Incipient activism of Sovereign Wealth Funds and the need to update United States securities laws

Abstract

Sovereign Wealth Funds (SWFs) lie at the cutting edge of a tectonic transformation in global business and international law embodying the sweeping changes in the global order. Illustrating the new financial and legal paradigm, SWFs demonstrate the blurring of lines between public actor states and private market actors. Ostensibly entrusted with the advancement of the public good of their respective citizenry, SWFs traditionally invested their vast pools of capital in apolitical, non-controversial, conservative government debt. Starting around 2006–2007, SWFs initiated an aggressive campaign of diversification and commenced allocating their immense investment capital into equity markets, real estate, energy projects, farming and private equity. This significant change led to SWF investment becoming inextricably linked to strategic industries in recipient nations. Simultaneously, apprehension developed in capital recipient nations with respect to potential non-financial motivation of SWF investment and the interrelated national security implications. In response, SWFs emphasized that they were not interested in exercising control over companies or countries, voluntarily limited their stakes, and expressed intent to embrace a passive shareholder approach. Since plowing into various investment markets, SWFs have generally acted cautiously and refrained from activist conduct which substantially obviated concerns over undue foreign control in host states. However, SWFs have recently undertaken a more activist investment approach comparable to other large investors. While the SWF activism is profits-centric, the behavioral shift reintroduces anxieties with respect to foreign government influence over political decision-making in host nations as well as undue dominance over strategic industry and infrastructure. Moreover, given their titanic financial strength, even profits based investment raises concerns over SWF dominance and influence over financial markets, portfolio companies and economic sectors. In the United States, securities laws mandate disclosure and regulatory approval for certain transactions. Such laws afford regulators an opportunity to review investment activity and provide an alert to ascertain whether the investor is in compliance with rules and regulations. In light of the budding activism, it is timely to examine whether securities laws need to be updated. What are the ramifications of SWFs working with other SWFs with respect to acting in concert and group action? Are SWF investors sufficiently different as to justify heightened regulation? This article will examine current US regulatory policy, identify potential shortcomings in light of the developing investment climate, and concludes with suggested reforms.