Sovereign Wealth Funds and Washington

The Committee on Foreign Investment in the United States, an interagency panel that examines U.S.-foreign deals for national security issues, will be getting some sought after clarity by the end of the month when the Treasury Department releases draft rules based on a law adopted last year revising the panel's review processes.
A key consideration will be whether sovereign wealth funds, the investment arms of foreign governments based mostly in Gulf and Asian countries, will fall under the new regulations when they buy large minority stakes in U.S companies. (SWF have bailed out a number of U.S. financial institutions struggling with subprime-related mortgage write-downs, including Citigroup Inc. and Morgan Stanley.)
The U.S. Treasury's draft rules are expected to clarify that even those foreign investments falling below the 10% threshold can be investigated on security grounds. For many CFIUS observers in Washington, that news simply means the status quo will continue.
CFIUS is a complex agency, and even with the new statute, foreign investments or acquisitions of U.S. assets can be investigated by the panel if there is a "controlling interest," which in many observers' minds can include allocations below 10% stake investments. But nevertheless, the question of what constitutes control is one that is being debated in Washington.
Patrick Mulloy, a member of the intergovernmental U.S.-China Economic and Security Review Commission, says CFIUS leaves "control" to be defined by agencies that make up the interagency panel. Golden shares and their super-voting rights aside, some observers argue that a sovereign fund could own a small passive stake of less than 10% but still have a controlling impact on a corporation.
But others have said ownership of less than 10% stakes can represent a noncontrolling minority investment, which wouldn't trigger a CFIUS review. John Douglas, partner at Paul, Hastings, Janofsky & Walker LLP in New York, says some sovereign funds have been taking stakes slightly below 10% because any allocation above that threshold in an institution that has a commercial bank would trigger a Federal Reserve Board review. That Fed review, they believe, could also trigger a CFIUS review.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., and a number of other lawmakers, argued in a Sept. 27 letter to Treasury Secretary Henry Paulson that in some cases, "passive foreign ownership interests in assets in the U.S., including through sovereign investment funds, may have national security implications."
Sometimes sovereign funds have taken much less passive roles in investments. Would one argue that the Qatar Investment Authority's decision to team up with activist investor Nelson Peltz last year to buy a 4.5% stake in Cadbury Schweppes plc and agitate for change to be a controlling stake? Qatar Investment Authority is an arm of the emirate's government.
Looks like minority sovereign investments, be they 5%, 10% or 15%, will still fall under the CFIUS purview.