Sovereign Wealth Funds: Certain Structuring, Governance and Legal Aspects Whitney Debevoise Darren Skinner Gregory Harrington Georgetown, Guyana March 21, 2017

What are Sovereign Wealth Funds? “SWFs are special purpose public investment funds, or arrangements. These funds are owned or controlled by the government, and hold, manage, or administer assets primarily for medium- to long-term macroeconomic and financial objectives. . . . The funds are commonly established out of official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports. These funds employ a set of investment strategies which include investments in foreign financial assets.” International Monetary Fund (IMF): Sovereign Wealth Funds--A Work Agenda 26 (2008)

SWFs: Form follows Function Considerations in structuring a SWF: Objective Source(s) of assets National government International legal considerations Santiago Principles (GAPP 1 Principle): the legal framework for the SWF should be sound and support its effective operation and the achievement of its stated objective(s). Form Objective Source(s) of Assets National government International legal considerations

Types of SWFs – Objective of Fund (1) Stabilization Fund Savings Fund Reserve Investment Fund Development Fund Contingent Pension Reserve Fund Source: IMF: Sovereign Wealth Funds--A Work Agenda 26 (2008)

Types of SWFs – Objective of Fund (2) Other objectives governing capacity EITI and EITI ++ standard by which information on extractive industries is published Appropriate sources of capacity building: IMF, IADB, etc. (examples: procurement vs budget execution) World Bank : RAMP (Reserves Advisory and Management Program) professional capacity oil & gas Regulation, management, development, etc. investment management use of SWF manager arrangements to build internal investment management expertise

Types of SWFs – Source of Assets Commodity SWFs SWF funded with excess accumulated revenue from commodity exports (e.g., petroleum exports) typically established by oil-rich nations (Kuwait, Saudi Arabia) fiscal revenue stabilization, preservation of inter-generational wealth, and balance of payments sterilization Non-commodity SWFs leading export-based economies with significant FX reserves (China, Singapore) excess accumulated balance of payment surpluses transferred from official foreign exchange reserves SWF has different investment objectives FX reserves are greater than amount the government needs to defend against financial shocks Asset source: Structure of the oil concession mix of income tax / royalty income reflect cyclicality / seasonality of income in SWF objectives Income

SWF Structure (1) Three common SWF structures: “Statutory entity” specific SWF entity formed under constitutive law or legislation examples: Angola (FSDEA), Kuwait, Korea, Qatar, and ADIA Entity formed under general domestic law examples: Temasek, China Investment Corporation (CIC) “Non-entity” pool of assets, without a separate legal entity examples: Trinidad and Tobago, Alberta, Norway

SWF Structure (2) Typical SWF structures Two Typical Governance Models Established by statute secures domestic tax exempt status increases likelihood of international sovereign immunity Either “non-entity” or “statutory entity” structure not constricted by formalities of domestic company/partnership law Two Typical Governance Models Manager model legal owner of the SWF pool of assets (eg, ministry of finance, central bank) gives an investment mandate to an asset manager Investment company model the government (as owner) establishes an investment company , which in turn owns the assets of the fund

SWF Governance—Example One Trinidad and Tobago’s SWF: Heritage and Stabilisation Fund Act of 2007 Commodity SWF (oil and natural gas) Governance Five-member Board of Governors (“non-entity” structure) Central Bank appoints external fund managers Board reports on a quarterly and annual basis to the Minister of Finance Minister of Finance presents annual report to Parliament Auditor general audits the fund annually 

SWF Governance—Example Two Angola’s HSF (Fundo Soberano de Angola (FSDEA)) Presidential Decree No. 89/13 of June 19, 2013 Commodity SWF (oil and natural gas) “Statutory entity” with separate public legal capacity Governance Three-person Board of Directors Board leads teams that establish and implement investment strategy and oversee risk management. Two committees oversee the Board: Advisory Committee (reviews the Board’s investment proposals and strategy recommendations) Audit Committee (reviews the fund’s quarterly and annual reports) Internationally recognized independent external auditor audits FSDEA’s annual accounts

Governance: Roles and Responsibilities An example: Source: IMF Working Paper — Sovereign Wealth Funds: Aspects of Governance Structures and Investment Management (November 2013)

SWF Governance—Key Objectives (1) SWF should: be clearly authorized under domestic law have legal clarity about the owners of SWF assets have clarity and disclosure of: SWF’s legal basis and structure legal relationship between the SWF and other state bodies conflicts of interest policies have clear drawdown rules To achieve SWF goals, need: clear objectives strong governance mechanisms proper oversight

SWF Governance—Key Objectives (2) Overall SWF objectives Specific investment objectives Clear mandate to manager(s) mandate to manager guidance on : acceptable risk/return consistent with SWF objectives appropriate use of leverage and derivatives/hedge mechanisms ability to measure its performance in a meaningful way (benchmarking) appropriate compensation generic objectives provide too little guidance, too much discretion: Examples of unclear objectives to provide investment manager: “enhance budget stability” or “income for future generations” difficult to determine proper asset allocation and/or investment restrictions “budget stability” (instead, perhaps: “liquid investments not sensitive to commodity prices”) “future generations” (instead, perhaps : “long term assets in stable and/or growth economies”) if dual (or multi) function, specify weighting / allocation financial risks may be rewarded, but operational risks certainly will not

SWF Governance—Leveraging When properly used, leveraging SWF assets can enhance total return example: Temasek’s US$15 billion debt program enhance total return while maintaining long-term objectives risks if used improperly or imprudently SWF as source of collateral use as a national development bank, to finance public spending quasi-fiscal instrument Securitization of future payments / royalties receive upfront payment at the expense of future income risk of default if structured poorly immediate spending, but at the expense of future income

SWF—External legal considerations Examples of non-Guyanese structuring considerations: U.S. Foreign Sovereign Immunities Act Foreign state (or an “agency or instrumentality” thereof) immunity for sovereign or public acts, but not for commercial acts SWF’s structure, activities and purpose behind its activities will determine whether it and its assets benefit from sovereign immunity central bank assets (special rules): for the central bank’s own account (notwithstanding that it is used for commercial activity), and for “central banking purposes” sovereign immunity can be waived U.S. Federal Securities Laws Exchange Act: beneficial ownership disclosures, anti-fraud obligations CFIUS (Committee on Foreign Investment in the US) U.S. Federal Tax Law IRC Section 892: taxation of foreign governments based on US source income “Soft Law” — IWG’s Santiago Principles

Questions? Whitney Debevoise Gregory Harrington whitney.debevoise@apks.com +1 202 942 5042 Gregory Harrington gregory.harrington@apks.com +1 202 942 5082 Darren Skinner darren.skinner@apks.com +1 202 942 5636