CRITICAL REGULATORY ISSUES FOR INTERNATIONAL FUND MANAGERS AND INVESTMENT ADVISERS SHARIAH COMPLIANT FUNDS AND SOVEREIGN WELATH FUNDS Jonathan Lawrence Cary J. Meer Clifford J. Alexander 26 January 2009

2 Shariah Compliant Funds and Sovereign Wealth Funds  Shariah Compliant Funds  Al Safi Platform  Sovereign Wealth Funds

3 Shariah  Divine law as revealed in the Quran and the words and acts of the Prophet Mohammed governing the practical aspects of a Muslim’s life  Shariah Supervisory Board or Committee (3 – 5 scholars)  Investors elect to have fewer rights

4 Obligations  Return based on actual fund earnings  Share loss and profit  Avoid uncertainty  Avoid speculation akin to gambling

5 Prohibitions  Guaranteed fixed rate of return  Earning money solely by passage of time  Dealing with traditional banks on an interest basis or for fixed term returns  Alcohol, illegal drugs, gambling, pork, adult entertainment, traditional insurance and reinsurance  Weapons manufacturing and sales  Lack of knowledge or excessive risk

6 Ijara/Leasing Fund Lessee Investor Asset Pool Income/Dividend Investment Purchase PriceOwnership Lease Leased Assets IncomeRent

7 Islamic Equity Funds  Stock selection  Industry Screen  Financial Screen  Non-compliant stocks: temporary, short-term or permanent?  Disclosure concerns

8 Al Safi Platform  May 2008 Cayman Islands mutual fund  Shariah compliant alternative investments  Multi-class unit trust with multiple sub-trusts  Specific investment objective and strict segregation between sub-trusts

9 Al Safi Platform  Shariah Adviser (Shariah Capital): advises on each sub-trust’s compliance with Shariah investment guidelines and provides reports  Shariah Supervisory Board: supervises the Trust and each sub-trust’s business, activities and investments

10 Al Safi Platform  Shariah compliant “short sale” of securities  “Arboon”: down payment; a non-refundable deposit equal to a percentage of securities’ fair market value  Closing date for payment of unpaid portion with right of acceleration

11 Al Safi Platform  Barclays Capital: prime broker and structured product distributor  Dubai Multi Commodities Centre Authority (DMCC) seeded $50m each to:  Tocqueville Asset Management: Gold  Lucas Capital Management: Energy/Oil and Gas  Zweig-DiMenna Intl Managers: Natural Resources  Black Rock: Global Resources and Mining

12 Sovereign Wealth Funds  Special purpose investment funds owned by the central government and created for macroeconomic purposes.  SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies, which include investing in foreign financial assets

13 Sovereign Wealth Funds SWFs are commonly established out of:  balance of payments surpluses;  official foreign currency operations;  proceeds of privatisations;  fiscal surpluses; and/or  receipts resulting from commodity exports

14 SWFs - Key Elements  Ownership  Investments  Purposes and Objectives

15 Estimated Worth  SWFs: $3.3 trillion  Hedge funds: $1.9 trillion  Private equity firms: $1.16 trillion

16 UK Regulation of SWFs  One of the least restrictive regulatory regimes  November 2007: Walker Guidelines for Disclosure and Transparency in Private Equity?  Qatar Investment Authority vehicle Delta Two Limited in bid for Sainsbury’s

17 US Regulation of SWFs  US Office of Foreign Assets Controls  2007 Foreign Investment and National Security Act (FINSA)  Review by Committee on Foreign Investment in the United States (CFIUS)  March 2008: US Treasury Principles for SWF Investment with Abu Dhabi and Singapore  April 2008: Withdrawal of proposed Californian ban on pension funds investing in PE firms backed by SWFs

18 International Regulation of SWFs  June 2008: OECD Declaration on SWFs and Recipient Country Policies  July 2008: European Parliament resolution  October 2008: IMF International Working Group of SWFs Generally Accepted Principles and Practices (GAPP) – the “Santiago Principles”

19 Issues for Contracting with SWFs  Authority to invest  Willingness to make representations and warranties  Willingness to waive sovereign immunity  Consent to jurisdiction in foreign courts  Regime change

CRITICAL REGULATORY ISSUES FOR INTERNATIONAL FUND MANAGERS AND INVESTMENT ADVISERS SHARIAH COMPLIANT FUNDS AND SOVEREIGN WELATH FUNDS Jonathan Lawrence Cary J. Meer Clifford J. Alexander 26 January 2009