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50–400 2010

S. HRG. 110–980 

TURMOIL IN U.S. CREDIT MARKETS: EXAMINING 

THE U.S. REGULATORY FRAMEWORK FOR 

ASSESSING SOVEREIGN INVESTMENTS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE U.S. REGULATORY FRAMEWORK FOR ASSESSING 

SOVEREIGN INVESTMENTS 

THURSDAY, APRIL 24, 2008 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

DEAN V. SHAHINIAN, Counsel 

ROGER M. HOLLINGSWORTH, Professional Staff Member 

JULIE Y. CHON, International Economic Policy Adviser 

NEAL J. ORRINGER, Professional Staff Member 

DIDEM NISANCI, Professional Staff Member 

DAVID STOOPLER, Professional Staff Member 

JAYME ROTH, Professional Staff Member 

MEGAN BARTLEY, Legislative Assistant 

BRIAN FILIPOWICH, Legislative Assistant 

MARK OSTERLE, Republican Counsel 

BRANDON BARFORD, Republican Professional Staff Member 

COURTNEY GEDULDIG, Republican Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 


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C O N T E N T S 

THURSDAY, APRIL 24, 2008 

Page 

Opening statement of Chairman Christopher J. Dodd ......................................... 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 3 

Senator Menendez ............................................................................................ 4 

Senator Reed ..................................................................................................... 5 

Senator Schumer .............................................................................................. 6 

WITNESSES 

Scott G. Alvarez, General Counsel, Board of Governors of the Federal Reserve 

System ................................................................................................................... 8 

Prepared statement .......................................................................................... 51 

Ethiopis Tafara, Director, Office of International Affairs, Securities and Exchange Commission .............................................................................................. 10 

Prepared statement .......................................................................................... 66 

Response to written questions of: 

Senator Shelby ........................................................................................... 154 

Paul Rose, Assistant Professor of Law, Moritz College of Law, Ohio State 

University ............................................................................................................. 33 

Prepared statement .......................................................................................... 71 

Response to written questions of: 

Senator Shelby ........................................................................................... 157 

David Marchick, Managing Director and Global Head of Regulatory Affairs, 

The Carlyle Group ................................................................................................ 35 

Prepared statement .......................................................................................... 135 

Response to written questions of: 

Senator Shelby ........................................................................................... 159 

Jeanne S. Archibald, Director of International Trade Practice, Hogan and 

Hartson LLP ......................................................................................................... 37 

Prepared statement .......................................................................................... 141 

Dennis Johnson, Director of Corporate Governance, California Public Employees’ Retirement System ....................................................................................... 39 

Prepared statement .......................................................................................... 151 

Response to written questions of: 

Senator Shelby ........................................................................................... 160 


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(1) 

TURMOIL IN U.S. CREDIT MARKETS: EXAMINING THE U.S. REGULATORY FRAMEWORK 

FOR ASSESSING SOVEREIGN INVESTMENTS 

THURSDAY, APRIL 24, 2008 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:12 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. Good morning. 

Let me first of all apologize to people, the witnesses and others. 

We had a hearing ongoing four floors down on the Food and Drug 

Administration, which I sit on that Committee as well, a hearing 

about food safety this morning as well. So we are trying to juggle 

the responsibilities of food safety and the responsibilities of the 

Committee. So I apologize to my colleagues and to the witnesses for 

being a few minutes late. 

What I would like to do is open up with a few opening comments 

on the subject matter of today’s hearing, and then I will turn to my 

colleagues for any opening comments they may want to make, particularly Senator Shelby. And then we will hear from our witnesses, and we thank you for being with us. 

Today’s hearing marks the sixth in a series of hearings examining the ongoing turmoil in U.S. credit markets. Today we are 

going to focus on a source of capital that has helped some of the 

largest U.S. financial institutions weather the storm in the credit 

markets: foreign government-controlled entities known as sovereign 

wealth funds. This is the second time the Committee has examined 

these funds. Last year, Senator Evan Bayh of Indiana, a member 

of this Committee, chaired a very good hearing on this subject, and 

we appreciate his work in this area. U.S. financial companies have raised over $60 billion in new equity from both foreign and domestic sources since the credit crunch 

began in July of 2007. Of that amount, approximately $39 billion, 

or nearly two-thirds, was supplied by sovereign wealth funds. Ninety-three percent of those bank capital infusions came from sovereign funds in just four countries: the United Arab Emirates, Kuwait, Singapore, and China. 


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Foreign government investments in our country are not new, of 

course; however, many analysts project tremendous growth in this 

area. The International Monetary Fund estimates that more than 

20 sovereign wealth funds, largely financed by petro dollars and excess foreign exchange reserves, currently manage $1.9 to $2.9 trillion globally. These funds, while less than the amount of the assets 

managed by pension funds worldwide, are up to twice the amount 

of assets managed by hedge funds and up to three times the 

amount managed by private equity funds. 

That amount is growing, by the way, and growing very quickly. 

Sovereign wealth fund assets are expected to grow to $12 trillion 

by the year 2012. With that kind of rapidly growing financial muscle, the operations of sovereign wealth funds in U.S. markets have 

raised questions generally about how they are run, by whom, and 

for what purpose. Additional questions have been raised about the 

impact of sovereign wealth funds on the safety and soundness of 

the U.S. financial system and the security of critical U.S. industries. 

I believe, firstly, that the United States can and must continue 

to maintain an open investment climate while still protecting our 

economic and national security interests. However, maintaining 

that vital delicate balance between openness and security will require continued vigilance, including, of course, vigilance by this 

very Committee. 

It was with that balance in mind that Senator Shelby and I authored the Foreign Investment National Security Act, which was 

signed into law last July. On Monday, the Treasury Department 

issued proposed rules to implement this law. In my view, these 

rules are consistent with our legislation’s purpose and a very important step forward, and I commend the Department. These rules 

will not only protect our national security; they will also hopefully 

bring greater predictability to the investment process. But it is important to note that CFIUS is only one tool available to address 

concerns about certain investments in the United States. 

The United States regulates the activities of and collects data on 

sovereign investments through a host of statutes. U.S. banking securities, Government contracting, and other laws regulate the activities of both foreign and domestic investors. Federal officials are 

responsible for implementing those laws, including officials at the 

Federal Reserve Board, the Securities and Exchange Commission, 

the Treasury Department, the Commerce Department, and the Defense Department, among others. 

The purpose of today’s hearing is to better understand how well 

these laws are working to protect U.S. markets and companies 

while at the same time allowing foreign investment to continue. 

For example, the SEC requires sovereign funds and other investors 

with ownership stakes exceeding 5 percent in a public company to 

file disclosure statements. Hearings held by this Committee in 

1975 indicate that this requirement is directed at foreign investors 

in order to improve the ability of the Federal Government to monitor foreign investment in the United States. The anti-fraud provisions of the Exchange Act, which prohibit market manipulation 

and other frauds, also apply to sovereign funds. 


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Like any laws or regulations, the effectiveness of these rules depends on the extent to which they are, of course, enforced. And 

here another unique challenge is posed by the sovereign wealth 

funds. SEC Chairman Cox has said it well, and I quote him: ‘‘If the 

same government from whom we sought enforcement assistance 

were also the controlling person behind the entity under investigation, a considerable conflict of interest would arise. Another issue 

is the conflicts of interest that arise when government is both the 

regulator and the regulated.’’ 

I am eager to learn about how the SEC is addressing these and 

other enforcement concerns. It is imperative, in my view, that this 

Committee know whether existing securities requirements are adequate for the purpose of securing the health and stability of our 

Nation’s markets in the face of increasing investment from foreign 

sovereign entities. 

Similarly, it is also important to examine the adequacy of the authority available to the Federal Reserve Board to maintain the 

safety and soundness of our Nation’s financial system when 

sovereigns invest billions of dollars into our financial institutions. 

How does the Fed determine whether a review of an investment in 

a financial institution is necessary? Given the size and anticipated 

increase of sovereign investment in U.S. financial markets, do they 

pose any systemic risks for our country? And how does the Fed assess those risks if, in fact, they exist? 

Fundamentally, the Committee and the American public I believe must know with certainty that sovereign wealth funds conduct themselves according to the same standards to which other 

economic actors are held: transparency, sound governance, commercial purpose, and market integrity. These are critical issues for our 

economy, and they are being raised at a critical moment, of course, 

in our Nation’s economic life. We cannot afford as a Nation to upset 

that vital balance that I mentioned earlier between openness and 

security. If we do, the consequences for our Nation I think will be 

dire. 

So I appreciate the willingness of our witnesses to join us this 

morning. We all look forward to hearing the thoughts and advice 

they have on the subjects I have raised in this opening statement 

on an issue that will be the subject of continued observation and 

concern to this Committee for many years to come. But it is important we get our arms around it, understand it well, and think carefully and thoughtfully about it. 

Now let me turn to Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

I strongly support this Committee’s continuing examination of 

the economic and security issues surrounding the investment activities of sovereign wealth funds. There are many U.S. statutes 

and regulations, which Senator Dodd mentioned, which govern foreign investments in American companies, including laws pertaining 

to investments by individuals, private or publicly trade corporations, state-owned enterprises, and sovereign wealth funds. 

While an examination of the law is important, we should also be 

mindful of how the legal structure interacts with market forces 


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which ultimately influence our economic growth and, on occasion, 

our Nation’s security. 

Notwithstanding our recent economic difficulties, the United 

States remains a very attractive and accessible market. This may 

explain in part why we are the largest recipient of foreign investment in the world. Not only are sovereign wealth funds increasing 

the size of the investments, but they continue to broaden their field 

of interest in American companies. As sovereign funds acquire 

stakes in a wider variety of economic sectors, I believe we need to 

ensure that our national security is not compromised by our openness. I believe the recent regulations written by the Treasury Department implementing the revised CFIUS statute will help add 

clarity and certainty to the process. 

I look forward today to a discussion of how we regulate foreign 

investments. In particular, I am interested in hearing which statutes and regulations pertain to various types of investments and 

how they are applied. 

Also important is how well our regulatory and law enforcement 

agencies communicate with each other as individual transactions 

are evaluated. Sovereign wealth funds and foreign investment in 

the U.S. are projected to increase significantly in the years ahead. 

This Committee, as Senator Dodd has reminded you, has a responsibility to fully evaluate the existing legal structures and processes 

governing foreign investment. Only then can we be sure that we 

are protecting our Nation’s security while maintaining an open investment climate. 

This hearing is a good step in that direction, Mr. Chairman. I 

thank you for calling it. 

Chairman DODD. Thank you very much, Senator Shelby. 

