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— Analysis —
To address these concerns, the International Monetary Fund's International Working Group of Sovereign Wealth Funds, or IWG, last October published its Generally Accepted Principles and Practices for Sovereign Wealth Funds. IWG's co-chairs are Jaime Caruana, director of IMF's monetary and capital markets department, and Hamad al Suwaidi, undersecretary of Finance of Abu Dhabi and a director of the Abu Dhabi Investment Authority.
Known as the Santiago Principles or GAPP, they establish voluntary practices and principles for SWF governance and transparency that are designed to demystify SWFs while ensuring that they invest on the basis of economic and financial, rather than political, considerations. The IWG launched on May 1 with a mandate to draft generally accepted principles and practices for SWFs and comprises representatives of the 26 member countries of the IMF with SWFs. Given the divergent structure and purpose of the various SWFs and the varying interests of their member countries, which included several Gulf states, China, Norway, Russia, Singapore and the United States, this was no easy task. The Santiago Principles consist of 24 principles and practices in three main areas: legal framework, objectives and coordination with macroeconomic policies; institutional framework and governance structure; and investment and risk management framework. In each, the objective is to promote accountability, transparency and independence, and reduce the risk of political influences on investment decisions of SWFs. GAPP principles most prominently focused on these aims include: GAPP 6, 7, 8 and 9, which are intended to draw a clear line between SWF owners and fund managers and to establish principles for SWF governance. They require an effective division of roles to facilitate operational independence of SWF management in implementing strategy. In addition, the SWF owner must set the objectives of the fund and appoint members of its governing bodies in accordance with clearly defined procedures. Those governing bodies must operate in the best interests of the SWF and have clear authority to carry out their functions. GAPP 16, 17, 18, 19 and 21, each of which is directed in part to ensuring transparency by requiring public disclosure of:
GAPP 15, 18, 19 and 20, which all establish behavior norms for SWFs designed to limit political influences on, and the use of political influence in, making SWF investments. This includes requirements that operations in host countries be conducted in compliance with local laws (including local disclosure requirements) and that investment policies be consistent with defined objectives and based on sound portfolio management principles. An SWF should also not take advantage of privileged information or inappropriate influence by the broader government in competing with private entities. The GAPP principles are voluntary, but, the report said, "members of the IWG support and either have implemented or aspire to implement" the principles. Although the SWFs and many observers argue that they have always been economic and not political actors, the Santiago Principles, if widely adopted, should go a long way toward allaying residual fears about the political motivations of sovereign wealth funds. Andrew L. Sommer is a partner and Liam F. Timoney is an associate in the New York office of Debevoise & Plimpton LLP. A version of this article originally appeared in the fall 2008 issue of the Debevoise & Plimpton Private Equity Report. |
Policymakers' frantic search for capital to prop up ailing financial institutions has led to a more welcoming environment for sovereign wealth funds in Washington and the capitals of Europe. Beneath this uneasy embrace, however, concern lingers over sovereign wealth funds' lack of transparency and the possible use of their investment clout to further the geopolitical ambitions of their sponsor countries.
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