Finding the Right Balance for Sovereign Wealth Fund Regulation: Open Investments Vs. National Security

Abstract

Definitions of the term “sovereign wealth fund” (“SWF”) vary, but they all roughly describe “government investment vehicles funded by foreign exchange assets, which manage those assets separately from official reserves.” Most definitions distinguish SWFs from traditional government reserves. Governments typically invest traditional reserves for safety and liquidity while they accept more risk and invest in broader asset classes when investing through their SWFs. In addition, other types of state-controlled investment entities exist and some are generally perceived to pose greater threats than others because these types tend to invest more aggressively. While this paper focuses on many of the concerns and policy responses are applicable to the other types of state investment entities, as well. Sometimes situations involving what are better described as “sovereign businesses” are discussed because they illustrate the lesson regarding SWFs as well.

During 2007 and 2008, likely as a result of the marked rise in SWF investment in Western companies during the beginning of the Credit Crisis, the legal environment regarding SWF investment in the United States changed grossly both at the domestic level and at the international level. The U.S. Congress passed new legislation regarding foreign investment in the United States and the Treasury Department issued new regulations and guidance under it. International organizations issued voluntary guidelines both for SWFs and for countries that receive investments from SWFs. This note discusses the national security concerns that arise as a result of SWF investment in the United States, as well as the importance of the United States promoting an open investment environment. Ultimately, the paper concludes that the new legal environment regarding SWFs balances well the need to protect national security with the need to promote open investment, but nevertheless argues that the United States should consider all measures which are reasonably practical and efficient and do not threaten U.S. national security in an effort to promote an open investment environment. This may include taking measures that do not have great immediate economic impact but do promote the image of the United States as open to foreign investment so that other countries in which Americans may want to invest will hopefully reciprocate. The paper finally offers a couple of possible suggestions that might further improve the balance.

Part II discusses how SWFs are not new institutions but have received increased attention recently for their massive growth and large investments in Western companies. Part III discusses the national security concerns that have arisen in response to the increased size and levels of investment by SWFs. Part IV argues that the United States needs to balance these concerns against the need for an investment environment open to foreign investment, including investment by SWFs. Part V reviews how the legal regimes governing SWF investment in the United States, both at the international level and at the domestic level, balance well these competing concerns. Finally, in Part VI, this Note discusses how even better balancing may be achievable.