Before I turn to Senator Menendez, let me just mention that 

there is a piece in this morning’s Washington Post, ‘‘Justice Department sees surge in global crime networks.’’ And let me just say 

to my colleagues here, I just mentioned to staff here, I think this 

is an appropriate area for us to want to look into. This is the Attorney General talking about this issue, and gasoline prices and possibly financial services as well. I am not drawing any hard conclusions here, but I would like to invite Members of the Committee 

to think about this and how we might as a Committee here examine this issue, some of these questions. So I just raise it here and 

let you know that we are going to possibly conduct a series of hearings about this very question in terms of the jurisdiction of the 

Committee. 

With that, Senator Menendez. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman. I appreciate you 

calling this hearing with the Ranking Member. 

When it comes to the growing presence of sovereign wealth investment, I think we have more questions than we have answers. 

Sovereign investment is not a new phenomenon, and it is not just 

a phrase, and increasingly the lines are becoming more blurred. Instead of an open, clear stake in a company, we are talking about 

pockets of investment, capital in an investment bank, a stake in an 

equity firm, or a merged cross-border exchange. We are not talking 


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about a single investor but a fund that is backed by a foreign government. The impact is less clear, but the implications are far more 

complex. And even though we are often talking about a 5-percent 

stake here or an 8-percent interest there, these investments add 

up. 

Now, Mr. Chairman, I have a little difficulty in believing that— 

I find it hard to believe that a foreign government is willing to invest billions and have no say. If that is the case, then I would like 

to invite them over personally at the end of the day. 

In the last 10 months alone, two-thirds of the equity raised for U.S. financial firms, some $39 billion, has been from sovereign 

wealth funds. So it is clear there is a strong appetite and a source 

for foreign capital. We need to make sure we know who is providing it and what, if any, motive they have beyond a purely financial interest. And given the volatility of our market, given that the 

need for foreign capital will only increase, and that sovereign investment could explode in the coming years, it is imperative that 

we ask now exactly who is interested in these investments and 

why. 

So today’s hearing is an important chance to hear what is being 

done and where the cracks may be. For instance, are these funds 

trying intentionally to stay below the radar and not trigger a review? Do we know enough about what their interests may be? Do 

we know who their investors are? I think these are important questions, and if we do not have the answers, I think it is a cause for 

concern. 

The stakes are rather high, and I share the concerns of a number 

of my colleagues that we still do not know enough and that we may 

be falling short of the transparency that we should have for these 

investments. The door has swung wide open to sovereign investment. None of us want to close it, but we need to make certain 

checks are in place, and at the very least, we need to know a few 

basic things about who is coming through the door and why. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Senator Corker. 

Senator CORKER. As usual, I would like to hear from the witnesses. Thank you. 

Chairman DODD. Thank you very much, Senator. 

Senator Reed. 

STATEMENT OF SENATOR JACK REED 

Senator REED. Thank you, Mr. Chairman. I think this is a very 

important hearing. 

Chairman DODD. Don’t let Senator Corker intimidate you. If you 

want to say something, you go ahead. 

[Laughter.] 

Senator REED. I want to say more than is in my statement, but 

I want to be polite, too. So I will pretend I am giving up my time, 

and then I will go on and on and on. 

No, I think the questions that have been posed by the Chairman, 

the Ranking Member, Senator Menendez, and others have really 

raised the seriousness of the issue and, I think, the importance of 

the debate. So I am looking forward to hearing the witnesses. It 


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just strikes me that we have created a regulatory scheme based 

upon the culture of companies, and now we have a completely different player that has different motivations, different incentives, 

and has a much longer sort of timeframe in terms of seeing the results, whatever they may be, financial or otherwise. And I think we 

have to understand that, that the rules that might be working— 

in fact, there is a real question whether they are working well even 

for private entities—might not have all of the facets and all the dimensions necessary to fairly deal with this. The issue of accountability, the issue of transparency, great slogans, but we have to 

translate that into operational rules and procedures. And I think 

we have to do it seriously, and we have to do it, because these 

funds are a reality in the world market. They are not going to go 

away. In fact, the evidence we saw is they are getting bigger. 

One final point is that sometimes I have the impression—and I 

think it is shared by a lot of people on the street—that we are taking our money at the gas pump, sending it over to many countries 

who now are creating sovereign wealth funds to buy our banks. 

And that might be, you know, a gross simplification, but there is 

a certain, I think, appeal and reality to that, and it has huge consequences. So I think we have to be serious about this inquiry. 

Thank you. 

Chairman DODD. Thank you, Senator Reed. 

Senator Schumer. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Well, thank you, Mr. Chairman, Ranking 

Member, and the witnesses, and I will apologize in advance. We 

have a markup in Judiciary, and I have a bill up, so I will not be 

able to hear your testimony. But as you know, I have been long involved in this issue, starting with Dubai Ports World, which was 

an anomalous situation because we were dealing with a key national security issue, and what applied there does not apply here 

necessarily. So I would just like to make a couple of points. 

First, Senator Reed talked about oil. We spend money on gas and 

oil, and the price is too high. But ultimately, in part we have ourselves to blame. We have not had an energy policy to wean ourselves away from oil for a very long time. My view is the administration thinks what is good for big oil is good for America, and big 

oil is happy to have the price go up and it is happy to be in cahoots 

with OPEC. 

And, second, in a broader sense, we have for now over a decade 

imported far more than we have exported. We have borrowed more 

than we have saved. We have spent or consumed more than we 

have produced. So there is a shortage of capital here, particularly 

when a crisis hits. We do not have it here in America because of 

these somewhat profligate habits that, again, have been allowed to 

just fester with no one doing anything about it. And then when we 

need capital, we have two choices, neither of them very good: get 

them from places that we are not particularly comfortable getting 

them from, or get no capital and have our economy contract and 

have tens of thousands, if not millions, thrown out of jobs. 

So let’s face the realities here. It is easy to rail against sovereign 

wealth funds, but the alternative is even uglier. So what do we do? 


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First, we do have to make sure there are certain—they are all 

not the same. The countries are not the same, and what they buy 

is not the same. You have to look at security. I stand by what 

many of us did—Senator Menendez was very much involved as 

well—with the Dubai Ports World, because dealing with a port 

where somebody could smuggle in a nuclear weapon—and I do not 

think the Government of Abu Dhabi wanted to do it, but who 

knows if somebody could have infiltrated, changed a freight manifest, and God forbid. 

On the other hand, there are some countries that seem to use 

their economic wealth for political purposes. A classic example is 

Russia. We have seen Putin do this with Europe. Who would want 

to let Putin or a Russian sovereign wealth fund buy an American 

natural gas company? I sure as heck would not. Some are more benign and—or less harmful, and countries in the Middle East, countries—Singapore—seem to be investing for economic purposes. And 

that is the one line that we have to assure, that the investment is 

for economic not political purposes. And that leads to transparency. 

There are a whole lot of questions such as: Do sovereign wealth 

fund officials report to an independent board of directors or directly 

to the government? Do they disclose their investment goals? If 

those goals change, are those made public? Are directors in the investment management team selected on the basis of business qualifications, not political affiliation? Is there a stringent code of conduct that compels boards of directors and management to report attempts by government influence of investment decisions? 

Abu Dhabi and Singapore have commendably moved in that direction. The IMF is putting out guidelines. But this is something 

we have to be very careful about. If you are doing nothing wrong, 

if your goals are economic, you should not mind transparency. And 

my thrust has been and will continue to be to make sure that there 

is real transparency here so that political decisions do not influence 

economic decisions. 

Mr. Chairman, thank you for having this hearing. I thank the 

witnesses, and I look forward to reviewing the testimony and the 

questions. 

Chairman DODD. Well, thank you, Senator Schumer. There is the 

old saying that any port in a storm, and the mismanagement of our 

economy over the last number of years, leading to the problems of 

illiquidity have caused in a sense that old saying to be the case— 

any port in a storm, and so institutions looking for capital are out 

there shopping for it and are willing to take it in almost any place 

it is available. And that is one of the concerns that has been produced by this economy over the last number of years. So the questions raised by our colleagues here are very worthwhile ones, and 

we have two very good witnesses here this morning who can share, 

I think, some thoughts about this. There are a lot of questions, obviously. 

We will begin with Scott Alvarez, who is the General Counsel of 

the Board of Governors of the Federal Reserve System. Mr. Alvarez 

joined the Federal Reserve Bank in 1981 and has been there for 

27 years, a distinguished record. He has held the position of General Counsel since 2004, serving as the chief legal officer. He advises the Board on laws such as the Federal Reserve Act, the Bank 


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Holding Company Act, Gramm-Leach-Bliley. He also assists congressional staff in drafting and developing legislation related to domestic and international banking issues. So we expect to get to 

know you rather well, Mr. Alvarez, if we have not already, in the 

coming months. 

Ethiopis Tafara—did I pronounce the first name correctly? 

Mr. TAFARA. Absolutely. 

Chairman DODD. Thank you. He is the Director of the Office of 

International Affairs for the Securities and Exchange Commission. 

Prior to joining the SEC in 1999, Mr. Tafara served at the Commodity Futures Trading Commission, known as the CFTC. I thank 

him for his years of Federal service as well. Prior to that, he 

worked for the law firm of Cleary, Gottlieb, Steen & Hamilton, currently oversees the SEC’s regulatory policy and enforcement initiatives on the international front. In addition to working with foreign 

regulatory agencies and organizations, Mr. Tafara represents the 

SEC in the International Organization of Securities Commissions. 

Let me ask both of these witnesses to provide us with their statements. I would like to ask you to kind of limit your remarks to 5 

or 6 minutes, if you could. We will accept, of course, your full statements and any supporting data you think would be worthwhile for 

the Committee to have. And with that, Mr. Alvarez, we will begin 

with you. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. ALVAREZ. Thank you, Mr. Chairman, Senator Shelby, Members of the Committee. I am pleased to be here today. I will focus 

my remarks on a narrow issue: the thresholds that trigger review 

by the Federal Reserve and the other Federal banking agencies of 

investments by sovereign wealth funds in U.S. banking organizations. 

As a general matter, investments by sovereign wealth funds are 

subject to the same statutory, regulatory thresholds and requirements for review by the Federal banking agencies as apply to investments by other domestic and foreign investors in U.S. banking 

organizations. These requirements are established primarily in two 

Federal statutes: the Bank Holding Company Act and the Change 

in Bank Control Act. The Bank Holding Company Act requires any 

company to obtain approval from the Federal Reserve before making an investment in a U.S. bank or bank holding company if the 

investment meets any one of three statutory thresholds. In particular, Board approval is required before a company acquires ownership or control of 25 percent or more of any class of voting securities of the bank or bank holding company; or acquires control of the 

election of a majority of the board of directors of the bank or bank 

holding company; or acquires the ability to exercise a controlling 

influence over the management or policies of the bank or bank 

holding company. 

