign immunity grounds... Income from commercial activities is to exempt, however, because such an exemption would grant a competitive advantage over non-governmental market participants… “In light of the rapid increase in the size and number of SWFs, their U.S. investments, and their expected continued growth, it is appropriate to examine the tax regime applicable to their U.S investments and its policy
underpinnings.”289

The object is to ensure that SWFs competing directly with the private sector do so with no unfair tax-exemption advantage.290 Although the agreement is only between the Treasury and Abu Dhabi, GIC, and Singapore, it is no doubt a model the Treasury would like to see all other SWF’s following.291

Canada and Australia follow a similar regulatory pattern. Sovereign investing other than the traditional investment in government securities is subject to review for its effects on the ability of the state to control the economic sector. The object is to avoid control by another political entity where the sovereign character of the investment cannot be separated from its commercial element. In Canada, control of inbound investment is regulated through the investment Canada Act.292 “It is the policy of the Government of Canada to ensure that the governance and commercial orientation of SOEs are considered in determining whether reviewable acquisitions of control in Canada by the SOE are of net benefit to Canada.”293 The framework is on the effect of transactions on Canada.294

Under the Investment Canada Act, certain investments by foreign entities (whether SWFs or not) resulting in the acquisition of control of a business in Canada are subject to review and ministerial approval if the value of those investments meets or exceeds certain financial thresholds. If a transaction is reviewable, the Federal Minister of Industry (the Minister) must determine whether completion of the transaction will result in a “net benefit to Canada”.295

The review is open ended, though the focus is on both control and the misuse of foreign acquired assets for non-commercial purposes.296 Similarly In Australia, the focus is on the internal effects of inbound investment.297 The concern is more focused on the sovereign character of the actor, 298 but in the context of a review framework applicable to all inbound investment.299 But in both cases, the form of the investment may make less of a difference than the sovereign character of the owner or director of the enterprise and the nature of the relationship between the political and commercial sectors of the investing government. The “the fact that these investors are owned or controlled by a foreign government raises additional factors that must also be examined. This reflects the fact that investors with links to foreign governments may not operate solely in accordance with normal commercial considerations and may instead pursue broader political or strategic objectives that could be contrary to Australia's national interest.”300 For this purpose, the government will look at six factors.301 The effect of the Australian Guidelines, in contrast to those of Canada, or even those of the United States, is to permit the government some latitude in enforcing, though only n a cumbersome case by case basis, the fundamental model of formally public-functionally private that forms the basis of efforts like the Santiago Principals, but extends its reach to all sovereign investing.

2. Europe. The Europeans have adopted a variation of these approaches.302 Germany, for example, has sought to follow the American lead, by considering a form of the CFIUS framework. The form of the activity was a proposed amendment to the Foreign Trade Act of 1961.303 The amendment was proposed in November 2007304, with a formal copy presented in Early June 2008305. The new legislation has been compared to a minimalist version of the CFIUS by German officials306, although they have also been quick to point out their proposal is much less strict than others of their kind.307 “By screening on a case by case basis, German authorities will be able to block certain acquisitions of foreign investors in German companies (in which they would gain 25 percent or more of voting power), if such cases have been classified as a threat to the public order or national security — as defined by regulations of the EU and the rulings of the European Court of Justice — within three months after the acquisition.308 Legislative activity in France has been more aggressive. In 2005, France created a new FDI law granting review of any attempt to purchase a controlling interest in a sector they deemed essential to ‘public policy’.309 France created a law allowing review of attempted purchases in certain sectors that could affect public policy.310 The decree provided that that any investment that grants control of a firm, or surpasses the 33% threshold, or involves any part of any branch of any firm that has established headquarters in France, is subject to government review.

However, the EU objected on the perfectly reasonable grounds that the French action went too far in its attempt to protect the national territory from the free inbound flow of investments from other E.U. Member States.311 Instead, the European Union has shifted its regulatory focus on the voluntary and guidelines based efforts of other supra national entities, among them the Organization for Economic Cooperation and Development and the International Monetary Fund.312 As a consequence France, and other E.U. members have tended to limit their control of inbound sovereign investment, and relied instead on the national security exceptions on which to ground their restrictions.313 The French administration, though, continues to call for heightened regulatory protection against inbound investment directly or indirectly controlled by foreign sovereigns.314 On the eve of the acknowledgement of the financial crisis, for example, President Sarkozy has announced he would like state-owned banks to protect French companies from ‘aggressive’ SWF’s315. And France, in line with the restrictions of the regulatory structure of the European Union, specifies a number of protected sectors of the economy.316

As a consequence, much effort has been expended on measures to control the investment strategies of sovereign wealth funds (understood as another arm of national policy and a possible source of indirect protections of national power abroad), along with other forms of sovereign investment in the private sector. These efforts have been undertaken with the goal of avoiding affecting the level of such inbound investment to states desperately hungry for the funds.317 And ironically, at least one country, France, has suggested that it might use its own sovereign wealth fund as a sort of state asset pool geared to the protection of local businesses from acquisition by foreign owned SWFs.318

B. Proposed Non-National Approaches to Regulatory Reform.

The governance reforms that have been generated since 2005 share a common conceptual basis. That basis can be understood as a drift to something like a "reasonable investor policy." Essentially, the governance efforts have followed something like the following logical sequence: (1) states are different from private actors, (2) sovereign wealth funds are creatures of the states that own and fund them, (3) when sovereign wealth funds invest in private markets they are acting for states, as a result they cannot be making decisions in the same was as a private owner might expect of investment funds, (4) the result might be to challenge the integrity of private market (through the introduction of sovereign regulators as market participants), (5) or to destabilize the international political system (by permitting sovereign regulators to use private markets for public policy purposes especially within the national territory of other states), (6) so that if sovereigns are to be permitted to act through sovereign wealth funds in global private markets then they will have to be required to act like other participants, (7) but since the prime assumptions is that states are not like private economic actors, (8) then it will be necessary to construct a sort of artificial private personality (9) and a system for monitoring compliance therewith (10) that states and their sovereign wealth funds will have to adopt if they mean to be accorded treatment like other private participants in global markets.

