Perceptions GAPP

Friday, October 17

The International Working Group on Sovereign Wealth Funds (IWG) released the Santiago Principles -- also known as the Generally Accepted Principles and Practices (GAPP) -- on October 11. The release of these principles is an important step towards resolving any remaining distrust or confusion surrounding Sovereign Wealth Funds (SWF).

The IWG was set up during a meeting of SWFs at the IMF in April. The meeting's purpose was to create a forum at the IMF that was the first 'port of call' for any national SWF concerns. The IWG's mandate was to identify a framework of generally accepted principles and practices that reflect appropriate governance, accountability and investment practices for all SWFs. Such a task was extremely difficult because SWFs are a highly idiosyncratic group; they can have different sources of capital, different legal statuses, different mandates and different investment policies. Nevertheless, in roughly half a year -- with consultations taking place in Washington, Singapore and Santiago -- the IWG finalised and delivered the principles last week.

GAPP. The 24 GAPP have the following goals:

• to encourage SWFs to meet local recipient regulatory requirements;
• to encourage them to make certain public disclosures in a variety of areas -- although these new disclosures must accommodate the competitive position of SWFs;
• to ensure stable financial markets and avoid any protectionist policies targeting SWFs;
• to instil transparent and sound governance structures; and
• to ensure that SWFs invest on the basis of economic and risk-and-return considerations -- a primary concern for many policymakers in the West.

Financial returns. Much of the concern about SWFs is rooted in a suspicion that governments will use them to advance political agendas. As such, the GAPP seek to attenuate these fears through a series of targeted principles:

• GAPP 6. The operational management of the SWF should be independent. Moreover, there should be a clear distinction between the owner/governing body and those individuals responsible for the actual management of the SWF.
• GAPP 7. The owner's role within the SWF is to determine the general objectives and ensure proper oversight.
• GAPP 9. The operational management of the SWF should act in the interest of the SWF. This is designed to ensure that owners do not place undue pressure on the SWF. In a sense, this is an attempt to introduce a sense of fiduciary duty within the SWF.
• GAPP 16. SWFs should disclose their governance structure. This will give outsiders a better sense of what the SWF seeks to accomplish. Moreover, this will verify to outsiders that SWF operations are managed separately from the owner (that is, the government).
• GAPP 19. If a situation arises where the SWF will invest on the basis of non-financial criteria (such as to address social, environmental or other factors), it needs to disclose these reasons and factors publicly.
• GAPP 20. The SWF should not take advantage of privileged -- or insider -- information known to the sponsoring government, in order to ensure fair competition with private financial institutions.

While the GAPP are voluntary -- and their implementation subject to home country laws -- they should help alleviate concerns in the West. In fact, if widely adopted, they may obviate the need for a national level response. In terms of strengthening the GAPP, policymakers could seek verification of the principles via an independent auditor -- as the ADIA suggested. The success of the Santiago Principles/GAPP would be welcome; financial markets could clearly benefit from SWFs, which are long-term, stable investors with plenty of liquidity.

>