SWFs: Euro-Protectionism Rears Its Ugly Head

♠ Posted by Emmanuel in at 2/29/2008 01:15:00 AM
Just out is the European Community paper on A Common European Approach to Sovereign Wealth Funds. In the coming months, the EC will likely try and persuade SWFs to comply with its provisions...or else. It is a nasty read on several levels, and you can see why for yourselves. Among other things I would like to ask the EC are:
- Why aren't hedge funds operating in Europe subject to the same "transparency" provisions?
- Can't foreign investment more readily be expropriated if relations go awry with SWFs' home nations?
- In what historical cases have SWFs used their investments in the EU in a "political" way?

I doubt whether any answers are forthcoming. In any event, here are the recommendations by the EC on improved SWF "transparency":

Transparency practices that could be considered would include:
• Annual disclosure of investment positions and asset allocation, in particular for investments for which there is majority ownership;
• Exercise of ownership rights;
• Disclosure of the use of leverage and of the currency composition [this is largely a non-sequitur; SWFs hardly use any leverage but use reserve proceeds in most cases];
• Size and source of an entity's resources;
• Disclosure of the home country regulation and oversight governing the SWF.

Yuck...and here are the punitive measures the EC has in mind for potential SWF transgressors:

The free movement of capital is not absolute. As a fundamental principle of the Treaty, it may be regulated in two respects at the European level under Article 57 (2) EC: first, the Community may adopt by qualified majority measures on the movement of capital from third countries involving direct investment Second, it is not excluded that the Community can introduce – by a unanimous decision - measures that restrict direct investments.

The Merger Regulation allows Member States to take appropriate measures to protect legitimate interests other than competition. Such measures must be necessary, nondiscriminatory and proportionate as well as compatible with other provisions of Community law. Public security, plurality of the media and prudential rules are regarded as legitimate interests, whilst other interests can be considered legitimate on a case by case basis on notification to the Commission [my emphasis].

Turning to national legislation, Member States have national instruments which could be used to control and condition SWF investments or any other investors and they can also develop new measures suitable to tackle specific needs if these arise, as long as those measures are compatible with the Treaty, are proportionate and non-discriminatory, and do not contradict international obligations.

The European Court of Justice has provided further guidance on how Member States can take these national measures in full compatibility with the Treaty, stressing that purely economic grounds can never justify obstacles prohibited by the Treaty. The Court has also provided criteria to assess the proportionality of authorisation systems: these must aim at the protection of a legitimate general interest and foresee strict time limits for the exercise of opposition powers, assets or management decisions targeted must be specifically listed, and the system’s objective and stable criteria must be subject to an effective review by the courts.

Lastly, there is scope to monitor and control the behaviour of SWFs as investors on an ongoing basis via the regulatory framework, which offers an effective tool to protect public interests irrespective of ownership. This is particularly the case in network industries.