In determining whether an investor may exercise a controlling 

influence over the management or policies of a U.S. banking organization and thereby trigger formal review of the investment, the 

Board considers the size of the investment, the involvement of the 

investor in the management of the banking organization, any busiVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\A400.XXX A400

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ness relationships between the investor and the banking organization, and other relevant factors. 

The Bank Holding Company Act itself presumes that an investor 

that controls less than 5 percent of the voting shares of a U.S. 

banking organization does not have a controlling influence over 

that organization. 

Chairman DODD. Mr. Alvarez, would you move that microphone 

a little closer to you, if you don’t mind? 

Mr. ALVAREZ. Sure. 

Chairman DODD. Thank you very much. 

Mr. ALVAREZ. Based on its experience, the Board generally has 

not found that a controlling influence exists if the investment represents less than 10 percent of the organization’s voting shares. 

The Bank Holding Company Act sets forth the standards that 

the Board must consider in acting on an application by any company, including a sovereign wealth fund, to acquire a U.S. bank or 

bank holding company. Those standards require review of the competitive, supervisory, convenience and needs, financial, and managerial effects of the transaction. The managerial standard includes 

consideration of the competence, experience, and integrity of the investor. 

Upon the acquisition of control of a U.S. banking organization, 

the investing company would, by statute, become subject to supervision by the Federal Reserve, including examination, reporting 

and capital requirements, as well as to the act’s restrictions on the 

mixing of banking and commerce. Importantly, the restrictions of 

Sections 23A and 23B of the Federal Reserve Act, which impose 

quantitative and qualitative limitations on transactions between 

U.S. banks and their affiliates, would also apply. These statutory 

provisions limit transactions between the U.S. bank and any company, including a sovereign wealth fund, that controls a U.S. banking organization. These restrictions help assure that the U.S. bank 

does not engage in unsafe or unsound practices for the benefit of 

the parent company or its affiliates. 

Investments by sovereign wealth funds that do not trigger the 

prior approval requirements of the Bank Holding Company Act 

may, nevertheless, require review by a Federal banking agency 

under the Change in Bank Control Act. The Change in Bank Control Act generally applies to any acquisition of 10 percent or more 

of any class of voting securities of a U.S. banking organization 

where the transaction is not subject to review under the Bank 

Holding Company Act. 

The Change in Bank Control Act also establishes specific factors 

that must be reviewed. These standards focus on the competitive 

effects of the proposal, the managerial competence, experience, integrity, and financial strength of the acquirer, certain informational requirements, and whether the transaction would result in 

an adverse effect on the deposit insurance funds. Unlike the Bank 

Holding Company Act, the Change in Bank Control Act does not 

impose any activity limitations or any ongoing supervisory requirements on the owners of banks. 

The recent investments by sovereign wealth funds in U.S. financial institutions have remained below 10 percent, and often below 

5 percent, of the voting equity of banking organizations. ConVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A400.XXX A400

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sequently, these investments have not triggered the formal review 

requirements of either the Bank Holding Company Act or the 

Change in Bank Control Act. 

Sovereign wealth funds have been a beneficial source of capital 

for U.S. financial institutions. Over the past several months, sovereign wealth funds have provided equity capital to U.S. financial 

firms that accounts for a significant portion of the total additional 

capital raised by these financial companies during this recent period of stress. All of these investments, as well as similar investments made by U.S. private equity firms, have been structured as 

passive investments that do not trigger the thresholds that would 

require formal review by the Federal banking agencies under Federal law. 

If a sovereign wealth fund were to make an investment that is 

at a level that meets the statutory thresholds for review, the Federal Reserve and the other Federal banking agencies would carefully apply the standards established in Federal law for reviewing 

that transaction in the same manner as the agencies apply those 

standards to reviewing transactions by other investors. 

Thank you very much, and I would be pleased to answer any 

questions. 

Chairman DODD. Thank you very, very much, Mr. Alvarez. 

Mr. Tafara, thank you very much for being with us. 

STATEMENT OF ETHIOPIS TAFARA, DIRECTOR, OFFICE OF 

INTERNATIONAL AFFAIRS, SECURITIES AND EXCHANGE 

COMMISSION 

Mr. TAFARA. Chairman Dodd, Senator Shelby, and Members of 

the Committee, thank you for inviting me to speak on behalf of the 

Commission before today’s hearing on the regulatory framework 

applicable to foreign government investment in the U.S. economy 

and financial sector. 

Today sovereign wealth funds hold, by some estimates, more than $2.5 trillion in assets. Some projections estimate that their 

size will increase fivefold by the middle of the next decade. This 

could quite possibly make these funds, collectively and individually, 

the largest shareholders in many of the world’s biggest companies. 

Sovereign wealth fund investments in the United States is not 

new. Sovereign wealth funds based on foreign exchange reserves 

have always tended to invest abroad since their capital was based 

on a foreign currency. What is new, however, is the size of their 

investment in the equity markets and their concomitant focus away 

from the bond markets. 

Sovereign wealth fund investment in the U.S. capital market offers definite benefits. Foreign investors, including sovereign wealth 

funds, can offer U.S. companies a lower cost of capital and a more 

liquid market for their securities. They also raise a number of potential concerns for regulators and other market participants. Some 

of these concerns mirror those raised by large hedge funds. By confining the foreign exchange reserves resulting from a thousands or 

millions of international transactions, an investment fund can 

wield enormous clout on a market. This creates opportunities for 

market manipulation and, where an entity owns enough shares of 

an issuer to control it, insider trading as well. 


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But sovereign wealth funds also raise other issues. Because they 

are owned and managed by Government, the incentives that drive 

fund manager decisions may potentially be very different from 

those associated with a privately managed investment fund. This 

is an issue that Chairman Cox has touched on in the past: the concern that sovereign wealth funds, because they are national entities, may not necessarily act like ordinary market participants and, 

thus, may have a distorting effect on a market. 

Sovereign wealth funds may prefer not to be transparent in their 

motivations or operations. This is particularly true if a fund is 

linked to a nation’s foreign exchange reserves. As you are aware, 

exchange rate policies traditionally are closely tied to matters relating to national sovereignty, trade policy, and the Nation’s economy. The point here is that such sovereign wealth funds are not 

just concerned about making a profit. They potentially may well be 

willing to operate at a loss or forego a profit if it achieves other national objectives. 

The SEC’s mandate is focused on investor protection, maintaining fair and orderly markets, and capital formation. Consequently, 

the SEC has in place several disclosure rules relevant to investments by sovereign wealth funds that address many of the concerns we hear voiced here and in other markets. 

First, the SEC requires that any beneficial owner holding 10 percent or more of an issuer’s securities disclose this ownership interest and any changes to this interest. 

Second, the SEC requires beneficial owners of 5 percent or more 

of an issuer’s equity securities to disclose this ownership, the 

source and amounts of the funds being used to purchase the securities, and their future intentions with regard to this ownership interest. 

And, finally, the SEC requires fund managers who exercise in- vestment discretion over $100 million or more of SEC-registered securities to file a quarterly disclosure of the fund’s holdings in these 

securities, as well as whether they have exercised voting authority 

over these shares. 

As a complementary matter, the Commission has the power to 

pursue sovereign wealth funds that violate the disclosure and antifraud provisions of the U.S. securities laws. Neither U.S. nor international law shields foreign countries’ commercial activities in the 

United States from the jurisdiction of U.S. courts. The SEC staff 

has a strong track record investigating cross-border violations of 

our securities laws, which we do by working closely with our foreign counterparts. The issue that arises with sovereign wealth 

funds is the possibility that the same government from whom we 

seek assistance might also be the controlling person behind the entity under investigation. This would present a considerable conflict 

of interest and might prove challenging. 

I should note that the concerns about sovereign wealth funds are 

not just concerns in the United States. These concerns are shared 

by other jurisdictions. Currently, the International Monetary Fund, 

the OECD, and the European Commission are all discussing best 

practices for sovereign wealth funds that in many ways mirror our 

own disclosure requirements. I find these international developments comforting because I believe that, at least with regard to the 


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disclosures that sovereign wealth funds should make, there appears to be widespread consensus that we are on the right track. 

Indeed, I would argue we are ahead of the curve on this. In the 

United States, these disclosures are not voluntary but mandatory, 

at least for any sovereign wealth fund of any size. 

Finally, sovereign wealth funds historically have been long-term 

investors. Many of their recent investments in troubled industries 

follow this trend. Given their size and the fact that they are owned 

by governments, the potential for politically driven investments 

with a concomitant effect on financial stability remains. But I believe that if we were to prohibit sovereign wealth funds from investing in our market for fear they might introduce market distortions, we might actually end up doing precisely this ourselves 

through the prohibition. A better approach is to address the underlying issues of transparency, independent regulation, depoliticizing 

of investment decisions, and conflicts of interest. 

Thank you for inviting me to appear today, and I would be happy 

to answer any questions. 

Chairman DODD. That was excellent testimony by both of you, 

and we thank you. You have raised a lot of the very same questions 

you heard raised by the Members up here as well. 

Let me begin, if I can—in fact, Mr. Tafara, at several points in 

your testimony—I am going to quote your testimony here, but there 

were several places—I am reading the quote I am going to use 

here, but there were several other points where you sort of said 

very similar things, and that is about governments that control 

sovereign wealth funds and the particular problems raised by that. 

So I am going to address that. Let me quote you. You said, ‘‘Governments that control sovereign wealth funds and sovereign businesses, because they are governments, can in some cases control 

certain economic events, and . . . governments routinely are privy 

to certain types of information that most private investors are not.’’ 

You pose the question: ‘‘What if the fund obtains information 

through its status as a government entity?’’ 

So let me ask both of you here, can we say with any certainty 

that sovereign wealth funds are operating in U.S. markets without 

access to non-public information? Mr. Tafara, you can start out. 

Mr. TAFARA. I do not know what we can say with any certainty. 

Certainly, if there is trading activity that is taking place on the 

basis of information that is not available to the public generally, 

it usually results in anomalous trading patterns, which would put 

us in the position as an agency to start inquiring as to what is behind that trading and to begin to build an investigative record. 

So I cannot say with certainty that it is not happening, but I believe there are tools in place that would allow us to see that sort 

of behavior, trading on the basis of information that may not be 

available to the public, and for us to start going down the line to 

see what may be behind that trading. 

