Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, December 21, 2007

Chair Cox on SWFs

Today, the world's sovereign wealth funds (SWFs) are larger than all of the world's hedge funds combined.  SEC Chair Cox has recently spoken publicly about SWFs, and, in light of the fact that SWFs are taking significant positions in major Wall St. institutions, I thought it would be useful to review what he has said about them.  In a Dec. 5, 2007 lecture at the AEI Legal Center for the Public Interest, entitled "The Rise of Sovereign Business," Chair Cox noted that SWFs are "challenging conventional approaches to the respective roles of government and the private sector."  Dissolving borders, he notes, requires us to face the reality that many of the world's governments do not attach the importance we do to private economic ordering  as the operating premise of the capital markets.  So he identifies the issue as:if the distinction between government and private activity in our capital markets is increasingly blurred, is there a point at which the "free market" as defined by Adam Smith stops being that and morphs into something else? 

Chair Cox also noted several specific issues that SWFs present for the SEC.  One is enforcement -- what happens when the SEC investigates an entity that is controlled by the government?  Is it likely that the SEC would get the assistance of its overseas regulatory counterparts?  In addition, questions of conflicts of interest and opportunities for political corruption increase.  Will SWFs always direct their affairs in furtherance of investment returns, or will they use those resources in pursuit of other government interests?  Another important issue is transparency, as to which Chair Cox noted that "the track record to date of most SWFs does not inspire confidence."  This could result in serious disparities of information, with a resulting loss in investor confidence.  The answer, however, is not to restrict SWFs' access to capital markets, but to work to ensure the transparency of sovereign investment.

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