Recent GAO Report on Sovereign Wealth Funds

This post is by Eduardo Gallardo’s 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.

Federal Laws

The report reviews the federal laws that govern foreign investment. Protecting national security plays the largest role in shaping laws that regulate foreign investment, although the laws are also intended to support and promote domestic industries.

Before proposing a transaction involving a U.S. asset, the GAO suggests that foreign investors should be aware of four different areas of focus.

1. CFIUS Review. The Foreign Investment and National Security Act of 2007, an amendment of the Defense Production Act of 1950, provides that any foreign acquisition, merger, or takeover of a U.S. business is subject to a review by the Committee on Foreign Investment in the United States (CFIUS), if the proposed transaction could potentially impair U.S. national security interests. The review is intended to determine if the proposed investment presents serious national security concerns, and if so, CFIUS can enter into an agreement that will impose conditions in order to mitigate those concerns. Following the review, the President is authorized to suspend or prohibit the transaction if there is credible evidence of a national security threat. Furthermore, due to recent changes in CFIUS rules, the normal 30 day review period is extended by an additional 45 days if state-owned entities are deemed to have a controlling interest in a transaction.

2. Emergency Powers. The International Emergency Economic Powers Act gives the President the authority to prohibit certain transactions if the transaction is seen as a threat to national security, foreign policy, or the economy of the United States.

3. Political Risk. General political risk may threaten a proposed investment. For example, the Dubai Ports World investment in U.S. port facilities was first approved by CFIUS but ultimately was abandoned due to the intense political controversy it provoked on Capitol Hill.

4. Public Disclosure. Any company that does business in the United States is subject to general reporting requirements including, but not limited to, confidential disclosure requirements for foreign-owned companies.

None of the laws targeting specific industries prohibit foreign investment outright, but each industry is subject to different restrictions of varying severity. These laws primarily serve three purposes: to limit and regulate direct foreign ownership, to restrict the activities of foreign-owned businesses, or to require disclosure of ownership. Transportation, communications, and natural resources are subject to laws that limit direct foreign ownership. Transportation, banking, and defense are regulated by laws that restrict the activities of the business once the foreign investment has been made. Agricultural investments are not limited or restricted but require purchases above a certain amount to be reported. Overall, these laws affect sovereign wealth funds by placing restrictions on all foreign investment into the United States, although none deals specifically with the funds as a separate group.

State Laws

The GAO report notes that individual states have also passed laws limiting foreign investment in specific areas.

Insurance. Twenty-eight states address foreign investment in state-regulated insurance companies. For example, a Wyoming law prohibits foreign insurers that are owned or controlled in any manner by a government or governmental agency from conducting insurance transactions.

Real Estate. As of 2006, 37 states had laws that regulated the ownership of real property. These laws range from registration requirements to laws that ban the foreign ownership of some types of land altogether.


The primary concern of the report is ensuring that the federal government can enforce compliance with laws. The GAO stresses that the agencies must be able to detect the initial foreign investment, verify the identity and share of foreign ownership and check that the control is below legal limits, and monitor ongoing changes in ownership.

• The first step, detecting foreign ownership, is largely done through licensing and disclosure requirements that must be submitted at the beginning of a transaction, as well as Hart-Scott-Rodino antitrust filings. The agencies report high compliance because the penalties for non-compliance are severe and include halting operations or the payment of penalties.

• The second step, verifying the identity and share of foreign ownership, is handled differently by each agency, although all request information initially. The agencies often ask for information in order to trace beneficial owners and to determine the extent of foreign ownership. Sometimes additional information will be requested, and occasionally outside sources will be used, although the agencies reported that they largely rely on the information given and trust that the penalties will prevent misrepresentation.

• Ongoing changes are monitored primarily through an inter-agency process chaired by the Department of the Treasury, which shares notifications and disclosure, tips from competitors, and news agency reports with the relevant agencies. The Federal Reserve Board also said that it requests SEC filings and information from private data sources to determine changes in ownership. The agencies report very high compliance with disclosure requirements, but violations are sometimes found and the corresponding penalties applied.

The report concludes by reiterating the commitment of the United States to foreign investment while emphasizing the importance of the monitoring agencies and compliance to foreign investment laws.


Finally, the GAO makes recommendations with regard to monitoring by federal agencies. The report finds that certain agencies—in particular, the Federal Reserve Board—are using other governmental agency reports and private data sources in order to more effectively detect changes in ownership. The report concludes that other agencies, specifically the Federal Communications Commission, the Department of Transportation, and the Department of Agriculture, should expand their use of such information as well.

Other than minor changes in monitoring, the GAO report does not otherwise recommend any significant changes with regard to sovereign wealth fund investment in the United States. Nevertheless, the GAO report is itself evidence that Congress remains interested in the oversight of investment in the United States by sovereign wealth funds.

A copy of the report can be found here.

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One Comment

  1. Posted Monday, June 22, 2009 at 12:14 pm | Permalink

    The report appears to detail not only inconsistent use of information but also overlapping and nonuniform regulatory missions. Is there a suggestion “between the lines” that the size and importance of SWF’s may call for a more uniform or even more centralized regulatory approach? Since there is CFIUS and since CFIUS now is more inter-agency than before 2007, why is there additional regulation and enforcement at the agency level?

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