Chairman DODD. Before you respond, Mr. Alvarez, let me add 

the element here, and that is, because I mentioned in my opening 

comments about the various agencies of our Federal Government 

that have pieces of all of this. As I was thinking about that last 

evening, that is encouraging on one level, but also knowing how 

many times there is a lack of communication between the various 


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agencies of governments that are blocks away from each other inquiring about the same sort of conclusions here, to what extent 

when that occurs are we getting information from those governments about that kind of information so we are better aware of it, 

not just from looking at the market reactions to it but to what extent do we feel we are getting the full cooperation of sovereign governments that own these funds about that kind of information? 

Can you respond to that? 

Mr. TAFARA. Well, at the SEC, anytime we have an investigation 

that has international elements to it, we frequently seek the assistance of a foreign counterpart. Some of the information that we may 

want and need to build that investigative record may be located 

outside the United States. And we have in place arrangements that 

date back 20, 30 years that basically amount to a commitment on 

the part of our foreign counterparts who provide us with the information we need. 

Now, I think in my testimony I indicated that when you are asking assistance of a government who may actually also be the subject of the investigation, you worry that there may be some recalcitrance on that government’s part. But I will say two things that 

I think serve to mitigate this potential problem. 

One, generally if you are doing insider trading, manipulation, or 

some fraud of that sort, you leave a pretty large footprint in the 

United States. So as an agency, we are able to actually gather the 

information we need within the United States to build an investigative record. 

But, second, even if the government is associated with the entity 

that is under investigation, for reputational reasons they are generally inclined to provide assistance. They do not want to have the 

reputation of being an authority that—in a world where markets 

are global and investigation and prosecution is national, they are 

not willing to be part of a chain of a system. That is a reputation 

they do not want to have. And, second, I think they are concerned 

ultimately that if they do not provide assistance, it could have consequences for the ability of their companies to do business in the 

United States. 

You know, there are a number of instances—there is precedent 

here in that, for example, in Foreign Corrupt Practices Act cases 

or cases involving companies that are considered to be national 

champions, we have gotten the assistance necessary from the foreign governments in those cases, which bodes well for the possibility of getting assistance if the investigation involves a sovereign 

wealth fund. 

Chairman DODD. I would feel a lot better about that answer if 

I did not also consider something Mr. Alvarez said that many of us, 

I think, on this Committee are concerned about as well, and that 

is that you see these sovereign funds structure their investments 

in many instances to avoid the thresholds that would trigger the 

kind of investigations that normally occur. So you get the sense 

that people here are doing just the opposite, making sure that, in 

fact, they are not subjected to the kind of investigation that would 

occur. And either under the Bank Holding Company Act or the 

Change in Bank Control Act, the case of Citi, for instance, none of 

the four sovereign funds on their own acquired more than 5 percent 


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of ownership. In fact, Abu Dhabi Investment Authority came in at 

4.9 percent. An aggregate, however, of these sovereign funds own 

10 percent of Citi. So if you apply the law in a very strict sense, 

obviously they were under the 5-percent threshold. But, clearly, 

this was not just coincidental that it ended up being 4.9. You are 

not going to convince me of that. 

So, clearly, they were trying to avoid the investigations that 

would normally occur to determine transparency on these other 

issues. So I am sitting here as the Chairman of this Committee 

concerned that, in fact, the very issues raised by Senator Menendez, Senator Reed, and others, Senator Bayh when he had earlier 

testimony, that we are being gamed a bit on all of this. 

And so, Mr. Alvarez, are you satisfied, are both of you satisfied, 

would you recommend to this Committee that we need more statutory authority, or if you do, that treaties are inadequate, we are 

going back to 1975 in some cases, the world has changed dramatically, as you point out? And, Mr. Tafara, you are going to maybe 

have three times the number of foreign investment funds moving 

around the world today. Do we need more authority here to better 

control—not to discourage, because I agree with you, I think if you 

discourage, you can also affect market outcomes here, but to have 

a better sense of balance between inviting these investment funds 

in and providing the kind of economic security we are looking for. 

Do we need more authority? Do you need more authority? 

Mr. ALVAREZ. Well, I would point out that sovereign wealth 

funds are not the only investors that structure their transactions 

in ways to take advantage of the thresholds in statutes. U.S. private equity funds do the same. Large investors do the same. And 

there may be a benefit to that in that we are bringing capital into 

organizations, into the financial organizations, without—because 

these are structured investment—without any incidence of control. 

They are agreeing to be passive investors to let their money be 

used by the current management and organization for its purposes. 

That I think is helpful and a protection. 

I think it is also helpful when you see a number of investors coming at the same time on relatively the same terms at the invitation 

of the target organization. That suggests less worry about manipulation in stock prices, less manipulation of the market, less likely 

to be trading on inside information. Everyone is being treated on 

the same terms and not getting special deals. 

There is quite a lot of cooperation among the banking agencies 

and the SEC in this regard, and I think we all have the same concerns, and we share information and we share concerns and work 

together on that. So that has also been very helpful. And we have 

been establishing at the Federal Reserve—and I know the SEC has 

as well—good relationships with the foreign supervisors to try our 

best to understand their motives, to understand their regulatory 

scheme, and how they approach these kinds of investments. 

So we are all trying to be sensitive to these concerns. At this 

stage, I do not think we at the Federal Reserve see a reason to 

change the law yet. But we are watching carefully. We want to see 

how this will develop, and we certainly will come to you if we see 

any trouble. 


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Chairman DODD. Well, before turning to Senator Shelby, let me 

thank you for that, and we want to keep you posted on it. We want 

you to know as well that we invited the Treasury Department to 

be here this morning, and they declined to have a witness be here 

this morning, despite a very important role in all of this as well. 

And we are going to pursue the Treasury Department to respond 

as well to these questions. But I was disappointed that Treasury 

decided not to participate in today’s hearing. 

Senator Shelby. 

Senator SHELBY. Mr. Chairman, I think you should pursue, this 

Committee should pursue Treasury, because Treasury is very involved, as we all know, in the CFIUS and chairs the CFIUS Committee. We cannot let them not be present at the table when we 

are doing this. You are absolutely right. 

Senator BAYH. Mr. Chairman, they also refused to come to our 

Subcommittee hearing on this topic as well previously. Senator, I 

apologize for interrupting. 

Senator SHELBY. That is OK. 

Senator BAYH. But for some reason, Treasury just refuses to be 

heard on this issue. 

Senator SHELBY. Well, Mr. Chairman, you know the rules of the 

Committee. We can get them up here, and I think that I agree with 

Senator Bayh. We should not put up with that. 

Chairman DODD. As I tell my 6-year-old, we can do it the easy 

way or the hard way. 

[Laughter.] 

Senator SHELBY. I think we need to tell the Secretary of the 

Treasury that, and the Deputy Secretary, and I appreciate that. I 

agree. The easy way or the hard way, but, Mr. Chairman, I think 

you are absolutely right having these hearings. They are very 

much needed, and I hope you will continue. 

I want to pick up, if I can, on what Senator Dodd was talking 

to you about. When we passed this legislation, the Bank Holding 

Company Act, I do not know that it was contemplated by the Congress, and maybe by the Fed, that we would be dealing with such 

investors, like sovereign wealth, on the magnitude that we see 

today, which will be much larger in 10 years, 20 years. And I hope 

that we will not and the Fed will not be behind the curve. Senator 

Dodd is absolutely right. He is asking you, as you know—and you 

are a very able attorney—do you need legislation. This Committee, 

we are going to very rigorously examine all these issues. But you 

need to be ahead of the curve rather than behind it. Nobody knows 

it better than you do. 

I am concerned, as Senator Dodd was, and others, let’s say you 

have 10 sovereign wealth funds. There are many more, but—and 

they want to buy—and we will just use Citicorp since it has been 

brought up. And they all want to buy 4.9 percent of Citicorp. Well, 

they might be different countries. They might be this and that, but 

they can act like we do as investors and do a lot of stuff. 

Is there anything to stop that? I do not see anything to stop it. 

Mr. ALVAREZ. That is a very good question, and both the Bank 

Holding Company Act and the Change in Bank Control Act allow 

us to look to whether folks are acting together. The Bank Holding 

Company Act—— 


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Senator SHELBY. Let’s say they are not acting together when 

they buy, but they act together as we put sort of—I mean, we put 

deals together once we are there. We all do it. It happens today in 

the board. 

Mr. ALVAREZ. Sure, and that is a more difficult problem to deal 

with. Once the investors have already—— 

Senator SHELBY. Once they are in the house, as Senator Menendez—they are knocking on the door. Once we let them in the door 

and they are there and enough of them are there, they are basically in control, aren’t they? And they have enough of it, sure, they 

are. 

Mr. ALVAREZ. The one protection that we have there—so we have 

that same problem, not just with sovereign wealth funds, but with 

private equity funds in the United States. They often have their 

own agendas as well when they acquire a—— 

Senator SHELBY. Well, you are not a naive man. Now, you know 

they are going to have their own agenda. It is just not brand investment. I mean, sure, they want a return on their investment. 

But why would three or four large sovereign wealth funds invest 

in one or two or three of our largest banks, financial institutions, 

or other strategic things? They will control it, wouldn’t they? 

Mr. ALVAREZ. Well, the—— 

Senator SHELBY. Sure, they would. You know they would control 

it. 

Mr. ALVAREZ. Well, it depends on the mechanisms and the relationships they have with the organization. So, for example, I think 

we would look differently at an investor who bought shares and 

then had no other relationship. We would look at them differently 

than an investor who buys shares and has director representation 

on the board of directors, has strong business relationships with 

the organization, has agreements about seeking approval before the 

organization can merge or make an acquisition or take various actions. And we have seen in the private investment world all those 

kinds of arrangements, and we look at those carefully. 

The one thing we have in our favor in the banking world that 

may be different from the rest of the world is that Congress has 

given the banking agencies authority to issue cease and desist orders and take other action to make sure that the banking organization is operated in a safe and sound manner. And so it is not as 

it might be in buying a car company where once an investor is in, 

they can do whatever they want and there is not any supervision. 

In the banking area, the banking agencies can examine the holding 

company and the bank. They can prevent unsafe and unsound actions from taking place. They can require business plans to be approved, things like that. We have some—— 

Senator SHELBY. I understand that. But they cannot stop them 

from making policy as long as that is a legitimate policy that might 

not be in the real interest of America. 

Mr. ALVAREZ. If they want to exercise control over the bank, we 

can stop that. They cannot—an investor cannot—— 

Senator SHELBY. Maybe not control. Influence. What about influence? If four of us had 20 percent or 19 percent or Citicorp, you 

do not think that is basic control or influence? 