I have suggested the basis of a critique for its over and under inclusion of restraint and its stubborn ignorance of the nature and scope of investment.319 Still, a more detailed review of the basis for this approach might be useful for understanding the limitations and weaknesses of current approaches to sovereign wealth funds. A few important international actors have sought to introduce regulatory mechanisms that might systematize approaches to the regulation of sovereign wealth funds. They are grounded in soft law principles and intended to create a basis for custom to form around benchmarked practices and the development of consensus in a conceptualization of sovereign funds. This section examines some of the more important recent efforts in that direction to date.

1. The European Union. The European Union has not been aggressive in formulating its own approach to SWF and SOE regulation. However, current EU. jurisprudence suggests that it would be more suspicious of governments investing outside their home territories and less likely to accept that states can ever act in nonsovereign capacities.320 The twin pillars of emerging European regulation of the participatory (rather than the regulatory) activities of state sovereigns in economic markets are the jurisprudence of free movement of capital provisions of the European Community Treaty,321 and the regulation of state subsidies to business under the Competition provisions of the European Community Treaty.322 With respect to the former, the focus has been on the privatization of state enterprises where the state seeks to retain an interest or otherwise intervene to protect the national character of the enterprise. In a recent series of cases, the so-called golden share cases,323 the European Court of Justice has rejected assertions of state power, characterizing them as regulatory, and consequently in breach of a Member State’s obligations under Art. 56 EC. With respect to the latter, both Court and Commission has sought to narrow the scope of permissible state intervention in the form of investment by treating many forms of such formally private activity as public and consequently in breach of the competition provisions of the EC Treaty. The focus of this jurisprudence has been on the special character of Member States’ interventions in their own economies. The object is to reduce all possible transaction costs to the free movement of capital that might be based on the “nationality” of that capital. Investors may be deterred by rules that discriminate on the basis of nationality, as well as other rules that make investment less attractive, for example, rules privileging state investment. The form of that privileging is immaterial. All state intervention that is accompanied by regulation, the threat of regulation, or indirectly supported by special regulation, constitutes an impediment to free movement. Derogations in the public interest are narrowly construed.324 In a general sense, then, a sovereign regulates, even when it appears to be participating in the market—if it participates in the market that is the subject of its regulation. It is the regulatory character of the action that is key, along with the power to implement it within its territory. In that context, the private law offers no cover.

With respect to the application of the discipline of the competition law rules to state investment activity in their domestic enterprises, the European Court of Justice has long held that the purchase by a Member State of equity interests in a company might be characterized as a “state aid”325 under the competition provisions of the EC Treaty.326 The framework is parity between state and private investors.327 From the principle of equal treatment, it fell to the Commission to determine whether the State’s investment programs corresponded to normal market conditions.328

Still, both European Court of Justice (in the golden share cases) and Commission (in its elaboration of state aid through shareholding) were concerned with the effects of privatization and the creation of a European private market in place of the old controlled economies of the Member States. The Commission made its position clear in the 1980s.329 At first blush, application of the principles extracted from the state aids and golden share cases to the sovereign wealth fund regulatory context might suggest a more restrictive approach to regulation of inbound SWF and SOE activities within the E.U. If the essential ‘postulate’ under free movement of capital and ‘state-aids’ rules is that states in general (and Member States in particular) are different—and always sovereign, it might suggest that the creation of a standard of behaviors that permit an exception—treatment as a private party—would have to be narrowly drawn. It may not be possible to have an open policy in light of the construction of the internal market limitation in EU jurisprudence. 330 On the other hand, it is just as likely that one could extract some sort of idealized private investor from that jurisprudence.331 The key is to privilege that part of the jurisprudential development that posited the possibility of equivalence where the state actor could demonstrate that its motives and behaviors approximated those of private actors in ways that can be described and measured. Certainly, the cases hold that possibility open. And it may be reasonable to assume that while there may be an emphasis on the sovereign power of states seeking to intervene in the economy within their borders, the same emphasis would be less compelling when sovereigns sought to intervene within the regulatory territory of another state. When state intervention is both accomplished outside the national territory, and through a separate legal person, a form also available to private investors, like SWFs represents one aspect of this change.332 The willingness of states to invest in SOEs like other investors is another.333

And, indeed, it appears that the E.U. will likely tale the broader view. "EU sources say Brussels is examining options stretching from an IMF-style code to a full directive giving Brussels the power to dictate policy."334 This is a particularly sensitive topic for Britain. "London is a clearing house for the mammoth funds rapidly changing the investment universe."335 The financial crisis intensified the need for a less imposing system of regulation of inbound investment by sovereign entities.336 These were to mirror the Santiago Principles being prepared by the International Monetary Fund.337 The Commission has explained its outline of this common policy. It emphasizes a commitment to an open investment environment consistent with E.U. common market jurisprudence, support for a multilateral regulatory framework, reliance on existing instruments, respect for EC Treaty obligations, and, perhaps most importantly, adherence to the principles of transparency and proportionality as those concepts are understood in the E.U. treaty. 338

Indeed, the EU, at its base, continues to view sovereign investing as essentially sovereign--and acceptable only when the sovereign is eliminated from the equation. This requires preventing the sovereign from controlling (effectively) the policy of the investment of its funds. "Clarity about the degree of possible political interference in the operation of a SWF is a prerequisite for addressing concerns about the existence of political and other non-commercial considerations in the operation of a fund."339 Indeed, the EU makes no bones of the equation of sovereign wealth funds with old socialist state run enterprises.340 But the limitations are clear--the reward will be available only where state investors can establish (perhaps according to a formula or a set of standards of actions) that they are not investing for the purpose of maximizing their own aggregate best interests (a luxury not denied other shareholders). The EU thus appears suspicious but perhaps ready to deal. It was no surprise then, that the EU "welcomed a joint commitment by OECD Ministers at their annual meeting in Paris on 5 June to an open investment environment for Sovereign Wealth Funds. OECD Ministers adopted a declaration that committed them to a transparent and predicable investment environment that does not discriminate against Sovereign Wealth Fund investors."341

