The so-called "sovereign wealth funds" : regulatory issues, financial stability, and prudential supervision

This paper aims to contribute to the debate on the regulatory and economic issues raised by the recent gain in prominence of the so-called "Sovereign Wealth Funds" (SWFs), by first trying to better identify the actual legal and economic nature of such "special purpose" government investment vehicles. SWFs are generally deemed to bring significant benefits to global capital markets. Nevertheless, significant concerns have been expressed due to SWFs limited disclosure and transparency, their multiple investment objectives and notably as - being sovereign entities' instruments - SWFs may take investment decisions driven by political and/or strategic objectives and considerations or in a fashion entailing national security concerns. Although the debate on SWFs has mostly revolved around such issues, this paper aims at also pointing out that SWFs sharp growth is one of the by-products of the large and persistent global imbalances in trade (which may threat global financial and economic stability) and that the increasing transfer of "excess reserves" from monetary authorities to SWFs is expected to result in significant rebalancing of capital flows in global financial markets. On the other side, while the risk of a political/strategic bias should not be underestimated, this paper argues that at present a specific regulation of SWFs may not be needed, as their assets actual management is already constrained by SWFs own features and objectives as well as by many regulatory, economic and political factors (e.g. WTO and OECD rules, as well as the acquis communautaire already provide for legal waivers and exception to the free movement of capital and goods whereby "legitimate national interests" are at stake). With specific reference to legal aspects, this paper proposes that a balanced and proportionate regulatory approach to SWFs issues may just require, for the time being, to complement "soft law" instruments - e.g. the so-called "Santiago Principles" or GAPP and the OECD guidelines for SWFs investments (expected to be finalised in 2009) - with a "light" and "indirect" regulatory and supervisory framework for SWFs equity investments consistent, inter alia, with the recommendations endorsed in the European Parliament Resolution of 23 September 2008 on transparency of institutional investors and essentially based on legal principles and provisions already in force in most EU Member States. In particular, reference could be made, primarily, to principles and rules providing for shareholding notification requirements and disclosure of information on voting rights attached to shares, and whereby necessary to those imposing possible limits to shareholdings and/or to the exercise of voting rights by EU companies' shareholders.