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Mr. ALVAREZ. I do not disagree with you that there is certainly 

controlling influence at certain levels, and that is what we have to 

look for, and that is the statutory standard. If an investor has a 

controlling influence, then they—before they have a controlling influence—they must get the Federal Reserve’s approval. They cannot exercise—even after they have bought the shares—they cannot 

then exercise a controlling influence without approval. 

Now, you are exactly right, there is a gray area there. What is 

controlling influence? And that can differ from person to person. 

Senator SHELBY. Then how do we address that? Do we need to 

address that gray area statutorily? Or does it need to be done 

through the regulator? Which you are the regulator. Or what? Because everybody here knows, or knows in the world, that there is 

going to be probably $10, maybe $15 trillion worth of sovereign 

wealth, and where do people want to invest it? In the United 

States of America and in Europe. I mean, that is a given. And with 

an investment of that magnitude, or let’s say half that magnitude, 

it is going to change this country from everything we know today. 

Isn’t it? It could change foreign policy. It could change a lot of 

things. Could it? 

Mr. ALVAREZ. It could, yes. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Shelby. 

Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman, and 

I want to follow on the line of questioning that Senator Shelby 

raised. I think it is very important. But just to drill down a bit, 

when you look at one of these proposed transactions, the red line 

is 4.9 percent, so if they are 4.9 percent, below that then you have 

to look at the nature of the deal. Would you be looking at the 

transaction and, for example, if they had a put at any time they 

wanted, would that be something that you would say might be used 

and, therefore, would disqualify the transaction? How deeply do 

you go into the structure of the transaction, not just the ownership 

level? 

Mr. ALVAREZ. We look at all aspects of the investment. So, for 

example, we would look at convertible shares or warrants or the 

right to impose restrictions on management through a contract. We 

look at debt relationships, normal business relationships, attempts 

to fund affiliates. We look at the entire arrangement that they 

have in mind. 

Senator REED. And you continue that observation on a periodic 

basis for sovereign wealth funds? 

Mr. ALVAREZ. Yes, sir. 

Senator REED. With particular emphasis on sovereign wealth 

funds? 

Mr. ALVAREZ. No. For all minority investors, and the threshold 

for us is really—we look at those investments if they are 24.9 percent or less. Above 25 percent, there is statutory control. 

Senator REED. Now, if they trigger a change in control or aspects 

of the Bank Holding Company Act, the requirement then would be 

to—and you can take me through this. They would then register 

as a Bank Holding Company? 

Mr. ALVAREZ. Right. So if they are in control—— 


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Senator REED. Would that be the sovereign wealth fund or the 

Nation of Dubai? 

Mr. ALVAREZ. It would be the sovereign wealth fund. The sovereign wealth fund would become a bank holding company. It 

would be subject to examination, to capital requirements, to all the 

full authority of the Federal Reserve, subject to restrictions on mixing banking and commerce. 

Senator REED. Now, are you prepared organizationally, staffwise, to do this? I raise that question because I do not want to— 

this is a very important issue, but it is something like, you know, 

the dog chasing the bus. You catch it and what do you do with it? 

And that sometimes inhibits the tough call, a close call, like, well, 

they really do have control, but if we tell them they are a bank 

holding company, you know, that sets off—and it goes along the 

line, I think, of Senator Shelby’s question. Do we have the legislative framework, the clear authority, do we have the institutional 

capacity to go and tell a sovereign wealth fund we want you to report everything you are doing and we do not want you to invest in 

commercial activities? 

Mr. ALVAREZ. I think we would have the institutional capacity to 

deal with that if it were to come up. But the sovereign wealth 

funds have tremendous incentives not to have that occur. They do 

not want to have the restrictions on mixing banking and commerce, 

for example. A sovereignty would not want to have to be subject 

to the capital rules of the United States in their actions or the 

cease and desist authority of the Federal Reserve or examination 

authority. And as a result, they really do try, the sovereign wealth 

funds, perhaps more so than other private equity funds, to be passive and to provide their funds without strings attached. 

Senator REED. Let me raise another question for both you and 

Mr. Tafara. Senator Schumer made comments that I were very interesting about, you know, there are some sovereign wealth funds 

that are models of decorum and transportation, and there are others which are highly suspicious. Would you have the authority to 

ban a sovereign wealth fund based upon your determination that 

there is no transparency, no accountability, in fact, criminality? 

There is an interesting story in Business Week about Russian police authorities who basically took down or tried to take down 

through fraud an American fund, Hermitage Capital Management. 

But would you have that authority? 

Mr. ALVAREZ. Both the Bank Holding Company Act and the 

Change in Bank Control Act have provisions that allow us to deny 

the approval if we do not get information that we think is required. 

Senator REED. Well, if there is—if you discern a pattern of—I 

guess the pattern would be illegality or you just do not feel that 

this fund is responsible, in fact, it clearly engaged in other areas 

of inappropriate activity, do you have the authority to say, no, you 

cannot invest? 

Mr. ALVAREZ. We have the authority to say they cannot control, 

because we are empowered to look at the experience, integrity, and 

competence of the investor. So we do have the authority if they 

wanted to breach one of the control thresholds based on—— 

Senator REED. But only if they are at that threshold of 5 percent. 


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Mr. ALVAREZ. Threshold of 24.9, or they are exercising a controlling influence—— 

Chairman DODD. Anything less than that, you would not have 

any authority. 

Mr. ALVAREZ. No, less than that, we do not have authority. That 

is correct. 

Senator REED. Let me shift to Mr. Tafara from the SEC. From 

an investment now—not a financial institution, but a publicly held 

company in the United States, would you have the authority to say 

because of the pattern of behavior of this sovereign wealth fund 

that you are aware of, or the lack of cooperation, you could say no, 

you cannot invest? 

Mr. TAFARA. We, in essence, administer a disclosure-based regime, so—— 

Chairman DODD. Would you raise that microphone a little? 

Mr. TAFARA. I am sorry. We administer, in essence, what is a disclosure-based regime. So we could take action for failure to comply 

with those disclosure requirements. So we—— 

Senator REED. You could not peremptorily deny them? 

Mr. TAFARA. No. 

Senator REED. OK. Just a final, if I may, and this might be 

something you can provide later. We have been talking in the context of a direct investment into a publicly held company or a financial institution. To what extent do we know—and maybe we do not 

know—that sovereign wealth funds are using intermediaries, like 

hedge funds and private equity funds where they are lending tremendous amounts of money to them, and these funds are making 

the investments? Would that trip any of your—would that lead you 

back to the sovereign wealth fund, at least knowing that they are 

behind the investment? Do you have any mechanism to do that? 

Yes or no. 

Mr. TAFARA. Under the securities laws, if you trigger the thresholds, if you have 5 percent or more, part of the disclosure involves 

disclosure of beneficial owners. So—— 

Senator REED. But if you are not an owner, you are a lender. Do 

you miss that? 

Mr. TAFARA. You also have to indicate the sources of your funds 

in that acquisition as well. 

Senator REED. Thank you. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. I apologize, just on that 

threshold question, I—— 

Senator REED. No, no. 

Chairman DODD. Senator Corker. 

Senator CORKER. Mr. Chairman, thank you. I think this, again, 

has been a great hearing, and thank you, witnesses, for your testimony. 

I am still unclear about your ability to request disclosure from 

sovereign wealth funds. There seems to be a distinction between requiring a corporation that is owned by a sovereign wealth fund and 

based in another country, them making investments here, versus 

just a direct investment by a sovereign wealth fund. And it seems 

to me that that has been a hazy area that, to some degree has been 

danced around a little bit. Mr. Tafara, there is no question that a 


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direct investment by a sovereign wealth fund, you all absolutely 

have the ability to require disclosure. 

Mr. TAFARA. To the extent we are talking about an acquisition 

into a U.S. public company, it is your being the acquirer, the investor, that triggers the disclosure. The form of the entity that is actually making the acquisition is of no relevance, so—by the way, 

these rules apply to anybody acquiring a U.S. public company, any 

entity acquiring—— 

Senator CORKER. Of any kind? 

Mr. TAFARA. Of any kind. 

Senator CORKER. And to both of you, what is the—they disclose— 

if you find that, in fact, thresholds have been broken that they 

have not, in fact, disclosed, what is the actual recourse that we 

have against entities that do that? 

Mr. TAFARA. On our side, the Securities and Exchange Commission, we would potentially bring an action for failure to comply 

with the disclosure requirements of the Federal securities laws. 

The remedies—— 

Senator CORKER. And what would that—— 

Mr. TAFARA. And the remedies available to us are those that are 

available to us in any enforcement action that we bring as an agency. It would depend on the facts and circumstances of the case, but 

it could be a fine, a cease and desist order. We have a whole panoply of remedies that are available to us as an enforcement agency 

which we could bring to bear should they have failed to comply 

with the requirements of the law. 

Mr. ALVAREZ. In the banking area, recall that they need approval 

prior to buying control of the banking organization. If a sovereign 

wealth fund or anyone else were to acquire control of a bank without approval, then we could require divestiture of the shares; we 

could fine the organization, the acquirer; we could prevent their acquisition of other organizations in the United States. 

Senator CORKER. I think the questions raised today have been 

very important, and, fortunately, most Members of Congress have 

not rhetorically used the fact that investments are taking place 

here to our detriment. But this is back to a serious issue, and I 

think as Chairman Dodd mentioned, there has to be a balance that 

is put in place. 

Do either of you see—I know some regulations came out on Monday that have been mostly well received. Do either of you see additional legislation of any type necessary in light of the very obvious 

and good questions that have been asked by other Members here 

today? 

Mr. ALVAREZ. We do not at this stage, though we are looking 

very carefully at the issues, and I think we support also the initiatives that the OECD and the IMF have started, which would increase transparency, improve governance at sovereign wealth 

funds, and we think those are positive steps. We would like to see 

how that develops as well. But then if in looking at those steps and 

our experience in the last year or so causes us to need more legislation, we certainly will come to you quickly. 

Mr. TAFARA. And my answer would be identical to the one that 

Mr. Alvarez has given. I think this is an area that has raised our 

interest as well, and we are giving careful consideration to whether 


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or not there is anything additional we need in terms of authority 

to address it. 

At this stage, I cannot say that that is the case. There is a fair 

amount of transparency that is required under the Federal securities laws by any investor, including sovereign wealth funds. But 

given the size of these investors and the nature of these investors, 

we are certainly giving some thought as to whether or not we need 

additional authority. 

Senator CORKER. Let me just ask one final question. Obviously, 

there have been concerns about foreign governments having other 

concerns other than just direct return on investment, which they 

do. There have been concerns, other types of concerns that have 

been raised here today. 

What concerns that have not been raised by Members here are 

some of the ones that as you think about new regulations, as you 

think about other activities that ought to be taking place as it relates to sovereign wealth funds, what other concerns do you or your 

staffs have as it relates to huge growth in sovereign wealth investment here in our country? 