2. American Bi-Lateralism. The United States has been at the forefront of creating a bilateral approach to the regulation of sovereign wealth funds. In a manner that mimics the way in which multinational corporations construct regulatory systems binding its suppliers,342 the United States has sought to arrange the terms of mutual investment on the terms of bi-lateral treaty arrangements.343 “In nince cases, the United States has entered into a BIT or a free trade agreement with countries with SWFs. . . . [T]he countries that have signed investment treaties or entered into free trade agreements with the United States, or are members of OECD and WTO.”344 In some cases, the Treasury Department has sought to impose certain otherwise soft law obligations on SWF countries through bi lateral agreements on trade.345 The policy principles for SWF states include that “SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government. . . . Greater information disclosure by SWFs. . . . strong governance structures, internal controls, and operational and risk management systems. . . . SWFs and the private sector should compete fairly. . . . SWFs should respect host-country rules. . . .”346 In return, the United States agreed to adhere to certain principles, including that it: “should not erect protectionist barriers to portfolio or foreign direct investment. . . . should ensure predictable investment frameworks. . . . should not discriminate among investors. . . . [and] should respect investor decisions by being as unintrusive as possible, rather than seeking to direct SWF investment.”347

3. Santiago Principles.348 As the discussion of national regulatory approaches makes clear, host state regulation faces two great difficulties. The first is structural—the more intensely host states regulate inbound sovereign investment, the more likely that the flow of capital will be impeded. Beyond its protectionist consequences,349 such approaches, if more widely adopted might affect the integrity of global markets.350 If regulation of outbound foreign investment in host states proved difficult because of its affect on the framework for economic globalization, then the solution might lie in regulation of those vehicles by the home states.351 This is an approach that mimics that used to regulate the activities of multinational corporations.352 Regulatory activity in that direction became more pronounced in the eve of the financial crisis. Thus, by "October [2007], the United States joined with Europe and Japan to call for a set of best practices to which funds would subscribe voluntarily. The practices would include pledges of nonpolitical governance structures and more disclosure of portfolio activities."353 And the solution, neutralize the sovereign element of sovereign investment and reduce the universe of acceptable operations to commercial or financial objectives, as conventionally understood. For that purpose, a self regulating system of soft law, similar to those being developed for the large commercial transnational enterprises appeared most suitable.354

In effect, the intent was to create a set of customary norms which SWFs would avoid at least the appearance of political considerations in their investment activities and provide a legal basis, even in soft law, for conformity to these standards that would, over time, become increasingly find difficult to avoid without great cost. Once established, they can also provide a framework against which states can legislate, for example by distinguishing between non-conforming and conforming SWFs.

In May 2008, the International Working Group (IWG) of Sovereign Wealth Funds (SWFs) was created in response to a G-8 initiative.355 The International Monetary Fund (IMF) provides support in the form of a secretariat. The IWG was tasked with identifying and drafting a set of generally accepted principles and practices (GAPP) that would properly reflect the investment practices and objectives of SWFs.356 The task to get to GAPP was not easy, and the adoption of GAPP papers over significant divergences of views among SWF home state. There was, for example, substantial jockeying over the construction of this benchmarked patterns of acceptable behavior are being contested.357

For all that, the SWF Generally Accepted Principles and Practices (GAPP), or “Santiago Principles,” provide a model framework for sovereign wealth funds and their governing bodies to ensure that SWFs remain a stabilizing force in financial markets, regardless of whether these markets are at home or abroad.358 In its own words, the IWG describes the purpose of the GAPP as being to “identify a framework of generally accepted principles and practices that properly reflect appropriate governance and accountability and arrangements as well as the conduct of investment practices by SWFs on a prudent and sound basis.” 359 In addition to ensuring that these principles are achieved, the GAPP also hopes that “SWFs continue to bring economic and financial benefits to home countries, and the international financial system.”360 By enacting the GAPP, the IWG “aims to contribute to the stability of the global financial system, reduce the protectionist pressures, and help maintain an open and stable investment climate.”361

“The GAPP covers practices and principles in three key areas. These include (i) legal framework, objectives, and coordination with macroeconomic policies; (ii) institutional framework and governance structure; and (iii) investment and risk management framework.”362 The incorporation of the GAPP principles is left to each respective nation in accordance with its national policies. As such, the “GAPP is subject to provisions of intergovernmental agreements, and legal and regulatory requirements. Thus, the implementation of each principle of the GAPP is subject to applicable home country laws.”363 Adherence to GAPP principles are meant to produce relatively well understood and fairly transparent entities or operations that mimic some sort of idealized private investor model. The effect is meant to assure host states of the absence of threatening political agendas effected through sovereign investment activity. Thus convinced, the hope is to avoid host state lawmaking that would inhibit sovereign investing.364

4. OECD Soft Stadard Setting. Like the developers of the Santiago Principles, the Organization for Economic Development and Cooperation (OEDC) has declared its adherence to a policy of transparency as well.365 Within that context, it has sought to develop its own version of a set of benchmark rules of behavior for sovereign wealth funds.366 They were developed in the context of the drafting of the Santiago Principles and were meant to be read with them, as a host country analog to the home country measures that are the focus of the Santiago Principles.367 “The resulting framework will foster mutually beneficial situations where SWFs enjoy fair treatment in recipient country markets and recipient counties can confidently resist pressures for protectionist responses.”368 The principles are grounded on the body of investment principles developed for the operation of enterprises across borders and the principles of state regulation grounded in principles of equal treatment, transparency and trade liberalization.369 Within that context, national security was recognized as a legitimate limitation on the OECD open trade principles,370 but only if narrowly drawn.371 The OECD, though, suggested that use of sovereign investment for foreign policy rather than commercial purposes, or to obtain sensitive technology, or to aid “the intelligence capabilities of a foreign country that is hostile to the host country” might serve as a legitimate basis for protection.372 The OECD suggested a principles based framework for implementing national security limitations on open investing based on its principles of non discrimination, transparency/predictability, regulatory proportionality, and accountability.373

In addition, the OECD has advanced a set of guidelines for state owned enterprises that in many respects mimics the approach of regulatory efforts aimed at sovereign wealth funds.374 “The Guidelines are primarily oriented to state-owned enterprises using a distinct legal form (i.e., separate from the public administration) and having a commercial activity (i.e. with the bulk of their income coming from sales and fees), whether or not they pursue a public policy objective as well.”375 These are grounded in transparency and separation of functions principles.376 The object, as with SWFs, is to neutralize the sovereign in the operation and control of these enterprises.377 Within this framework, the state is expected to act like an idealized private sector owner.378 “It is often the multiple and contradictory objectives of state ownership that lead to either a very passive conduct of ownership functions, or conversely results in the state’s excessive intervention in matters or decisions which should be left to the company and its governance organs.”379

