SWF Radar Guidelines

Adam O. Emmerich of Wachtell Lipton Rosen & Katz has posted a note (based on a client memorandum) on the Harvard Law School Corporate Governance Blog on the IMF’s new GAPP guidelines for SWFs (also known as the “Santiago Principles”).

IMF Survey has published an article on the new GAPP guidelines for sovereign wealth funds.

Edwin Truman of the Petersen Institute writes that, “The GAPP is a solid piece of work that should help to dispel some of the mystery and suspicion surrounding SWFs. The International Monetary Fund deserves substantial praise for facilitating an agreement in the IWG in a remarkably short period of time.”

Emirates Business 24/7 writes that, “The publication of the SWF principles may have been overshadowed by bigger events but long-term they will be an important contribution to the global economy. For a start, they will improve the governance of the funds - particularly those owned by smaller nations who perhaps do not have the rigorous standards and controls of an Abu Dhabi Investment Authority (Adia) or Dubai International Capital (DIC).”

Emirates Business 24/7 writes that, “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.”

GAPP 19 states that investment decisions by SWFs should be based on economic and financial grounds:

GAPP 19. Principle

The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.

And Subprinciple 19.2 states that SWFs should follow standard asset management principles:

GAPP 19.2 Subprinciple The management of an SWF's assets should be consistent with what is generally accepted as sound asset management principles.

Subprinciple 19.1, however, makes it clear that the “based on economic and financial grounds” does not mean “exclusively based on economic and financial grounds”:

GAPP 19.1 Subprinciple 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.

This certainly leaves the door open for some use of non-financial investment criteria – no doubt so as not to rule out the kind of SRI of which Norway’s Government Pension Fund–Global is very keen. But the demand for transparency and the demand that all investments must be based [also] on financial criteria makes it unlikely that an SWF could adhere to GAPP, make a substantial politically-influenced investment (other than for relatively benign social or environmental reasons), and still fail to provoke an outcry.

(Update a couple of minutes after initial post: The full report makes clear that this is indeed targeted at SRI-type investments (page 22 of the report, 29 of the PDF): “Some SWFs may exclude certain investments for various reasons, including legally binding international sanctions and social, ethical, or religious reasons (e.g., Kuwait, New Zealand, and Norway). More broadly, some SWFs may address social, environmental, or other factors in their investment policy. If so, these reasons and factors should be publicly disclosed.”)

Meanwhile, GAPP 20 states that SWFs must keep their distance from their respective governments:

GAPP 20. Principle

The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.

And other protections against the kind of political investing that many lawmakers and commentators fear from SWFs are contained in GAPP 21, which rules out any kind of value-eroding shareholder activism on the part of an SWF:

GAPP 21. Principle

SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value. If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments. The SWF should publicly disclose its general approach to voting securities of listed entities, including the key factors guiding its exercise of ownership rights.

The IMF International Working Group of Sovereign Wealth Funds has released its Generally Accepted Principles and Practices (GAPP).

Here is the list and here is the full report (PDF).

Channel NewsAsia reports that, “A set of guidelines for sovereign wealth funds (SWFs) is expected to be published on Monday after being reviewed by the International Monetary Fund (IMF) this Saturday.”

The Times of India writes that, “Another advantage that might accrue from [the IMF] guidelines [for SWFs] will be that this model will serve as a starting point for a similar deal with another secretive pool of capital - hedge funds.”

The Khaleej Times reports that, “GCC Sovereign Wealth Funds (SWF), which control assets valued more than $1.5 trillion worldwide, have little to fear from the voluntary code of conduct agreement reached last week in Santiago, analysts said. The real target of the move to put in place a set of voluntary practices and principles for SWFs are Chinese and Russian funds and not GCC funds, an analyst at Middle East Eonomic Digest (MEED) said.”