Sovereign Wealth Funds: Ripe for International Regulation?

Alex Gish, Associate Editor, Michigan Journal of International Law

Sovereign wealth funds (SWFs), government-managed investment vehicles, have been growing rapidly in both numbers and assets in recent years[i] but continue to operate in lightly-regulated terrain.  If the problem is left unchecked, the inherent risks of the SWF model can be exposed. Most SWFs lack transparency and have questionable fiduciary duty controls, causing an investee nation to be exposed to risks of unfair competition, corruption, and non-financially or non-economically motivated investments.[ii] The only international answer to these concerns thus far is the International Monetary Fund’s (IMF) voluntary “best practices” list, better known as the Santiago Principles.  Alas it is not clear they are being followed, even by the nations who signed it.[iii]  To be clear, the record shows that thus far the concerns regarding SWFs are hypothetical.[iv]  But that does not mean we should wait to act until dangers are apparent. This blog post considers the question of whether an international agreement is an appropriate measure to regulate SWFs and concludes that a multilateral treaty would be one way to ensure compliance with much-needed standards.


While there is no single definition of a sovereign wealth fund, it can be thought of as simply a government investment vehicle that manages a pool of assets separately from the official reserves from their monetary authorities.[v]  The assets of SWFs typically come from the sovereign entity’s budget surpluses, excess natural resources revenues, or currency reserves. SWFs can be further distinguished by their stated purpose.  Is it to stabilize resource revenue?  To save for future generations?  Or simply to invest?[vi] Examples of SWFs are the Government Pension Fund of Norway, which manages Norway’s excess petroleum income, and the China Investment Corporation, which is funded through issuing special treasury bonds.  The U.S. also has SWFs, most notably the Alaska Permanent Fund, which is designed for future generations of Alaskans who would no longer have oil as a resource.


There are many reasons to regulate SWFs.  Because SWFs are entities ultimately responsible, not to private stakeholders, but instead to the same sovereign entity that manages it, ineffective and inefficient use of the funds could be a problem.[vii]  SWFs also have access to superior information, allowing them to have the upper hand against private investors. [viii]  Further, SWFs contribute to market volatility because, as SWFs hold massive stakes in the firms in which they invest, the fund’s movement, or even rumors of such movements, can cause extreme fluctuation in the market.[ix]  Lastly, there are more principled objections to SWFs, namely that capital markets and governments should be kept separate, or else there is always the fear that the investor nation is seeking strategic goals on behalf of its government.[x]


While many sovereign entities regulate SWFs bilaterally or multilaterally with other nations,[xi] currently the only attempt at international regulation of SWFs is in the form of an agreed-upon “best practices” list.  These Santiago Principles were introduced in the spring of 2008 with the efforts of the IMF and signed by most of the countries with the largest SWFs.  The 24 principles are guided by four objectives, which speak directly to the concerns alluded to above.  In brief, the Principles direct SWFs to invest on the basis of economic and financial risk and return and to respect the transparency requirements of the countries in which they invest.[xii]


Yet, the Santiago Principles are clearly not enough.  First, while the Santiago Principles are guided by the appropriate principles of more transparency and mandating financial or economic motives only, its substance can be criticized.  The standards should be made more concrete to ensure that compliance is in strict accordance with the principles of the list.[xiii]  Additionally, some suggest that the Principles should be more focused on what the relationship of the investee or investor nations should look like, rather than what the investor and investee should do in the abstract.[xiv] Third, they lack any sort of enforcement arm, or even a system set up to measure compliance along the way.[xv]


Of course, the overarching criticism of the Santiago Principles is that they are a voluntary set of “best practices”, far from “hard law,” which creates legally binding obligations, and much closer to a set of recommendations.[xvi]   Though revamping the Santiago Principles or regulating through bilateral negotiations remains an option, an international treaty would certainly be one way to ensure necessary standards are followed.  One easy way to do this would be for the International Forum of Sovereign Wealth Funds, the international body for SWFs who also currently oversees the Santiago Principles, to propose a binding international agreement based on the Santiago Principles.   Most major SWFs are already subject to them, so the efforts involved in doing so would be minimal.  Further, given that much of the concern regarding SWFs appears to be undue, most countries would likely be excited to dispel them by committing to a treaty.


The Santiago Principles validated the use of sovereign wealth funds, and currently there is no sense at all that this has been a mistake.[xvii]  SWFs are a tremendous source of inflow to investee nations[xviii] that have the innate capacity to contribute to healthy bilateral relations.   It is clear that we should be open to them.  This blog post is only meant to emphasize that SWFs, like anything else, need to be regulated to make sure their effects are as positive as possible.  An international treaty in this regard would be one way to do that.  Such an agreement could alleviate any concerns about SWFs we have and leave these tremendous sources of revenue to contribute in all the positive ways they are poised to.

[i]  Espen Klitzing, Diaan-Yi Lin, Susan Lind, and Laurent Nordin, Demytifizing Sovereign Wealth Funds, in Economics of Sovereign Wealth Funds: Issues for Policymakers 3 (Udaibir S. Das, Adnan Mazarei, and Han van der Hoorn eds., 2010).


[ii] Amy Keller, Sovereign Wealth Funds: Trustworthy Investors or Vehicles of Strategic Ambition? An Assessment of the Benefits, Risks and Possible Regulation of Sovereign Wealth Funds, 7 Geo. J.L. & Pub. Pol’y 333, 342-43 (2009).


[iii] Naveen Thomas, Regulating Sovereign Wealth Funds Through Contract, 24 Duke J. Comp. & Int’l L. 459, 466-67 (2014).


[iv] Adam D. Dixon, Enhancing the Transparency Dialogue in the “Santiago Principles” for Sovereign Wealth Funds, 37 Seattle U. L. Rev. 581, 583 (2014).


[v] Congressional Research Service, Sovereign Wealth Funds: Background and Policy Issues for Congress, Sept. 3 2008, available at:


[vi] For a list of sovereign wealth funds, see: Sovereign Wealth Fund Institute, Fund Rankings, updated October 2014, available at:


[vii] Keller, supra note 2, at 343.


[viii] Id.


[ix] Victor Fleischer, A Theory of Taxing Sovereign Wealth, 84 N.Y.U. L. Rev. 440, 490 (2009).


[x] Keller, supra note 2, at 345.


[xi] See generally Yvonne C. L. Lee, The Governance of Contemporary Sovereign Wealth Funds, 6 Hastings Bus. L.J. 197, 220 (2010).


[xii] International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds, Generally Accepted Principles and Practices “Santiago Principles”, October 2008, available at:


[xiii] See Thomas, supra note 3, at 465.


[xiv] Anthony Wong, Sovereign Wealth Funds and the Problem of Asymmetric Information: The Santiago Principles and International Regulations, 34 Brook. J. Int’l L. 1081, 1105 (2009).


[xv] Id.


[xvi] Meg Lippincott, Depoliticizing Sovereign Wealth Funds Through International Arbitration, 13 Chi. J. Int’l L. 649, 659 (2013).


[xvii] Dixon, supra note 4, at 583.


[xviii] Keller, supra note 2, at 341-42.