Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance through Private Global Investment
Backer, Larry Cata, Georgetown Journal of International Law
I. INTRODUCTION II. CONCEPTUAL AND REGULATORY FRAMEWORK: PUBLIC ACTORS AND PRIVATE ACTION III. THE NORWAY SOVEREIGN WEALTH FUNDS A. History B. Legal Structure C. Investment Principles IV. THE NORWAY FUNDS IN ACTION: PRIVATE AND PARTICIPATORY OR PUBLIC AND REGULATORY? A. Corporate Social Responsibility and Ethics B. Development and Use in Macroeconomic Policy: the 2008 Financial Crisis V. REGULATORY IMPLICATIONS A. The Role of Investment and the Utility of the Idealized Private Investor Model B. The Importance of Approaches in Conceptualization of Regulatory Options C. Participation Versus Regulation as an Alternative to the Public/Private Model VI. CONCLUSION
For much of the end of the last century, legislatures and courts have been grappling with the problems of state participation in private markets (1) and private market actors participating in governance activities within and between states. (2) These issues have become acute in the first decade of the twenty-first century as a number of forces intersect--an increasing willingness of states to invest their wealth abroad in instruments other than the debt securities of other nations, the rise of transnational normative frameworks for global market and business behavior, the development of a severe economic collapse in the last years of the decade, and an increasing understanding of the public role of private actors, especially in places where state authority is weak.
Among the more visible manifestations of these tectonic changes in the way in which the global order is organized are sovereign wealth funds. (3) Over the last decade they have been transformed from a simple and relatively benign sovereign vehicle for the investment of excess wealth in a discrete way, (4) to an important force in global finance. (5) According to Congressional Research Service, such SWFs currently manage between $1.9 and $2.9 trillion, and they are expected to grow to over $12 trillion by 2015. (6) Similarly, the International Monetary Fund indicates that the expected growth of SWFs' assets will be over $10 trillion in the next 5 to 10 years. (7) And thus an irony, though they are creatures of states, they also tend to challenge state power to order its internal relations, and the legal systems under which these arrangements are maintained.
At the international level there have been public and private efforts to create either voluntary codes of behavior for such funds, including collective efforts backed by states with important sovereign wealth funds. (8) These tend to privilege transparency, disclosure and equivalent treatment with private funds similarly operated. (9) On the other hand, host states have been tending toward a jurisprudential position that significantly narrows the circumstances under which a state ought to be treated like a private entity, at least for purposes of applying the obligations the European Union's treaty framework. (10) The United States, in contrast, has tended to avoid direct regulation. (11) Sovereign wealth funds can fall within a variety of regulatory fields depending, for example, on the object of investment, (12) the form of investment, (13) and the relation to sovereign activity. (14) Essentially, however, sovereign wealth funds in the united States are treated as sovereign for tax purposes, and used to invest in those instruments traditionally used by sovereigns to manage their currencies and reserves. (15) Otherwise, sovereign wealth funds will be treated as private entities for purposes of immunity from suit, investment suitability as a foreigner and obligation to comply with generally applicable law. (16)
At the root of these various approaches is both fear and desire--especially among host states. As Gerard Lyons recently noted, these states have come to understand three crucial implications of sovereign wealth funds--first, that their influence is growing in all financial markets and across all financial products; second, that host and home states will clash over what SWFs can buy and where; and third, that the first two implications are powerful evidence of a great shift in the world economy, one not necessarily to the benefit of Western investment host states, now more dependent on direct foreign investment. …