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

2. 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)

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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 

10. 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

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

12. 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

13. 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

14. 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

15. 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

16. Questions? Whitney Debevoise Gregory Harrington
Gregory Harrington
Darren Skinner