Research On Legal Issues Of Sovereign Wealth Funds

This paper aims to contribute to the debate on the law and regulatory issues raised by the recent gain in prominence of the so-called "Sovereign Wealth Funds" (SWFs), by first trying to better identify the actual legal and economic nature of such "special purpose" government investment vehicles. Sovereign Wealth Funds are government owned investment funds typically funded by foreign currency reserves, which are managed separately from official currency reserves. The origin can be from commodity sales or non-commodity factors. They have become controversial in large part due to their sudden growth. SWFs are generally deemed to bring significant benefits to global capital markets. Nevertheless, significant concerns have been expressed due to SWFs limited disclosure and transparency, their multiple investment objectives and notably as-being sovereign entities’instruments-SWFs may take investment decisions driven by political and/or strategic objectives and considerations or in a fashion entailing national security concerns. Although the debate on SWFs has mostly revolved around such issues, this paper aims at also pointing out that SWFs sharp growth is one of the by-products of the large and persistent global imbalances in trade (which may threat global financial and economic stability) and that the increasing transfer of "excess reserves" from monetary authorities to SWFs is expected to result in significant rebalancing of capital flows in global financial markets.SWFs pose a complex challenge for policy makers. On one hand, SWFs are long-term investment vehicles looking beyond quarterly results and therefore serve as stable funding sources during financial turbulence. On the other hand, however, there are operational concerns stemming from government control (i.e., lack of transparency and possible non-commercial investment goals). The focus of this discussion is on the problem of asymmetric information. Asymmetric information occurs when one party has better information than the counterparty. SWFs are not in the same position as typical private parties in business relationships, which might have superior information, so it is difficult to attain a clear picture of SWFs investment activity. A lack of SWFs transparency can also obscure governance and risk-management problems within SWFs. Many are also concerned that countries will use SWFs to support what one analyst has called "state capitalism," using government-controlled assets to secure stakes around the world in strategic areas such as telecommunications, energy and mineral resources, and financial services, among other sectors.In response to these concerns, many analysts and policy makers are evaluating the operations of existing SWFs and are looking to the international financial institutions such as the International Monetary Fund, World Bank, and the Organization for Economic Cooperation and Development to establish guidelines for SWF operations. IMF’s calling for adjustment of member countries’ financial regulatory emphasizes, the enhancement of regulation about merger and acquisition or national security of or for foreign investments, the making of the General Acknowledge of Principles and Practices, i.e., Santiago Principles, as well as the release of host countries’ model policy by OECD, et al. Meanwhile, the academician have learned around and done research on the structural implication on the global financial market, the social responsibility of SWFs, multilateral regulatory measures and the improvement of company governance.However, the response of international society to SWFs has an certain explicate defect, i.e., lack of Law enforcement and execution, The Santiago Principles known as "soft law" do not address the latter problem of cooperation between supervising authorities and foreign States. They only recognize that the national rules of the recipient State are applicable to the activities of the SWF and that the SWF should disclose any financial or non-financial information as required under the applicable regulations in the host State and that the SWF should cooperate in investigations. It is desirable that countries with SWFs explicitly endorse cooperation between investigating authorities of the recipient State and the authorities of the country of the SWF. So it consequently leading to that the potential threats of the funds have been exaggerated, as well as both the responsibility of host countries and the home countries’interests neglected. Hence, there has been discriminatory treatment to SWFs’investments. But the burst-out of current financial crisis has made the role and impact of SWFs re-evaluated. The funds’ more-than-hundreds-billions-loss has indicated that the home countries, rather than the host countries, should and have to assume the main duty to establish an effective regulatory system to SWFs to reach their commercial purposes, while the loss also has showed that the concerns of host countries failed in proof. The author argues that the funds’emergence is originated from the unbalance of global economy and the inner flaw of international monetary system, which is incorporated to reduce the cost of holding excessive foreign reserves as an adaptive adjustment, while it is very fairly likely that the funds’investments will make the reserve more exposure in global market due to shortage of experience and expertise. Therefore, the effective regulation needs the coordination between both sides and the main responsibility of home countries due to the asymmetrical interest distribution. The politicization of SWFs is the primary, if not only, obstacle of the realization of effective regulation on the funds. As a result of that, SWFs have not been treated as the typical market investor for their possible non-commercial motives as most scholars and regulators of host countries held. Therefore, the author proposes that it is the key to depoliticize SWFs to have an effective regulation, suggesting that the emphasis of regulation should be transformed from identity (who is it) to action (what it has done), while the funds should be taken off the political interference to be neutral investors.The thesis consists of eight parts, including introduction, six chapters and a final conclusion. The introduction analyses the complex and overlooked origin of SWF as "the government-owned investment vehicle or capital pool initially sourced from foreign reserve, to have reward more than risk-free return", and sets forth that the regulation should be depoliticized. ChapterⅡamplifies the disputes of SWFs which is imperative for home countries to centralize and legalize aims of incorporation and operation, to establish accompanying the framework of performance evaluation, to standardize and institutionalize the roles of ownership played by home countries governments, and to improve the corporation governance of SWFs. The next two chapters discuss national regulation to SWFs, i.e., regulation from both the home and the host. In Chapter III, the governments of the home play the role of regulator on capital export. And Chapter IV exposit there special issues from the perspective of the host, i.e., the law and regulatory policy of SWFs, the application of national security review mechanism as well as the key infrastructure protection system. Chapter V elaborates international regulation on SWFs, suggesting that there is no necessity to have a special regulator or to prescribe special acts to regulate the funds but to integrate them to existent international investment legal system. Chapter VI examines two principal issues concerning foreign State-controlled investors:whether the doctrine of foreign state immunity may make it difficult for private parties to pursue legitimate claims against them and whether that doctrine creates regulatory enforcement gaps for host countries. Although the restrictive approach to immunity is now widely recognized, important issues, such as whether the financial investment activities of a sovereign wealth fund are commercial or sovereign acts, remain uncertain. In the area of regulation, the paper analyses state policies in the area of jurisdiction, tax and competition law, and notes key factors that may influence immunity in such cases.The thesis mainly brings about four innovations are\as follows on the topical issue. First, it reflects on and relocates the emergence and the role of SWFs on a comprehensive basis. Since the researches and regulation is grounded on the host countries’ angle currently and neglect the concern and interest of the home countries, the author argues that the funds should be oriented from the perspective of the home and globalization. Second, Home countries of SWFs should erect effective and transparent firewalls between their role as shareholders and their role as watchdogs of state-owned capital-exporting. The Santiago Principles can be utilized as a benchmark for that purpose. Third, Host countries should abandon all biased laws and regulations regarding SWFs and treat them as private institutional investors. Fourth, there should be an effect to clarify and redefine international investment regimes, which should include governmental investments. Under that broad definition, issues and concerns on the part of the home countries and host countries, then should addressed at bilateral multilateral or global investment forums. Consequently, there will be no need to create national/international regulatory agencies or to formulate biased regulations after the depoliticization of SWFs to reach their commercial purposes while the implication.