Sovereign Wealth Funds as Emerging Financial Superpowers: How U.S. Regulators Should Respond

By Slawotsky, Joel | Georgetown Journal of International Law, Summer 2009 | Go to article overview

Sovereign Wealth Funds as Emerging Financial Superpowers: How U.S. Regulators Should Respond


Slawotsky, Joel, Georgetown Journal of International Law


INTRODUCTION

Sovereign wealth funds ("SWFs") are the new masters of the global financial order. Owned by foreign governments (1) and armed with an estimated U.S. $3 trillion in assets, (2) SWF financial power already dwarfs that of hedge funds. (3) SWFs are generally funded by foreign exchange assets and invested internationally. While SWFs have existed for decades, SWFs from oil exporting nations and Asian exporters have accumulated a staggering amount of assets due to high oil prices, globalization, and large global imbalances. (4) Accordingly, the number of SWFs and their available funds are rising rapidly, and their significance in global capital markets is becoming more prominent. (5) Expected growth in the near term is remarkable:

   These [growth] projections indicate that foreign assets under
   management of SWFs could reach U.S. $6-10 trillion by 2013. Other
   commentators also project rapid growth over the next five to ten
   years. For example, Morgan Stanley projects that SWFs' assets could
   exceed official reserves by 2011, and Standard Chartered projects
   SWFs' assets to reach U.S. $13.4 trillion over the next decade. (6)

According to the IMF, there are five basic categories of SWFs. (7) Because each fund is different and has varying goals and objectives, it is difficult to generalize about the investment strategies of SWFs as a class. (8) However, despite these differences, many SWFs present the same critical concern: as essential global players, they are in the unique position to influence and control financial markets. (9) SWFs have engendered intense global concern (10) and vigorous analysis and scrutiny by leading academic institutions. (11) A surge of legal scholarship has resulted due to the "host of questions" raised by the potential effects of SWFs on markets and states. (12)

To date, SWFs have been relatively passive investors. However, this tranquility is almost certain to change. (13) In the coming years, SWFs likely will become more active, and their ownership of flagship international corporations could allow them to influence corporate boards in dramatic ways, radically transforming corporate governance. (14) The fundamental difference between SWFs and other investors is the potential for investment decisions to be based on non-financial factors, due to their status as government-owned entities. (15) Due to the wide-ranging interests of their state backers, SWFs, unlike any other group of activist investors, could impinge upon the sovereign interests of American economic and international policy. (16) Additionally, SWFs may enjoy informational advantages that may not be available to private investors, due to their relationships with their home governments. (17) Such information could place SWFs at a huge advantage, if their home states possess information regarding investigations or lawsuits involving the portfolio company, or its competitors. (18) Consider the potential for abuse if foreign national security bureaus, traditionally thought of as instruments of public international law, were to supply information to SWFs unavailable to private investors. (19)

In the U.S., securities laws and governmental review processes are meant to prevent improper acquisitions of U.S. business interests. The securities laws obligate investors to disclose publicly certain market activities. (20) These reporting requirements are designed to provide fairness and equal access to information, and preclude investors from either taking certain actions alone, (21) or in conjunction with other parties without public disclosure. (22) For example, once a SWF position exceeds 5% of a company's shares, the SWF will be obligated to file, thus alerting the appropriate gatekeepers (23) Of the size of the SWF's interest. The problem with this system is that it developed as a way to regulate private actors. SWFs, however, raise serious new issues. For example, multiple SWFs could severally own less than the percentage trigger, and yet collectively own a large percentage of shares. …

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