Thus neutered, SOEs could be deemed safe enough to compete on an equal basis with private actors.380 The guideline aims at “a level-playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions.”381 For that purpose, the Guideline specifically requires SOEs face competitive conditions regarding access to finance and avoid indirect subsidies through cross ownership of state enterprises. “[SOEs’] relations with state-owned banks, stateowned financial institutions and other state-owned companies should be based on purely commercial grounds.”382 Equivalence produces compatibility between state owned and private enterprises. The Guidelines are designed to produce SOEs that operate like private entities. It then follows that the OECD Principles of Corporate Governance can apply to SOE and private enterprises on an equivalent basis.383 Effectively the SOE Guidelines are a condition precedent to preparing state owned enterprises ready to conform to emerging governance principles meant to govern all economic organizations.384

Realizing that SOEs face some distinct governance challenges, the OECD Guidelines treats transparency as a key factor in governing SOEs. First, the Guidelines require the co-ordinating or ownership entity to “develop consistent and aggregate reporting on state-owned enterprises and publish annually an aggregate report on SOEs.”385 Second, the Guidelines impose requirements of efficient internal and external audit procedures on SOEs.386 Similarly, the Guidelines impose on SOEs the same high quality accounting and auditing standards as listed companies. Lastly, the Guidelines are based on disclosure of deviations from a private actor model of SOE operation rather than on mandatory provisions. The idea, it seems, is to permit SOEs to be structured as a government likes, but to warn others within the global economic sector so that they know what they are dealing with (or choose not to deal with).387 For all their elegance, this approach has been subject to criticism, essentially as both unrealistic and unenforceable.388

END NOTES

265 “SWFs are generally considered to be stable investors by the U.S. Department of Treasury. Investment stability has been especially prized in the volatile period associated with the subprime crisis which saw numerous investments by SWFs in U.S. Financial firms.” Paul Rose, Sovereigns as Shareholders, 87 NORTH CAROLINA LAW REVIEW 83-93 (2008).266 Jim Heskett, What is the Future of State Capitalism, HARVARD BUSINESS SCHOOL – Working Knowledge, May 2, 2008.267 Brad W. Setser, Sovereign Wealth and Sovereign Power, Council on Foreign Relations, Center for Geoeconomic Studies, Council Special Report No. 37 (Sept. 2008), at 40. See also, Chris Lalonde, Note: Dubai or Not Dubai?: A Review of Foreign Investment and Acquisition Laws in the U.S. and Canada, 41 VAND. J. INT’L L. 475 (2008). See also United Stated Government Accountability Office, Sovereign Wealth Funds: Laws Limiting Foreign Investment Affect Certain U.S. Assets and Agencies Have Various Enforcement Processes, Report tothe Committee on Banking, Housing and Urban Affairs, U.S. Senate, GAO-09-608, May 2009, at 8-21.268 “The Committee on Foreign Investment in the United States ("CFIUS") is an interagency committee in the U.S. federal government which reviews inward foreign investment policy and specific foreign investment transactions which have national security implications. Chaired by the representative of the Secretary of the Treasury, CFIUS was established by executive order in 1975. Exec. Order No. 11858(b), 40 Fed. Reg. 20263 (May 7, 1975).” Thomas R. Howell, Alan Wm. Wolff, Rachel Howe, Diane Oh, China's New Anti-Monopoly Law: A Perspective From The United States, 18 PAC. RIM L. & POL'Y J. 53 (2009) at note 193.269 For a discussion, see e.g., Georgiev G. Stephanov:

[T]he Department of the Treasury originally tasked CFIUS with monitoring the impact of inbound foreign investment and coordinating U.S. investment policy. The President’s power to act in this domain was formalized by the International Investment Survey Act of 1976. In the 1980s, mounting concerns over the acquisition of U.S. firms by Japanese and British investors prompted Congress to introduce a system of formal review of these transactions through the Exon-Florio Amendment to the Defense Production Act of 1950. The Amendment authorized the President to investigate the effect of foreign acquisitions on U.S. national security and, acting based on “credible evidence,” to suspend or prohibit acquisitions that might threaten national security. Prior to the Amendment, foreign acquisitions could be blocked only if the President declared a national emergency or regulators found a violation of federal antitrust, environmental, or securities laws.