Mr. TAFARA. I have, I think, in my testimony articulated the one 

additional concern that I have, and that is the fact that frequently 

investigation and prosecution of wrongdoing involving foreign entities requires the assistance of a foreign counterpart, and some concern that there may be some recalcitrance on the part of the foreign counterpart to provide assistance when the target is actually 

its government. 

Now, history has demonstrated that that has not been a complete 

impediment. We have been able to overcome that recalcitrance because we see it in connection with other investigations involving 

Foreign Corrupt Practices Act cases, involving companies that are 

viewed as national champions that potentially have fallen afoul of 

U.S. law. And we have gotten the assistance in those circumstances, so I am inclined to believe that we will get the assistance in connection with the sovereign wealth fund. 

But it is something that, in the back of my mind, is a potential 

concern which I am thinking about to determine whether or not 

there is anything additional we need to do in my office or as an 

agency. 

Mr. ALVAREZ. Yes, and I think the concerns that we focus on are 

actually the ones Senator Shelby focused on, what a controlling influence is, and what to do in that gray area, how to assess investments there. 

I think we also have some concern that there not be an overreaction. Sovereign wealth funds investments have been a source 

of useful capital to organizations in a passive way so far. And so 

far, the funds appear to have been helpful and not hurtful. We 

want to be vigilant going forward, but not overreact to concerns 

yet. 

Senator CORKER. Mr. Chairman, thank you. I do think that on 

the one hand we have been very fortunate to have liquidity available to us at a time when it was much needed. I think some of the 

other comments, you know, talking about our own policies leading 

to much of the need today for this investment is something not to 

take lightly. I know all of us are concerned and I hope this is a 


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time of us growing stronger. Obviously, this liquidity, along with 

the tremendous mark-to-market issues that are taking place, hopefully will make us stronger, if you will, in the financial markets 

when this particular turmoil goes by. 

I hope this is not the time, on the other hand, of the shrinking 

giant because of other policies that are in place. And I know you 

will continue to examine those, and thank you for this hearing. 

Chairman DODD. It is one thing to welcome sovereign wealth 

funds. It is another thing to beg for them. And the whole nature 

of whether or not I am welcoming those investments to come in the 

country or whether, because any port in a storm, that you are begging for them, then that equation can change dramatically. 

And I want to turn to Senator Bayh right now, but one of the 

things that occurs to me in response to Senator Corker’s question, 

one that I asked, and Senator Reed and Senator Shelby have raised 

as well, about whether or not you think we need any more authority. I think the question ought to go, not just a question of whether 

or not the existing laws, but to the extent there is coordination. 

One of the things we did with the CFIUS legislation, as you will 

recall, was to strengthen the coordination on national security 

issues and the issue of our economic security issues, whether or not 

we need something like that. 

So it is not necessarily new laws, but requiring that there be better communication between the various agencies of the Federal 

Government, so that we have a better understanding of what is occurring when these matters arise. You are looking at it from a Federal Reserve perspective. You are looking at it from the SEC. 

Someone else is from Treasury and Commerce. And whether or not 

we are looking at it in a holistic way, as to what this means, may 

be something I would like to explore with you. 

Let me turn to Senator Bayh. 

Senator BAYH. Thank you, Mr. Chairman, and thank you for 

having this hearing today. And gentlemen, thank you. 

I apologize for not being here for your opening statements. We 

had a meeting of the Armed Services Committee on a top secret 

matter, and it was at the same time. So I am trying to be two 

places at once, and it is just always a struggle. But I am very interested in this topic and I am grateful for your presence here today. 

I wish, Mr. Chairman, that Treasury had joined them today. 

Hopefully, the hard way or the easy way, that will happen at a future time. 

My own thoughts on this reflect many of the others you have 

heard here today at a time when we are running tremendous imbalances. Our current account imbalance, particularly in the energy area, we have to find a way to recycle this capital. And it is 

good for our country to have it reinvested here. It improves productivity growth, helps to create jobs, strengthens our economy. There 

are many, many upsides. We want to be a good place for capital 

investment. 

At the same time, I think we would be naive if we did not appreciate the fact that governments are just sometimes different than 

private investors. And Mr. Chairman, I am struck by the irony of 

the fact that literally, in the two chairs you gentlemen are occupying today, seven or 8 years ago Alan Greenspan sat there and 


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Secretary of Treasury O’Neill, back when they were willing to appear before the Committee, sat there. And both of them said that 

we should never allow our own government to invest in private equities because the risk of political interference was too great. 

And so we are now entertaining the question of whether we are 

more afraid of our own government investing and meddling in our 

affairs than we are other governments investing in our country and 

possibly having political agendas other than just purely profit 

maximization. 

So that is kind of the nub of the argument here. We want the 

capital. There are a lot of advantages. But how do we protect ourselves against the potential, whether our own government or another, has yet not realized but the potential of another agenda, political interference, non-economic motives, those kinds of things. 

And Russia has been mentioned, their thuggish behavior with regard to some of their neighbors certainly raises red flags. China, 

I understand the fellow who is running their sovereign wealth fund 

is a good person, he is saying all the right things, interested in 

maximizing profits, making good investments and that sort of 

thing. But the recent controversies regarding Tibet, for example, do 

raise the real prospect that occasionally the highest authorities in 

China have other agenda and perhaps other values that do not correspond with our own. And they have shown a willingness to pursue those agendas and values even in the face of global condemnation. 

As I said, we would be naive if we did not at least consider those 

possibilities. 

So, having said all of that, Mr. Alvarez, I would like to start with 

you and the banking sector. One of the things we are dealing with 

in this whole financial crisis we are currently trying to work our 

way through, and I think the Fed is, of course, actively involved in 

this is that a great deal of lending in our country, a great deal of 

banking activity over the last 15 to 20 years has been undertaken 

in what is now called the sort of shadow banking system or an alternative banking system. 

Do you have regulatory powers oversight over those entities? Or 

is it just pure banks? 

Mr. ALVAREZ. No, we have authority over banks and companies 

that own banks. So the lenders that are not affiliated with a bank 

are not themselves a bank. 

Senator BAYH. So the folks we have opened the discount window 

to, you have regulatory authority over them? 

Mr. ALVAREZ. We have opened the discount window to banks. 

That has always been the case. But we have recently opened the 

discount windows—— 

Senator BAYH. I am talking about investment banks. 

Mr. ALVAREZ [continuing]. To primary dealers, a subclass of investment banks that we deal with in dealing with monetary policy. 

Senator BAYH. Well, these—— 

Mr. ALVAREZ. We do not have regulatory authority over them by 

statute. 

Senator BAYH. So a 5 percent investment in one of those is not 

subject to the regulatory structure that you have outlined for us 

here today? 


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Mr. ALVAREZ. That is correct. 

Senator BAYH. Well, this seems to me to be potentially a significant—I do not know if I would call it a loophole. But if, in fact, 

banking-like activity is taking place in that area of the economy, 

but your regulatory structure only applies to traditional banks not 

these new bank-like entities, is that not an area that we should 

look at possibly extending this regime to? 

Mr. ALVAREZ. Well, that certainly has a lot of ramifications beyond sovereign wealth funds and that is something we are thinking 

very deeply about and in consultation with the SEC about, because 

the SEC has regulatory authority over those primary dealers. 

So that is part of a larger program and we certainly will be talking to this committee about that. 

Senator BAYH. Mr. Tafara, is that—— 

Mr. TAFARA. That is correct. 

Senator BAYH. I understood your testimony, in response to very 

good questions from Senator Reed, to be that if an intermediary, 

a sovereign wealth fund invests in a financial intermediary of some 

kind, an investment fund of some kind, and that investment fund 

acquires more than a 5 percent stake in a publicly held entity, that 

they have to report, disclose their beneficial owners and also their 

sources of capital. Was that a correct understanding of your testimony? 

Mr. TAFARA. Yes. 

Senator BAYH. Which leads me to the point, and I think Mr. Alvarez perhaps—or perhaps both of you were getting to this. You 

had both acknowledged that is control the correct notion for us to 

focus on here? It is certainly possible to exercise considerable influence, short of official benchmarks of control. In fact, that takes 

place in our own economy all the time. 

Mr. ALVAREZ. In the banking world, of course we straddle those 

terms. Controlling influence is what the statute looks for, so it is 

more than a simple influence but it is something that has—and it 

is less than absolute control. It is a gray area that is sometimes 

difficult to navigate. 

But if an investor has a controlling influence, they are subject 

to—— 

Senator BAYH. Well, I do not want to get too semantic about it 

here, and again it is very difficult to define. And it does take place 

in our own economy. And I see my time is up, so maybe I will wait 

for a second round. 

But if, in fact, the investor can pick up the phone and have a material impact—maybe that is a better way to phrase it—on the decisionmaking of the entity to which they have lent money or invested, is that not the point that we are driving at here, as opposed 

to some arbitrary definition of control? 

Mr. ALVAREZ. The ability to do that is certainly one of the things 

we look for in any investor and making an investment in a banking 

organization. Are they going to be able to—— 

Senator BAYH. So even short of 5 percent you look at that kind 

of thing? 

Mr. ALVAREZ. Under 5 percent, the statute presumes you do not 

have controlling influence. That is by law. 


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Senator BAYH. I have exceeded my time, so I will let the Chairman get on with it. But my point is—— 

Chairman DODD. There are very few of us here. We do not have 

to—I am not trying to be rigid. Senator Shelby has some questions. 

Senator BAYH. My point is that what we are after, if there are 

sovereign entities that can have a material impact in the decisionmaking of our financial sector, then it seems to me what we are 

after. And it is possible to have that kind of material influence 

somewhat short of just an arbitrary 5 percent standard. I mean, at 

a moment of financial crisis, these are growing entities, we want 

the capital, and it is a good thing that they have stepped in at this 

moment of instability to stabilize our financial market. That is a 

good thing. 

But it seems to me if that is one of the greatest sources of capital 

in the globe today, that even if you are short of 5 percent, you are 

going to take that phone call, of course. And that person’s opinion, 

although—they may not even have a seat on the board. But you 

are going to listen pretty carefully to what they have to say if you 

know that when the going gets tough this is one of the people you 

can turn to for additional capital, they are going to have some impact on your decisionmaking, in all likelihood, it seems to me. 

So that is how to—I know what the statute says. What we are 

asking for, we are grappling with this. We have not reached any 

conclusions. Neither have you. But it seems to me that something 

short of this arbitrary 5 percent standard, we may need to look for 

a different definition to try to handle this. That is the point I wanted to make. 

