New guidelines set to reduce hostility against SWFs

Hostility against sovereign wealth funds (SWF) is expected to be significantly reduced thanks to the creation of a common set of voluntary principles and practices for SWFs.

Under the Santiago Principles, presented by the International Work of Sovereign Wealth Funds (IWG) on Sunday to the International Monetary Funds's policy guiding International Monetary and Financial committee, SWFs will be required to disclose the funds' source and purpose to the public.

Other things that need public disclosure include SWF's legal basis and structure, as well as the legal relationship between the SWF and other state bodies.

There should also be clear and publicly disclosed policies, rules, procedures or arrangements in relation to the SWF's general approach to funding, withdrawal and spending operations on behalf of the government.

In addition, SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate.

If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.

Until recently, SWFs have been under fire for the lack of transparency with the exception of the Norwegian and Canadian SWFs, and, recently, Kuwaiti SWFs.

In general, SWFs do not disclose their asset and investment decisions. In a recent UN report, it said despite their potentially strong impact on the market, SWFs have little accountability to regulators, shareholders or voters, and there are limited data on their investment strategies, portfolio composition and the average annual returns on assets.

With the establishment of the principles, SWFs are now obliged to go into a greater level of public disclosure.

Also called the Generally Agreed Principles and Practices (Gapp), the 24 principles reflect the overarching objectives for sovereign wealth funds, which are: first, to comply with all the applicable regulatory and disclosure requirements in the countries in which they invest; second, to invest on the basis of economic and financial risk and return-related considerations; third, to have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability; and, fourth, to contribute to maintaining a stable global financial system and free flow of capital and investment.

It is notable that the guidelines have been completed just six months after the IMFC and the G7 asked the IMF and the OECD to prepare a set of best practices for SWFs and principles for recipient countries.

According to Hamad Al Suwaidi, undersecretary at the Abu Dhabi Department of Finance and a director of the Abu Dhabi Investment Authority (Adia), who co-chairs the IWG, all these principles can be thus deduced into two basic points: transparency and trust. "Sovereign wealth funds are making it clear that they are open to being more transparent," he said.

To clearly indicate the SWFs' commitment to broadening the understanding of their objectives, Al Suwaidi highlighted the fact that six of the principles and four of the sub-principles in the Gapp specifically commit sovereign wealth funds to make public disclosures in a variety of different areas.

"I think that hostility was greatly reduced when we started our process, and the more information that came out of our effort, the less hostility, if there were ever hostilities we have seen," he said. Asked if the hostility had vanished because corporations are so desperate for capital due to the financial crisis, Al Suwaidi said: "We are in the middle of uncertain times. We just came out publicly with the Gapp. We should wait and see."

In terms of accountability and transparency, David Murray of the Australia Future Fund and Chair of the IWG's Drafting Group said that there are different models in different sovereign wealth funds.

The accountability issue, he said, should be read to look at the commitment to accountability of audit, of presentation to financial statements of owners, and the transparency issue. Murray, however, stressed that there are "limits and a commercial reality" to sovereign wealth funds protecting the confidentiality of transactions they enter into with counterparties in the market.



AREAS THAT NEED PUBLIC DISCLOSURE

- The key features of the SWF's legal basis and structure, as well as the legal relationship between the SWF and other state bodies

- The policy purpose of the sovereign wealth fund

- Policies, rules, procedures, or arrangements in relation to the SWF's general approach to funding, withdrawal, and spending operations on behalf of the government

- The source of SWF funding should be publicly disclosed 

- The general approach to withdrawals from the SWF and spending on behalf of the government should be publicly disclosed

- SWF operations and activities in host countries (in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate)

- The governance framework and objectives, as well as the manner in which the SWF's management is operationally independent from the owner

- Relevant financial information regarding the SWF so as to contribute to stability in international financial markets and enhance trust in recipient countries 

- A description of the investment policy of the SWF

- If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed

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