sovereign wealth funds

International, USA

As defined by the US Department of the Treasury, sovereign wealth funds (SWFs) are government investment funds (or pools of money) funded by foreign currency reserves but managed separately from official currency reserves which governments use to invest, typically in foreign companies. SWFs have gained prominence in the last five years because of many high profile investments by the SWFs of China, Singapore and the United Arab Emirates (Dubai and Abu Dhabi, in particular). For example, China's SWF has purchased equity holdings in Morgan Stanley and the Blackstone Group, Dubai's SWF has purchased shares of several Asian companies, including Sony, and Singapore's SWF has purchased shares in Global Crossing.

Many concerns have been raised about SWFs, including:

• Lack of transparency: SWFs are not required to disclose their investment strategies or the scope of their holdings. Norway's SWF has agreed to be more open about its activities but other governments have resisted.

• Political motives: Many critics worry that SWFs will use their economic clout for political advantage (for example, changing a company's operations to further the interests of the SWF's government or to undermine the interests of other countries). To combat these criticisms, many SWF investments are structured as non-voting.

The US government, through the Committee on Foreign Investment in the United States (CFIUS), adopted regulations in 2008 to manage proposed SWF investments that may threaten national security.

For more information on proposed regulations of SWFs, see Legal Update, US Treasury Reports on Sovereign Wealth Fund Investment Policies (www.practicallaw.com/3-384-4213).