Mr. ALVAREZ. Fair point. 

Senator BAYH. Thank you, Mr. Chairman. 

Senator SHELBY. Mr. Chairman. 

Chairman DODD. Yes, in fact, this is a line of questioning that 

Senator Shelby had. 

Jack Reed has a very good question that he wants to—— 

Senator SHELBY. Go ahead. 

Chairman DODD. No, go ahead. 

Senator SHELBY. I defer to Senator Reed. 

Chairman DODD. The 24 percent and the 4 percent, I want you 

to clear this up, too. Jack raised the question. 

Senator REED. Mr. Alvarez, there are two thresholds. Could you 

just amplify the consequences of the thresholds, first the 5 percent 

threshold and then the 25 percent threshold? 

Mr. ALVAREZ. Sure. There are a lot of different numbers here and 

different things happen at different levels, and there is a 5 percent 

threshold that the SEC worries about, which is different than ours. 

So there are two thresholds to worry about on numbers, 25 percent, if you own more than 25 percent of the shares of a bank, you 

become a bank holding company, no ifs, ands, or buts about it. 

If you buy more than 10 percent, then you are subject to review 

under the Change in Bank Control Act. Again, that is in the regulations. 

There is a 5 percent threshold in the Bank Holding Company Act 

that says if you own less than 5 percent, you are presumed not to 

have a controlling influence. 


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Senator REED. Unless you have some type of arrangement beyond your ownership that would give you—— 

Mr. ALVAREZ. You are presumed by law not to have a controlling 

influence unless the Federal Reserve Board, by a preponderance of 

evidence, can overcome that presumption. That presumption is just 

below 5 percent. Between 5 percent and 25 percent, the Board 

could find you have a controlling influence, and you look at all the 

facts and circumstances. And we, in fact, have regulatory presumptions that under certain circumstances, you are in control. So the 

presumption switches the other way when you go above 5 percent. 

Senator REED. If I can just follow up, and I do not want to—because my colleagues have questions, also. 

Are you saying, though, these transactions are specifically structured at 4.9 percent. So the burden of proof is on the Federal Reserve to say that there is something else going on out there that 

is not represented by the stock ownership? 

Mr. ALVAREZ. Correct. 

Senator REED. And that is a fairly high burden of proof? 

Mr. ALVAREZ. That is absolutely right. 

Senator REED. And in your review you told, you said you look at 

all the different instruments, do they have puts? Do they have special consultative arrangements, et cetera. But if you challenged this 

ownership and went to court or tried some court action, you would 

have a significant burden to prove if they stay at 4.9 percent? 

Mr. ALVAREZ. Yes, sir. 

Senator REED. I think what that does, that implicates some of 

the issues that both the Chairman and Senator Bayh and Senator 

Shelby have raised, which is in this safe harbor of less than 5 percent, your instincts might say they have this influence and it could 

be problematic. But we really do not have the kind of legal authority to go in and second guess the investment. Is that fair? 

Mr. ALVAREZ. That is correct. I would add just two small points. 

One is we have not seen that so far. There has not been any under 

5 percent investment we have been particularly worried about. And 

second, this rule applies to everyone, not just sovereign wealth 

funds. So other private investors are in the same position. 

Senator REED. Thank you. 

Chairman DODD. I just wanted to now turn to Senator Shelby. 

I asked my staff, and I have submitted a copy to my two colleagues 

to look at this. This is in my hand, the form required if you have 

more than 5 percent interest. There are 12 questions. Are you familiar with this? 

Mr. ALVAREZ. Which form is it? 

Chairman DODD. The 5 percent or less, excuse me. This is the— 

I do not know what—this is specifically—— 

Mr. ALVAREZ. This is a Federal Reserve form? 

Chairman DODD. It is the SEC form, excuse me. And it is a— 

I filled out a form this morning for my 3-year-old to go to preschool 

over here. Believe me, I answered a lot more questions than this 

one here requires about it. And I am just sort of stunned. In terms 

of to determine whether or not abiding by SEC standards, it is a 

rather simplistic set of questions. 

I just wondered if you have any response to this at all. I am not 

trying to point a finger at you specifically, but it just seems to me 


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at a time when we talk about an issue of this magnitude that we 

would have a questionnaire with some very simple responses, and 

that is all we get out of it. 

You are familiar with this, obviously? 

Mr. TAFARA. Not intimately, but certainly there are—there is 

basic information that is sought once you have got 5 percent or 

more because that is viewed as having enough influence over—potentially having enough influence over a company that information 

about you should be made available to the public. 

In essence, what we get is we get the name and other identifying 

information about the beneficial owners of the shares, the sources 

and the amounts of the funds and other consideration used to purchase the securities, the purpose for which you are acquiring control, any plans or proposals you have with regards to future action, 

the number of shares beneficially owned, and any other shares that 

the purchaser has the right to acquire similar to the inquiry that 

is conducted by the Fed, and information about any contracts or 

other arrangements with regard to any securities of the issuer. 

That is four or five items or six items but pretty important piece 

of information that, if public, give you a sense of what that investor 

could be up to in connection with a particular company. 

So I am not sure that the simplicity of the form should necessarily indicate that there is inadequacy there. But certainly, if 

there are more things that people think we should be asking in this 

context, that is something we are prepared to—— 

Chairman DODD. One of the questions that has been raised by 

our colleagues here, about given the world we live in today and the 

potential influence that can exist, it seems to me there may be a 

bit more information we would want to know before making a determination that just—if you are at that 4.9 percent, it seems to 

me there may be a bit more we would want to know to determine 

whether or not we are abiding, in effect, by the spirit if not the letter of the law when it comes to the kind of controlling influence, 

the language of controlling influence that could be important. 

Anyway, let me turn to Senator Shelby. 

Senator SHELBY. Mr. Alvarez, what is roughly the market capitalization of your top 10 banks that you regulate, just roughly, all 

together today or in the last month? What is their capitalization? 

In other words, what are they worth together on the market, just 

roughly? 

Mr. ALVAREZ. I could not tell you the market capitalization. The 

assets, though—— 

Senator SHELBY. No, we are talking about their stock. 

Mr. ALVAREZ [continuing]. Something on the order of maybe a 

trillion dollars. 

Senator SHELBY. What is their stock worth? What is their market capital? 

Mr. ALVAREZ. I do not know. 

Senator SHELBY. It would not be a trillion dollars, would it, the 

10 top banks? 

Mr. ALVAREZ. I am not certain. I would have to—— 

Senator SHELBY. Can you get that for the record? 

Mr. ALVAREZ. I can certainly get that for you. 


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Senator SHELBY. If these sovereign wealth funds are going to grow, as some people predict, to $15 trillion they are going to have 

the money as we export our wealth, buying oil and buying goods 

and so forth, to these countries who are looking for places to invest. 

You can see that we are just scratching the surface now on what 

is going to flow toward us and also toward Europe. 

And your challenge is going to be a lot greater than probably 

maybe you do think you are going to have. But I worry about it. 

We better worry about it. This panel is serious about it. 

I do not know the answer to it because we do not generate 

enough savings in this country. We do not have a surplus of savings to invest collectively in this country. And money, at the end 

of the day, will find its best investment. What I am afraid of, we 

are going to be owned and controlled and influenced by countries, 

sovereign wealth countries. And I believe it was Senator Bayh that 

made a good point earlier, we have always tried to say in this country, and I believe the policy has been basically, keep the government out of business. Let the private market work. Let the market 

work. 

But we are now inviting sovereign wealth funds, countries that 

own these and have got the money, to buy up and buy parts and 

a lot of times buy up whole companies. That has got to be a real 

challenge for this country, emotionally, financially, politically, and 

otherwise in this country. 

Who is going to influence this country? Will it be the American 

people? Or will it be other people that own us? We know what will 

happen. The people who own, Senator Bayh brought this up. If you 

are investing, you are not going to be a passive investor, not long. 

I mean, you know, you are influencing whoever is on that board 

some way because you have got the clout, you have got the money. 

Let us be honest about it. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very, very much. 

Any additional questions? 

Senator BAYH. I just had two but Senator Reed comes first. 

Senator REED. I had just one question, if I may, excuse me. 

You indicated, in response to questions Senator Bayh and I both 

had, that you would be able to essentially track the lending of a 

sovereign wealth fund to an investor in a publicly held company because that investor would have to disclose their source of financing. 

Do you have those statistics? Could you tell us—not just today, 

but could you tell us what percentage, what activity sovereign 

wealth funds have, not just direct investment but in lending to investors in our economy and publicly held companies? 

Mr. TAFARA. I certainly can inquire. I do not know how we would 

collect the information in the way you are suggesting. Certainly, 

when you are a 5 percent beneficial owner of a company, one of the 

things you are supposed to disclose is the sources of those funds. 

I will have to check back at the SEC as to whether or not there 

is a way of gathering the information because you are talking 

about lending that could be done to a whole host of entities—— 

Senator REED. Right. 

Mr. TAFARA [continuing]. That then go on to purchase interest in 

U.S. companies. I do not have the answer for you now. 


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Senator REED. It would seem to me that that is something, that 

is information that I think you would want to have, we would want 

to have. And it is something that would focus more attention perhaps on who is lending to these investors. 

I get the sense—I do not want to trivialize this—but it might be 

sort of formulaic that they submit their forms, which you are in the 

disclosure business. They check the box, borrowed $2 billion from 

the government of X or the sovereign wealth fund. That does not 

set any bells or whistles off because they are disclosing it. But collectively it might set off lots of bells and whistles. And I think you 

better begin, I would suggest, to think about collecting the information and then looking at it. 

Mr. TAFARA. And I think the further issue we will have to consider is that this could be part of a chain. In other words—— 

Senator REED. Exactly. 

Mr. TAFARA [continuing]. Will you be able to get all the way back 

to the original, original source of the funds? I am not sure about 

that. But it is certainly something where we will inquire about 

that. 

Senator BAYH. Senator, if I could follow up on your question, are 

you getting at the point where let us say, Mr. Tafara, there are 

three or four intermediaries, investment banks let us say, and a 

lender to each of them were to acquire 4 percent, 4 percent through 

intermediary A, B, C, and D. So through each of those entities they 

would be below the 5 percent threshold. But when you aggregate 

them together to the lender, they would be well in addition to that? 

Is that what you were driving at? 

Senator REED. Well, I think that is possible, but in effect, this 

is the question of who is influencing who. If you have an investor 

in a public company or a financial institution who appears to be 

a private investment fund something like this, but his sole course 

of—he has got $2 million in equity and $1 billion in borrowings, I 

would suspect he would be very responsive to his lender and that 

might translate. 

