Sovereign wealth funds (SWFs) have been an important source of new capital for the financial services industry during the current financial crisis. However, there has been some suspicions and criticisms expressed about SWF investments in major financial services companies, focusing on the relative lack of transparency of SWF operations, the ambiguous role of foreign governments in SWF investment decisions, and concerns about foreign government control over major financial institutions.
Yesterday, the International Working Group (IWG) of SWFs publicly released a report setting forth a set of 24 generally accepted principles and practices (GAPP) for SWFs that were developed at the IWG’s recent meeting in Santiago, Chile (the principles are also referred to the “Santiago Principles”). At the press briefing, Hamad al Hurr al Suwaidi, Undersecretary of the Abu Dhabi Investment Authority and co-chair of the IWG, stated that the 24 principles are intended to reflect four overarching goals for SWFs: “First, to comply with all the applicable regulatory and disclosure requirements in the countries in which they invest; second, to invest on the basis of economic and financial risk and return-related considerations; third, to have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability; and, fourth, to contribute to maintaining a stable global financial system and free flow of capital and investment.” The stated purpose of the Santiago Principles is “to identify a framework of generally accepted principles and practices that properly reflect appropriate governance and accountability arrangements as well as the conduct of investment practices by SWFs on a prudent and sound basis.” The GAPP consists of 24 principles and associated explanation and commentary illustrating how each principle might be applied by different types of SWFs organized in three major sections:
- Five principles addressing the legal framework and objectives for the SWF and coordination with macroeconomic policies
- Eleven principles addressing the institutional framework and governance structure of the SWF (including issues of ethical behavior, accountability and transparency)
- Seven principles addressing the investment and risk management framework for the SWF (covering such matters as investment policies, risk exposure, and refraining of use of privileged government information).