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: Jim Hamilton's World of Securities Regulation

By James Hamilton

European Commission Supports Code of Conduct for Sovereign Wealth Funds

The European Commission has set forth core principles for sovereign wealth funds focusing on the twin pillars of governance and transparency. For now, the Commission is content to allow the IMF to develop a code of conduct for sovereign wealth funds and the OECD to develop best practices, presumably on a comply or explain basis. According to Commissioner for the Internal Market Charlie McCreevy, the Commission is saying that there is no need to alter the current legal system in regard to inward investment into the EU, but also that it is not unreasonable that investors closely linked with national authorities or governments should follow some common principles on transparency and governance.

In the EC?s view, transparency promotes accountability by providing a disciplinary effect on the management of sovereign assets, as relevant stakeholders can exercise some degree of oversight on the activities of investors and monitor whether funds deviate from their stated objectives. Transparency also fosters market discipline and reduces the incentives for any government intervention. It is therefore a critical factor in offering the confidence that underlies an open investment environment.

The Commission said that transparency practices in a code of conduct should include the annual disclosure of the fund?s investment position and asset allocation, the disclosure of the use of leverage and the currency composition, as well as the disclosure of the home country regulation and oversight governing the sovereign wealth fund.

Sound governance must also be part of any code of conduct for sovereign wealth funds. According to the Commission, sound governance includes the disclosure of the general principles of internal governance and the issuance of risk management policies. Sovereign wealth funds should also disclose the principles governing their relationship with governmental authority. Another aspect of sound governance is the issuance of an investment policy defining the overall objectives of funbd investments.

The issues raised by the growth of sovereign wealth funds are also under consideration in the US. For example, the President's Working Group on Financial Markets, of which the SEC is a member has formed a working group on sovereign wealth funds. Congress is also showing interest in the issue. Senator Evan Bayh (D-IN) said that Congress should require passive investment by foreign government-operated sovereign wealth funds in testimony before the U.S.-China Economic and Security Review Commission. In addition, a task force has been formed by the House to study sovereign wealth funds.

At a hearing held by the Joint Economic Committee which he chairs, Senator Charles Schumer urged sovereign wealth funds to voluntarily provide information and agree to guidelines that promote good governance, accountability, and transparency. The senator would like to see the funds disclose their investment goals and all their portfolio holdings.

Stuart Eisenstat, former US Ambassador to the EU, testified that the underlying concern is that these funds are not transparent, and consequently policymakers cannot be sure what drives their investments and divestments. It is possible that real transparency would ease the acceptance of sovereign wealth funds as host states came to understand their investment strategies and management structures. He said that adopting some measures of transparency and other robust regulation for themselves is the best way to avoid heavy-handed regulation.

Full post as published by Jim Hamilton's World of Securities Regulation on March 03, 2008 (boomark / email).