Georgiev, George Stephanov,The Reformed CFIUS Regulatory Framework: Mediating Between Continued Openness to Foreign Investment and National Security(January 10, 2008). YALE JOURNAL ON REGULATION, Vol. 25, 2008.270 Dubai Ports World is self described as “one of the largest marine terminal operators in the world with 49 marine terminals and 12 new developments across 31 countries [as of March 2009]… DP World’s hallmark is [its] unique ‘integrated port management’ model, which brings together container terminals, other cargoes, free zones, infrastructure developments and consultancy services.” Also, “In 2008, DP World handled more than 46.8 million TEU across its portfolio from the Americas to Asia - an increase of 8% on 2007. With a pipeline of expansion and development projects in key growth markets, including India, China and the Middle East, capacity is expected to rise to around 95 million TEU over the next ten years.” See Dubai Pots World website (Overview).271 H.R. 556, [110th]: Foreign Investment and National Security Act of 2007 (Public Law 110-49). The Bill’s history may be accessed here.
272 “This is good legislation that will contribute to the improvement of CFIUS,” said Rep. John D. Dingell DMI), Chairman of the Committee on Energy and Commerce. “Our nation must remain ever vigilant of its own security as we work to achieve a free and fair flow of capital and trade in the global economy.” House Passes Foreign Investment and National Security Act H.R. 556.273 See: ‘CFIUS Reform Legislation Signed Into Law’, by Wiley Rein LLP [EDITOR NOTE 2020: Wiley-Rein has changed it's name to Wiley and is now using a new domain name, wiley.law]. Many firms published at length about the CFIUS process (e.g. Skadden, Wilmer Hale) on their websites following the Dubai Ports controversy in light of the CFIUS’s more publicly scrutinized role involving potential M&A. For a few examples of recent, public CFIUS exercises of power, see also the WSJ’s blog review of a 2008 Corporate Law Institute panel held at Tulane University Law School emphasizing the growing importance of the CFIUS, found here.274 Id. at II.275 Section 3.276 Section 2.277 Section 2.278 Section 2.279 Id.280 Section 5.281 Section 6.282 See Defense Production Act § 721(a)(3), Pub. L. No. 110-49, 121 Stat. 246 (2007) (to be codified at 50 U.S.C. app. §2170). See Christopher M. Weimer, Foreign Direct Investment and National Security Post FINSA 2007, 87 TEX. L. REV. 663 (2009). Note the Exon-Florio provision has been in place for many years; it is important because it details the President’s authority which, although it might not be new to the 2007 Act, is extremely relevant.283 For a discussion of the issues, see, Matthew A. Melone, Should the United States Tax Sovereign Welfare Funds, 26 B.U. INT’L L. J. 143 (2008).284 “The effect of the Board's long-standing interpretation is that a sovereign wealth fund that seeks to make an investment in a U.S. bank or bank holding company that exceeds the thresholds in the BHC Act would be required to obtain Board approval prior to making the investment and would become subject to the other provisions of the BHC Act, but its parent foreign government would not.” Scott G. Alvarez (General Counsel Board of Governors Federal Reserve System), Sovereign Wealth Funds, Testimony Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate, April 24, 2008 available http://www.federalreserve.gov/newsevents/testimony/alvarez20080424a.htm ("As a general matter, the same statutory and regulatory thresholds for review by the federal banking agencies apply to investments by sovereign wealth funds as apply to investments by other domestic and foreign investors in U.S. banks and bank holding companies.").285 See discussion, supra, at text and notes ---.286 Section 892 of the Internal Revenue Code of 1986 at (a)(1).287 Id. at (a)(2). The sovereign’s taxed income will be treated as if they are a corporation of their state. Id. at (a)(3) 288 Baucus-Grassley letter to the Joint Committee on Taxation, United States Senate Committee on Finance (March 13, 2008).289 Id.290The agreement set out both principles for SWFs and for countries receiving SWF investment. Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu Dhabi (March 20, 2008) available http://www.ustreas.gov/press/releases/hp881.htm. Section 38 of the ICA provides that “The Minister may issue and publish, in such manner as the Minister deems appropriate, guidelines and interpretation notes with respect to the application and administration of any provision of this Act or the regulations.” ICA, Sec. 38. The Guidelines have been published online.291 See U.S. Department of the Treasury, Press Room, Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu Dhabi 30 (hp-881, March 20, 2008).292 See, An Act Respecting Investment in Canada, 1985, c. 20, assented to 20th June, 1985.293 Industry Canada Investment Canada Act Guidelines — Investment by state-owned enterprises — Net benefit assessment.294 Shuli Roda, et al., Sovereign Wealth funds to the Rescue, OSLER CORPORATE REVIEW, December 8, 2008 (“In response to a number of proposed transactions (including three significant energy sector acquisitions -- Northrock Resources Ltd., PrimeWest Energy Trust and the assets of Pioneer Canada Ltd.) by the Abu Dhabi National Energy Company PJSC (TAQA), a company that is majority owned by the Abu Dhabi government, Canada introduced new guidelines (the SOE Guidelines) under the Investment Canada Act to address proposed investments in Canada by SWFs (referred to in the Guidelines as “state-owned enterprises.” Id.).295 Shuli Roda, et al., Sovereign Wealth funds to the Rescue, OSLER CORPORATE REVIEW, December 8, 2008 (“The SOE Guidelines prescribe a set of specific criteria that the Minister will apply when assessing whether a reviewable investment by an SWF satisfies the net benefit to Canada test.” Id. These include “additional scrutiny of their governance structure and commercial orientation in determining whether their investments meet the “net benefit to Canada” test, and undertakings may be sought as a condition of obtaining approval.” Id.).296 See Industry Canada Investment Canada Act Guidelines — Investment by state-owned enterprises —Net benefit assessment. In addition to the general factors set forth in ICA, Section 20, the “Minister will assess whether a Canadian business to be acquired by a non-Canadian that is an SOE will continue to have the ability to operate on a commercial basis regarding: where to export; where to process; the participation of Canadians in its operations in Canada and elsewhere; support of on-going innovation, research and development; and the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position.” Industry Canada Investment Canada Act Guidelines — Investment by state-owned enterprises —Net benefit assessment.297 The Australian government explained:

“To ensure they are consistent with Australia's national interest, the FIRB examines whether proposed foreign investments may have any adverse implications for Australia's national security or economic development and ensures they are consistent with any specific foreign investment legislation in areas such as transport and telecommunications. It also examines whether proposals have implications for other Government policies, competition and the operations of Australian businesses. If the Treasurer forms a view that a foreign investment would be inconsistent with Australia's national interest, it may be blocked or made subject to conditions to address any problems that have been identified.”

Treasurer of the Government of Australia, Principles Guiding Consideration of Foreign Government Related Investment in Australia, No, 009.298 “The principles set out the main factors that are considered in determining, on a case‑by‑case basis, whether particular investments by foreign governments and their agencies are consistent with Australia's national interest.” Wayne Swan, Government Improves Transparency of Foreign Investment Screening Process, Press Release No. 009, Treasurer of the Government of Australia.299 “Proposed investments by foreign governments and their agencies (e.g. state‑owned enterprises and sovereign wealth funds (SWF)) are assessed on the same basis as private sector proposals. National interest implications are determined on a case‑by‑case basis.” Treasurer of the Government of Australia, Principles Guiding Consideration of Foreign Government Related Investment in Australia, No, 009, (Guidelines for foreign government investment proposals).300 Id.301 These factors include the independence of the investor's operations from the relevant foreign government.

In considering issues relating to independence, the Government will focus on the extent to which the prospective foreign investor operates at arm's length from the relevant government. It also considers whether the prospective investor's governance arrangements could facilitate actual or potential control by a foreign government (including through the investor's funding arrangements). Where the investor has been partly privatised, the Government would consider the size and composition of any non‑governmentinterests, including any restrictions on governance rights.

