Risk & Compliance

Keep a Close Eye on Sovereign Funds: Cox

But the SEC and Treasury's Paulson both warn against over-regulating the foreign investment groups.
Alan RappeportFebruary 14, 2008

Sovereign wealth funds should not be over-regulated, Securities and Exchange Commission Chairman Christopher Cox warned Thursday. But the investment groups controlled by foreign governments — hot targets this week, as Senate members seek to place blame for a faltering U.S. economy — certainly demand U.S. attention.

“The U.S. continues to welcome with open arms any investment from abroad,” Cox said at a hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. “Because these are fundamentally government arms, they raise questions.”

The recent controversy over sovereign wealth funds has reflected the large stakes many have taken in American banks that have suffered fallout from the subprime mortgage crisis. The funds from the Middle East, Asia, and elsewhere, are estimated to hold some $2.5 trillion in assets, according to the SEC. And that amount could skyrocket to $12 trillion during the next eight years.

Speaking at a Joint Economic Committee hearing on Wednesday Sen. Charles Schumer, the New York Democrat, said that he was considering drafting legislation to increase transparency of Sovereign wealth funds.

“Sovereign wealth funds need to assuage concerns that they will manage their investments in terms of political or economic power objectives,” Schumer said. “The alternative I fear is restrictions on sovereign wealth fund investments in the United States.”

Although Cox agreed that the funds “warrant attention” he also attempted to ease concerns by recalling that sovereign wealth fFunds have been around for “half a century,” and noting that despite their growing influence they still comprise just 1.2 percent of assets invested globally.

U.S. Treasury Secretary Henry Paulson also cautioned against over-regulating sovereign wealth funds, noting that he met recently with 30 such funds, and that all expressed that they are driven by “economic intent.” Despite such assurances, Paulson acknowledged that America’s regulatory structures have not “evolved with the markets.”