Recent GAO Report on Sovereign Wealth Funds

Editor’s Note: This post is by Eduardo Gallardos partner Jeffrey Trinklein .

Government investment funds, often referred to as sovereign wealth funds, have become increasingly visible investors in the United States, a trend that has not escaped the attention of Congress. A series of recent investments led the Senate Banking, Housing and Urban Affairs Committee to raise concerns in 2008 over national security and the possible impact on the economy of large influxes of foreign governmental investment. Accordingly, Senators Christopher Dodd of Connecticut and Richard Shelby of Alabama, the senior Democrat and Republican members on the Senate Banking Committee, asked the Government Accountability Office (GAO) to address a variety of concerns and issues. The most recent report, the second in the series, was issued in May 2009 and looks at the laws that control foreign investment into the United States and whether those laws affect sovereign wealth funds.

The report makes several recommendations to Congress with the goal of increasing compliance with existing foreign investment laws. In particular, the GAO suggests that agencies that are not currently using other governmental agencies reports, like SEC filings, and private data sources, like Bloomberg, should use these sources to monitor changes in ownership of U.S. assets. The recommendation is minor in that it seeks only to increase compliance with already existing laws, but it demonstrates the continuing interest of Congress in reviewing foreign investment generally and investment by sovereign wealth funds specifically.

The United States generally has a policy of openness with regard to foreign investment, but some laws limit and restrict certain types of investments and the activities of foreign-controlled companies. Although federal and state laws affect sovereign wealth funds simply by placing limits on all foreign investment, no laws exist that directly address sovereign wealth funds. Some general laws can potentially affect investment in any industry, while other laws have specific industry requirements and will obviously have a greater impact on funds seeking to invest in those areas. Each of those industries has at least one governmental agency that exercises oversight to monitor compliance to the laws. According to the GAO report, the following industries are affected specifically by laws restricting foreign ownership:

• Banking, overseen by the Federal Reserve Board

• Communications, overseen by the Federal Communications Commission

• Transportation, overseen by the Department of Transportation

• Natural resources and energy including nuclear power, overseen by the Department of Energy, the Nuclear Regulatory Commission and the Department of the Interior

• Agriculture, overseen by the Department of Agriculture

Defense-related matters are also subject to restrictive investment laws, but span different industries and are not overseen by one specific government agency. Furthermore, the Department of the Treasury and the Department of Homeland Security are often involved in the oversight of foreign investment in these industries.