Id. An additional factor include the extent to which the investor “is subject to and adheres to the law and observes common standards of business behaviour,” Id. The focus of this analysis is the “extent to which the investor has clear commercial objectives and has been subject to adequate and transparent regulation and supervision in other jurisdictions.” In the case of direct SWF investment, the government “would also consider the fund's investment policy and how it proposes to exercise voting power in relation to Australian companies.” Id. A third factor is the extent to which the investment could “hinder competition or lead to undue concentration or control in the industry or sectors concerned.” Id. A fourth factor is the impact on state revenues. A fifth factor is the impact on national security. “The Government would consider the extent to which investments might affect Australia's ability to protect its strategic and security interests.” Id. A sixth factor is the a benefits to Australia analysis. Id. “The Government would also consider the extent of Australian participation in ownership, control and management of an enterprise that would remain after a foreign investment, including the interests of employees, creditors and other stakeholders.” Id.302 A useful review of the approaches of influential EU Member State legal regimes was published by Gulf Research Center. See GULF RESEARCH CENTER, A Common European Approach to Sovereign Wealth Funds – Continuity of the Status Quo?,
303 See Germany: Amendment of foreign trade and payments act, NORTON ROSE, March 12, 2009.304 ‘SWFs: Common European Approach Need of the Hour’; Arab News; 25 April 2008; .305‘Germany finalises draft law on sovereign wealth funds: report’; AFP; June 2, 2008 .306‘Germany plans for own Cfius deal watchdog’; Financial Times; 27 Sept 2007.307 ‘Sovereign funds welcome in Germany, finmin says’; Reuters; 9 may 2008 308 ‘SWFs: Common European Approach Need of the Hour’; Arab News; 25 April 2008; verbatim from Arab News article, footnote 4 (“It is noteworthy, that Germany — unlike several other European countries — does not name particular industries as sensitive to national security considerations, but reserves its right to decide on a case by case basis whether an enterprise is of ‘strategic relevance’.””).309 Decree 2005-1739 of 30 December 2005.310 ‘France Investment Climate 2007’, U.S. State Dept., which includes a link to view the original French law.311 ‘Free movement of capital: Commission scrutinises French law establishing authorisation procedure for foreign investments in certain sectors’, published 4/4/2006. For a discussion of the principles and regulations involved, 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).312 See discussion, infra at --.313 A recent decree, Royal Decree 664/1999, modifies existing rules by deregulating practically all FDI transactions and eliminating ‘prior verification’ and aligns Spanish FDI law with the Treaty on European Union. Gomez-Acerbo, Spain: Corporate Acquisitions And Mergers In Spain; mondaq.com; 19 Feb 2008. As is consistent with other EU nations (see Germany, France above), Spain does have sectors protected from FDI. Id.314 Sarkozy calls for state-owned bank Caisse des Depots et Consignations (CDC) to protect local industry. See Sarkozy says strategic fund to start in coming weeks, REUTERS.UK, October 30, 2008.315 ‘Sarkozy to use CDC to defend French cos against 'aggressive' speculators’; Forbes; 01/2008.316 In France, protected sectors included ‘gambling activities (e.g., casinos); private security services; research, development or production of chemical or biological antidotes; activities concerning equipment for intercepting communications or eavesdropping; services for evaluation of security of computer systems; dual-use (civil and military) technologies; cryptology; activities of firms that are repositories of defense secrets; research, production or trade in arms, munitions, explosives or other military equipment; or any other industry supplying the defense ministry any of the goods or services described above. Finance Investment Climate 2007’, section: ‘Openness to Foreign Investment’. The protected sectors in other states may be much more focused. In Spain, for example, protected sectors include gambling, radio, air transportation, banks and credit institutions (authorization is required from the Spanish Central Bank to acquire participation exceeding 15%). For an explanation on protected sectors, corporate acquisitions and mergers, see Fernando De Las Cuevas, Spain: Corporate Acquisitions And Mergers In Spain, MONDAQ®, February 19, 2008.317 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, 2008.318 As reported by the Asian press, “France’s plan to create a sovereign wealth fund is a part of the country’s efforts to guarantee its economic security in the current world financial crisis. The fund, announced by French President Nicolas Sarkozy last week, is designed to protect the strategically important French enterprises threatened by the global credit crunch and prevent those companies from foreign takeover, the latest manifestation of economic patriotism of the country.” France’s Sovereign Wealth Fund to Boost Economic Security, Thaiindian News, Oct. 28, 2008.319 See, e.g., See Larry Catá Backer, State Subsidies and the Character of the Market Transactions of Sovereigns: The Case of EADS, Law at the End of the Day, May 29, 2008; Larry Catá Backer, Brazil Builds a Sovereign Wealth Fund and Norway Flexes Its Muscles: Private Participation in the Market or Regulation by Other Means, Law at the End of the Day, May 24, 2008; Larry Catá Backer, Extraterritoriality and Corporate Social Responsibility: Governing Corporations, Governing Developing States, Law at the End of the Day, March 27, 2008.320 Thus, it was reported that

Joaquin Almunia, the EU's economic commissioner, said Brussels would soon submit proposals to EU governments and Euro-MPs, a use of wording that hints at a legally binding directive. Germany has led the campaign to clamp down on state-funds wielding $3 trillion, afraid that "giant locusts" may buy stakes in strategic industries to gain technology secrets. German Chancellor Angela Merkel stopped Russia's Mischkonzerns Sistema from taking a bite of Deutsche Telekom last year, and put her foot down when Russia's VTB bank began nibbling at EADS, the Airbus and defence group. Berlin is now drafting a law enabling it to vet non-EU takeovers, and to create a superfund to defend German crown jewels. Both Austria and Hungary have erected barriers.

EC to Rule on Sovereign Wealth Funds, Telegraph, Nov. 29, 2007.321 Art. 56 EC.322 Art. 87 EC.323 (see Larry Catá Backer,The End of Golden Shares in the EU: The EU Commission Takes a Step in its Abolition, It Ought to Harmonize the Rules of Sovereign Investments Instead Law at the End of the Day, March 9, 2008.324 This was the case, for example, in Case C-503/99, Comm’n v. Belgium, 2002 E.C.R. I-4809, paras. 46-47, where it was noted that the “Court has also held that the requirements of public security, as a derogation from the fundamental principle of free movement of capital, must be interpreted strictly.”325 (Art. 87(1) EC)326 (e.g., Case 323/82, Intermills SA v. Commission [1984]ECR 3809). In Case T-198/01 Technische Glaswerke Ilmenau GmbH v. Commission [2004] ECR II-2717 the Court explained that

“In order to determine whether the reduction of some of the applicant’s debts to the BvS constitutes State aid, it is appropriate, in the present case, to apply the test of a private creditor in a market economy, which was referred to in the contested decision and which, moreover, was not challenged by the applicant. . . . By granting the price reduction, the BvS did not 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”

Id., at ¶¶ 98-99.327 In an early case, the Court explained:

“19 The Commission showed itself to be aware of the implications of the principle of equal treatment as between public and private undertakings in its communication to the Member States of 17 September 1984 on public authorities' holdings in company capital (published in the Bulletin of the European Communities, September 1984). In that statement it correctly observes that its action may neither penalize nor favour public authorities which provide companies with equity capital.

