US Pushes Sovereign Funds to Open to Outside Scrutiny

WASHINGTON -- Seeking to head off a political backlash against huge investments in Western companies by Asian and Middle Eastern government-run investment funds, the U.S. is prodding two of the biggest funds to embrace a set of promises that they won't use their wealth for political advantage.

Executives from the world's largest sovereign-wealth fund -- the Abu Dhabi Investment Authority -- and from the Government Investment Corp. of Singapore met Thursday with a U.S. Treasury delegation led by the assistant secretary for international affairs, Clay Lowery. The talks are part of delicate global negotiations to draft rules to oversee the behavior of such funds, without discouraging them from investing in the U.S., Canada and Europe at a time of global financial turmoil.

Abu Dhabi's fund has assets of about $900 billion; Singapore's is estimated to have $300 billion. "The two funds are some of the most mature, well-known and credible sovereign-wealth funds," said Treasury Undersecretary David McCormick in an interview yesterday. "We are actively trying to have many conversations" with different funds.

A representative of the Singapore fund declined to discuss the matter; officials at the Abu Dhabi fund weren't available for comment.

Sovereign-wealth funds are huge pools of government-controlled investment cash. They have an estimated $3 trillion in assets and are growing rapidly. Recently, they have helped rescue U.S. and European financial institutions, including Citigroup Inc., Merrill Lynch & Co. and UBS AG, by purchasing minority stakes.

Those investments have raised concerns in Washington and in European capitals that the funds may be gaining political clout. The European Commission plans to release its views on the subject tomorrow. That's likely to ratchet up pressure on the funds to adopt what amounts to a voluntary code of conduct.

With encouragement from the U.S. and Europe, the International Monetary Fund is aiming to put together by the fall what it calls a voluntary code of "best practices." The code would cover how sovereign-wealth funds are structured, how they invest, and how they disclose information, among other things. The Treasury meeting appeared to be an attempt to push forward that process. "Discussions are obviously useful," says John Lipsky, the IMF's deputy managing director, adding that the fund wasn't involved in the session.

Mr. Lipsky says the IMF wants to help the funds reach consensus on issues such as transparency, governance, disclosure and fund organization. Currently, the funds' practices vary widely. Norway's fund, for example, makes detailed disclosures of purchases; Abu Dhabi's fund, known as ADIA, publishes none. ADIA has a Web site with a single page and no links to financial information.

Survey on Practices

The IMF is putting together a survey on investment practices, which it plans to send to the funds in the next few weeks. The funds then will gather in the spring to compare notes and see if they can agree on common practices. Further negotiations are expected to last until the IMF's annual meeting in October.

"We'll come up with something useful," says Mr. Lipsky. "It's in everyone's interest."

Outside pressure could backfire, Mr. Lipsky says. "If there were a sense that somehow 'best practices' were decided by someone else and dictated [to the funds], that could be extremely counterproductive," he says. "This needs to be cooperative to be meaningful."

Beyond the Mandate

Some of the most politically sensitive issues involving the funds are beyond the IMF's mandate, Mr. Lipsky says. For example, the IMF isn't looking at whether the funds should be limited to minority stakes or passive investments, he says. It also isn't trying to devise a definition of "national security," something that could be used by nations to review investments.

Those issues, he says, are best left to the countries that receive investments. The Organization for Economic Cooperation and Development is also looking at codes for countries that receive investments.

Officials in many national capitals are increasing pressure on the funds to agree to revamp their practices. The efforts come amid rising worries about the political implications of foreign investment. Over the past two years, at least 11 major nations, including the U.S., have passed or debated laws to restrict foreign investment, according to an upcoming report for the Council of Foreign Relations by David Marchick, an investment expert at the Carlyle Group, and Dartmouth College economist Matthew Slaughter. Those 11 nations together have received 40.6% of global foreign direct investment, the report says.

The European Commission's statement on the behavior of sovereign-wealth funds, due to be released tomorrow, will urge the funds to reduce their "opacity" so their investments can be "demystified," according to an individual briefed on the matter.

During a visit yesterday to Oslo, European Commission President José Manuel Barroso sought to distinguish between Norway's fund, which he praised, and those outside the Continent. "We cannot allow non-European funds to be run in an opaque manner or used as an implement of geopolitical strategy," he said.

But the commission will also make clear its commitment to remain open to foreign investment. It will urge that investments be judged on national-security grounds, not on more amorphous ones, according to a European Union official. The commission is aiming to forge a common position among its 27 member nations, which currently hold diverging views on government-fund investments. Germany and France have been skeptical, while Britain has actively sought investment. Some investment rules proposed by France and Germany have run afoul of European Commission rules, according to the report by Messrs. Marchick and Slaughter.

Effort to Persuade

The Treasury meeting in Abu Dhabi was another effort to persuade the funds to change. The Abu Dhabi and Singapore funds are considered significant because of their size, the difference in the sources of their capital -- Abu Dhabi's money comes from oil; Singapore's from export revenue -- and their unwillingness thus far to disclose much about their operations. In a ranking of the openness of 32 sovereign-wealth funds by Ted Truman, who formerly worked at the U.S. Treasury and the Federal Reserve, Abu Dhabi's fund ranked last, and Singapore's ranked third to last. Any agreement by those funds to make their operations more public could have wide influence among other funds.

In a speech yesterday in Key Biscayne, Fla., Mr. Lowery, the Treasury official who attended the Abu Dhabi session, said sovereign-wealth funds that choose to vote their shares when they take noncontrolling stakes in U.S. companies should disclose how they voted. Doing so, he said, may "help mitigate concerns" that the funds are acting in a political fashion rather than a commercial one. It's not clear whether Mr. Lowery made those arguments in the Abu Dhabi meeting.

When contacted about the matter, a representative of Singapore's fund referred a reporter to comments made last month by the fund's deputy chairman, Tony Tan, in Singapore's Straits Times newspaper. Mr. Tan said the fund was ready to make changes, including regularly announcing its rate of return on investments and clarifying the objectives of those investments. But the fund wouldn't disclose all its purchases, he said, because that would put it at a "competitive disadvantage" to hedge funds and private-equity funds.

Abu Dhabi's fund, so far, hasn't opened its books. But it may be encouraged to do so by the example of state-controlled companies in Dubai, a 90-minute drive away. Recent deals by those companies used borrowed money, which obligated them to give bankers and other lenders access to their finances. Abu Dhabi and Dubai are part of the United Arab Emirates.

Several U.S. lawmakers have raised the prospect of legislation if they aren't satisfied with the voluntary IMF code. Mr. Barroso, the European Commission president, has done the same. "We will not propose European legislation, though we reserve the right to do so if we cannot achieve transparency through voluntary means," he said in Oslo.