Case C-303/88 Italy v. Commission [1991] ECR I-1433 at ¶19, available at .328 Id., at ¶ 20 (If so, such investments “cannot be regarded as State aid. In the present case it must therefore be determined whether, in similar circumstances, a private industrial group might also have made up the operating losses of the four subsidiaries between 1983 and 1987.”). However, the “dividing line between general measures of economic policy and state aids may . . . be a fine one.” PAUL CRAIG AND GRÁINNE DE BÚRCA, EU LAW: TEXT, CASES AND MATERIALS 1088 (Oxford: Oxford University Press, 4th ed., 2008)329 See Application of Articles 92 and 93 of the EEC Treaties to Public Authorities’’ Holdings, Bulletin EC 91984 (1984). The Commission noted, for example, four situations

“in which public authorities may have occasion to acquire a holding in the capital of companies: (a) the setting up of a company,(b) partial or total transfer of ownership from the private to the public sector, (c) in an existing public enterprise, injection of fresh capital or conversion of endowment funds into capital,(d) in an existing private sector company, participation in an increase in share capital.”

Id. At ¶ 2330 See A Common European Approach to Sovereign Wealth Funds, supra.331 “[W]hen injections of capital by a public investor disregard any prospect of profitability, even in the long term, such provision of capital must be regarded as aid within the meaning of Article [87] of the Treaty, and its compatibility with the common market must be assessed on the basis solely of the criteria laid down in that provision.” (Italy v. Commission, supra, at ¶ 22.).332 See Larry Catá Backer, Brazil Builds a Sovereign Wealth Fund and Norway Flexes Its Muscles: Private Participation in the Market or Regulation by Other Means, Law at the End of the Day, March 24, 2008.333 See Larry Catá Backer, Missing the Point of the Ports Problem—Getting Foreign Governments Out of U.S. Security Related Business, Law at the End of the Day, March 26, 2006.334 EC to Rule on Sovereign Wealth Funds, Telegraph, supra.335 Id.336 By February, it was reported that "The European Commission will consider a code of conduct asking sovereign wealth funds run by countries to stress commercial goals rather than strategic considerations when making investments, an EU official said." EU To Consider Sovereign Wealth Voluntary Code, Reuters, Feb, 23, 2008.337 Id. "Mr. McCreey added that the EU had no plans to limit investment by such funds, only that all business 'should follow some common principles on transparency and governance.'" Id.338 Commission of the European Communities, Communication From the Commission to the European Parliament, the Council, the European Economic and Social Committee, and the Committee of the Regions, A Common European Approach to Sovereign Wealth Funds, Brussels, xxx COM(2008) 115 provisional, at 9. On proportionality as a general concept of E,U. law, see, e.g., TAKIS TRIDIMAS, THE GENERAL PRINCIPLES OF E.U. LAW (2nd ed., Oxford: Oxford University Press, 2007).339 Commission of the European Communities, Communication From the Commission to the European Parliament, the Council, the European Economic and Social Committee, and the Committee of the Regions, A Common European Approach to Sovereign Wealth Funds, Brussels, xxx COM(2008) 115 provisional, at 10.340 Id., at 10 (Text box).341 See also OECD, Chair's summary of the OECD Council at Ministerial Level, Paris, 4-5 June 2008 - Outreach, Reform and the Economics of Climate Change, June 5, 2008.342 See, Larry Catá Backer, Economic Globalization and the Rise of Efficient Systems of Global Private Law Making: Wal-Mart as Global Legislator, 39(4) UNIVERSITY OF CONNECTICUT LAW REVIEW 1739 (2007).343 United Stated Government Accountability Office, Sovereign Wealth Funds: Laws Limiting Foreign Investment Affect Certain U.S. Assets and Agencies Have Various Enforcement Processes, Report to the Committee on Banking, Housing and Urban Affairs, U.S. Senate, GAO-09-608, May 2009 ( Id., at 8-9).344 Id., at 9.345 See, Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu Dhabi (March 20, 2008) available (“The United States, Abu Dhabi, and Singapore, being a group of nations with SWFs and a country receiving investments from SWFs, have a common interest in an open and stable international financial system. We support the processes underway in the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) to develop voluntary best practices for SWFs and inward investment regimes for government-controlled investment in recipient countries, respectively.” Id.)346 Id.347 Id.348 I provide a more detailed analysis of the Santiago Principles elsewhere. See, Larry Catá Backer, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment, 41(2) GEORGETOWN JOURNAL OF INTERNATIONAL LAW – (forthcoming 2009).349 See, e.g., Robert M. Kimmett, Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy, 87(1) FOREIGN AFFAIRS 119, 126-128 (2008). For a sense from the popular press, see, The Invasion of the Sovereign Wealth Funds, THE ECONOMIST, Jan. 19. 2008.350 For a discussion in the popular press, see Warren Buffet, Chairman’s Letter, Berkshire Hathaway Annual Report 2007, Stephen Schwartzman, Reject Sovereign Wealth Funds at Your Peril, FINANCIAL TIMES, June 19, 2008.351 See, Edwin M. Truman, A Blueprint for Sovereign Wealth Funds Best Practices, Peterson Institute Policy Brief, PB08-3, April 2008 .352 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).353 Steven R. Weisman, Overseas Funds Resist Calls for a Code of Conduct, New York Times, Feb. 9, 2008.354 It was commonly understood that

“These funds do not think of themselves as political, and so far they haven’t been,” said an I.M.F. official involved in the drafting of a code who would not speak on the record about internal discussions. “What we’re hearing from them is, ‘What are you so upset about?’ But the concerns are there, and they need to be taken care of in a code of best practices. . . . ”

Id.355 International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices (“Santiago Principles”) 1, October 2008, can be found online at: http://www.iwgswf.org/pubs/eng/santiagoprinciples.pdf, (last visited on February 18, 2009).356 Id.357 "Lou Jiwei, head of China’s $200 billion fund, said at a talk at the World Bank that the I.M.F.’s effort had run into disagreement over the meaning of transparency and political motivation." Id.358 Id. at 4. The GAPP are grounded in four “guiding objectives for SWFs.” These include the maintenance of financial stability and free capital flows, compliance with applicable laws of host countries, and an idealized private investor strategy for investments, focused on investment “on the basis of economic and financial risk and return-related consideration.” Id. Lastly, adhering SWFs ought to have in place systems of transparency and a “sound governance structure that provides for adequate operational controls, risk management, and accountability.” Id.359 Id.360 Id.361 Santiago Principles at 4.362 Id.363 Santiago Principles, supra, note 27, at 5.364 “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.” Larry Catá Backer, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment, 41(2) GEORGETOWN JOURNAL OF INTERNATIONAL LAW – (forthcoming 2009), manuscript at 33.365 OECD Countries Commit to Open Climate for Sovereign Wealth Funds, June 5, 2008.366 Organization for Economic Cooperation and Development, Investment Committee, Report on Sovereign Wealth Funds (SWFs) and Recipient Country Policies, April 4, 2008, at 5, available http://www.oecd.org/dataoecd/34/9/40408735.pdf (Investment policy guidance from the freedom of investment project). The project was undertaken at the behest of the G7 Finance ministers “to develop guidance for recipient countries‟ policies toward investments from SWFs.” Id., at 2.367 “The OECD also supports the work underway at the IMF on best practices for sovereign wealth funds, calls attention to OECD‟s voluntary standards on corporate governance and good business conduct, and notes their relevance to work under way at the IMF.” Id., at 6.368 Id.369 “The OECD‟s existing investment instruments already contain fundamental principles for recipient country policies needed for the required guidance. Through their adherence to the OECD investment instruments, OECD and other adhering governments have committed to the principles of transparency, non-discrimination and liberalisation.” Id., at 3.370 Id., at 3.371 “However, OECD members have agreed that the national security clause of the OECD investment instruments should be applied with restraint and should not be a general escape clause from their commitments to open investment policies.” Id., at 3.372 Id.373 Id., at 5 (Box 2. Investment policy guidance from the freedom of investment project ). Transparency, in turn, would be grounded in principles of codification (“Primary and subordinate laws should be codified and made available to the public in a convenient form”), prior notification, consultation (“Governments should seek the views of interested parties when they are considering changing investment policies), procedural fairness (“Strict time limits should be applied to review procedures for foreign investments. Commercially-sensitive information provided by the investor should be protected”), and disclosure. Id. Regulatory proportionality, in turn, is grounded in a set of subsidiary principles, including the right of a host state to determine its security concerns, (“This determination should be made using risk assessment techniques that are rigorous and that reflect the country’s circumstances, institutions and resources. The relationship between investment restrictions and the national security risks identified should be clear”), narrow focus (“Investment restrictions should be narrowly focused on concerns related to national security”), appropriate expertise (“Security-related investment measures should be designed so that they benefit from adequate national security expertise as well as expertise necessary to weigh the implications of actions with respect to the benefits of open investment policies and the impact of restrictions”), tailored responses (“If used at all, restrictive investment measures should be tailored to the specific risks posed by specific investment proposals”), and last resort (“Restrictive investment measures should be used, if at all, as a last resort when other policies”). Id.374 See Organisation for Economic Co-operation and Development, OECD Guidelines on Corporate Governance of State-Owned Enterprises, (2005).375 OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES (2005), Preamble at 10.376 “The state should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness.” OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES 13 (2005).377 Thus, for example, the Guidelines suggest that the “boards of state owned enterprises should have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance and monitoring of management.” Id., at 17.378 Id., at II (The State Acting as Owner), at 13 (including separation fo ownership and control, protecting the independence of the board of directors, not mixing regulatory and participatory powers in administering SOEs and the like).379 Id., at 23 (Annotations Chapter 2.A.).380 OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES 13 (2005), . See also, Id. at 12. (“There should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for state owned enterprises, particularly with regard to market regulation.”).381 OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES 12 (2005), .

The state often plays a dual role of market regulator and owner of SOEs with commercial operations, particularly in the newly deregulated and often partially privatised network industries. Whenever this is the case, the state is at the same time a major market player and an arbitrator. Full administrative separation of responsibilities for ownership and market regulation is therefore a fundamental prerequisite for creating a level playing field for SOEs and private companies and for avoiding distortion of competition.

Id., Annotations to Chapter 1.A, at 18.382 OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES 12 (2005), .383 Id.384 “These Guidelines should be viewed as a complement to the OECD Principles of Corporate Governance on which they are based and with which they are fully compatible. The Guidelines are explicitly oriented to issues that are specific to corporate governance of State-Owned Enterprises and consequently take the perspective of the state as an owner, focusing on policies that would ensure good corporate governance.” Id., Preamble, at 9-10.385 OECD GUIDELINES ON CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES 16 (2005).386 Id.387 Likewise it alerts host governments to the character of an SOE. Id., at --.388 One commentator put it well: the “problem with the best practices model is that a gap may arise between the stated practices of a fund and its actual practices, and it may be difficult to anticipate such departures from best practices before they occur. It is not difficult to imagine, for example, that managers of China's or Russia's state-owned funds could find themselves subject to unofficial political pressure.” Victor Fleischer, A Theory of Taxing Sovereign Wealth, 84 N.Y.U. L. REV. 440, 478 (2009) (citing Ronald J. Gilson & Curtis J. Milhaupt, Sovereign Wealth Funds and Corporate Governance: A Minimalist Response to the New Mercantilism, 60 STAN. L. REV. 1345, 1362 (2008) ("Could anyone genuinely believe that the investment managers of China Investment Corporation or Singapore's Temasek would hang up the phone if a senior government (or in China's case, Party) official called to offer advice on the fund's handling of a particular investment to advance the country's, rather than the portfolio company's, interests?")).