So again, I think at this juncture having that information is 

something as we go forward, you consciously have to think about 

doing it in a systematic way. 

Senator BAYH. Gentlemen, I just had two other quick questions. 

You are familiar with the notion of reciprocity, I am sure. Do you 

find it ironic that some of the countries restrict investment by U.S. 

private investors in some of these sectors in their own countries 

and yet seek to invest in some of these sectors in our own? Is that 

something we should consider as policymakers, the notion of reciprocity and asking if they open their markets to investment? 

Mr. ALVAREZ. The decision on reciprocity is clearly your decision 

to make, and there has been a conscious decision through the years 

in the banking area to focus on national treatment as opposed to 

reciprocity. So we treat foreign investors in the United States in 

the same way that we treat domestic investors and not based on 

reciprocity. 

Senator BAYH. But when it is a government entity making the 

investment and that government’s policy is to restrict U.S. investors, is that not a fair consideration for us to take into our deliberations? 


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Mr. ALVAREZ. I think it is certainly a fair consideration for you 

to take into account. I think the notion of national treatment, as 

opposed to reciprocity, is based on the idea of us being an open 

market and wanting to invite funds and investment opportunities 

as much as possible with the hope that success here would be an 

inspiration to other countries that they should be open, as well. 

But that is clearly a decision for the Congress to make. 

Senator BAYH. My last question, Chairman, is are either of you 

gentlemen familiar with the debate about best practices being defined under the auspices of the IMF on a voluntary basis? There 

is some positive movement there, and I must say the Gulf countries 

and the Singapore entity have been exemplary in their behavior, as 

far as I know. They have not pursued a political agenda or that 

kind of thing. My guess is that there may be some rallying around 

of that sort of thing. 

My questions to you—which I would view as a positive development. 

My question would be, just two or three related to that. What do 

we do about outliers, people who just chose not to participate in the 

best practices? No. 2, what about those who say they will abide by 

them? How do we verify that they are actually doing that? And No. 

3, what should the consequences, if any, be for noncompliance? 

In other words, might we not have a bifurcated system where 

those who we can verify were abiding by the best practices might 

be subject to one regulatory regime and those that did not might 

be subject to somewhat different scrutiny? 

Mr. TAFARA. As I said, I think the good news from our perspective is that the IMF initiative and the OECD initiative actually 

mimic the requirements we already have as a mandatory matter in 

the United States when it comes to transparency and disclosure. So 

we have a way of giving effect to what is a voluntary code by virtue 

of the requirements that are built in to the Federal securities laws. 

And in that sense, I think we are ahead of the curve. 

This may be a more important issue for other jurisdictions that 

are going to be relying on this voluntary code, as opposed to statutory requirements in place in those jurisdictions. 

Now there will be an issue as to a couple of things that may be 

in this code that are not part of our statutory framework, which we 

think are good and would like to see these funds abide by. We will 

have to see if there are any outliers and what the consequences 

could be for those outliers. It ultimately may end up being a decision for you. 

Senator BAYH. I am a little more concerned, Mr. Tafara, let us 

take for instance the issue of intellectual property. Some countries 

have passed intellectual property protections but gee, unfortunately 

they are just not enforced very vigorously. So what do we do about 

countries that say oh, of course we will abide by the practices. 

Don’t we need to trust but verify? And what do we do if they are 

not living up to their word? 

Mr. TAFARA. As I said, the good news for us is those are practices 

that are built into our laws. So we have a way, we have an obligation to verify and we have a way of enforcing. So in that respect, 

I think we are in a better place than some of our friends in other 

parts—in the rest of the world. 


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Senator BAYH. Anything from you, Mr. Alvarez, about best practices or compliance and that kind of thing? 

Mr. ALVAREZ. I think we endorse the efforts to have best practices but whether a wealth fund complies with the best practices 

or not, if they need approval from the Federal Reserve, they are 

going to have to meet the informational requirements of the Federal Reserve to grant that approval and they will be subject to the 

same laws as everyone else. 

So we will have some mechanism to enforce compliance across 

the board. I think there will also be tremendous pressure on sovereign wealth funds that choose not to comply with those best practices to comply, because I think the worldwide pressure is going to 

build. 

Senator BAYH. Well, I agree with that, but as I observed with regard to the situation in Tibet, you know occasionally global pressure does not affect some countries’ behavior because they have 

other values and agenda that they might find to be appropriate for 

themselves but we would look at and simply have a difference of 

opinion about. 

Mr. TAFARA. The one thing I might add is that I suspect, given 

that this is being developed by the IMF and it is a membership organization, one of the means the IMF may have available to it for 

enforcing its codes would have to do with the administration of 

membership. And there is pressure that can be brought to bear 

there. I take your point that pressure does not always work, but 

there may be tools available to the IMF to actually give teeth to 

this voluntary code that they are coming up with. I suspect that 

is something that is under consideration by the organization. 

The one other piece of information I wanted to add, I do not have 

the numbers on the market capitalization of the financial sector, 

but we have looked at market capitalization in the United States 

generally speaking as against sovereign wealth funds and the capitalization is at $56 trillion to $60 trillion now and sovereign 

wealth funds are at 2.5. Now that is going to grow, as we know, 

over the course of the next years. But that gives some context to 

what we are talking about here. 

Chairman DODD. Senator, thank you very much. Excellent questions, by the way. And we thank both of you very much, and there 

may be some additional questions that members may have that 

were here or those who were not able to be here this morning. 

Senator SHELBY. Mr. Chairman, I have a number for the record, 

that I would like to submit. 

Chairman DODD. They will be submitted and we would ask both 

of you, if you could, in a timely fashion to share with us your observations and responses to those questions. 

And we thank both of you very much. It was very, very informative, very, very helpful. And it is—the Federal Reserve, I want to 

say, has been very, very responsive. Chairman Bernanke has been 

here. Don Kohn has been up to this Committee. We have had, over 

the last number of months since January, we have had you here 

a lot on various subject matters. 

The SEC, Christopher Cox was up several times before the Committee, as well. And we are very grateful, knowing everything else 


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you have got to deal with here, to be here and come before the 

Committee. 

And I will express once again my disappointment that Treasury, 

given its important role in this subject matter, could not, was not 

willing to submit and have a witness here this morning. It is very 

disappointing to me. 

Senator SHELBY. Mr. Chairman. 

Chairman DODD. And they will be before this Committee, I promise them, one way or another. And it will not be a warm welcome 

either, because I am not happy about the fact they could not be 

here on a subject matter of this importance. 

Senator SHELBY. Mr. Chairman? 

Chairman DODD. Yes. 

Senator SHELBY. Mr. Chairman, on the subject matter of Treasury not showing up today, I would hope that when you invite the 

Secretary of the Treasury, Hank Paulson, that we work with all 

the time, that he will come. But also the Deputy Secretary 

Kimmitt, because if we are going to deal in CFIUS, and we are, 

and foreign investment in the U.S., I think we need them both 

here. 

I think you would agree with that, would you not, Senator Bayh? 

Chairman DODD. Very good. We thank both of you very much. 

Let me jump to our second panel, and we have got some very important witnesses here in the second panel. We appreciate their patience. Let me introduce them if I can. 

Jeanne Archibald is a partner at Hogan and Hartson—let me 

start with—let me get Paul Rose. Let me start with Paul. Paul 

Rose is Assistant Professor of Law at the Moritz College of Law, 

Ohio State University, previously a Visiting Assistant Professor in 

Securities and Finance at Northwestern University. Before that, he 

practiced law in Covington & Burling, San Francisco office. Professor Rose’s areas of research include corporate governance, securities regulation, institutional investors, and comparative corporate 

law. 

David Marchick is the Managing Director and Global Head of 

Regulatory Affairs for the Carlyle Group. Prior to joining the 

Carlyle Group, Mr. Marchick was a partner in the law firm of Covington & Burling. In addition, he served under the Clinton administration for 7 years in positions within the White House. He was 

Trade Representative at the Department of State. 

Then we have as our next witness is Jeanne Archibald, as I mentioned, a partner at Hogan and Hartson. She currently directs 

Hogan and Hartson’s International Trade Group. She brings with 

her a wealth of experience in the field of international trade law, 

having served as the General Counsel for the Treasury Department, where she helped draft the regulations governing the Committee on Foreign Investment, the CFIUS legislation we have been 

talking about, and negotiated the first CFIUS-related mitigation 

agreement. Prior to her service in the Treasury Department, Ms. 

Archibald served in the Office of the U.S. Trade Representative. 

She joined Hogan and Hartson in 1993. 

Dennis Johnson is the senior portfolio manager in charge of global corporate governance for the California Public Employees’ Retirement System, otherwise known as CalPERS. Mr. Johnson is 


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chiefly responsible for the strategy and day-to-day management of 

CalPERS’ corporate governance activities. His 26 years of experience in investment management include serving as the Managing 

Director for Citigroup Global Markets and managing global equity 

and fixed-income investment portfolios. In addition to his duties at 

CalPERS, Mr. Johnson chairs the Board of Directors for the National Council of Institutional Investors and serves on the Board of 

Directors of the National Association of Corporate Directors of 

Northern California Chapter. 

We welcome all four of you, very distinguished backgrounds and 

service to the country and to the institutions you are now associated with. So we thank you very much for being with us, and, of 

course, you had the wonderful opportunity to be enlightened by the 

previous witnesses here. So let me introduce you in the order in 

which I introduced you. And, again, your statements and supporting information will be made a part of the record. I would ask 

you to keep your remarks to 5 or 6 minutes, if you could. 

I would tell my colleagues as well, there is at least one or two 

votes we are going to have beginning at 12:15. So we will try and 

get through your presentations, take a few minutes’ break, and 

then come back for the question-and-answer period. 

Mr. Rose. 

STATEMENT OF PAUL ROSE, ASSISTANT PROFESSOR OF LAW, 

MORITZ COLLEGE OF LAW, OHIO STATE UNIVERSITY 

Mr. ROSE. Chairman Dodd, Ranking Member Shelby, and Members of the Committee, thank you for the opportunity to speak to 

you today on the regulatory framework for sovereign investments 

and how such investments impact U.S. financial stability. 

Sovereign investment takes many forms, including stabilization 

funds, endowment funds, pension reserve funds, development 

funds, and sovereign wealth funds. Sovereign wealth funds may be 

narrowly defined as ‘‘government investment vehicles funded by 

foreign exchange assets and managed separately from official reserves.’’ 

SWFs are increasingly important players in our capital markets. 

The size and impact of SWFs may be given context through comparison with other major investment vehicles such as institutional 

funds, private equity funds, and hedge funds. If we assume on the 

high side approximately $3 trillion in sovereign wealth fund assets, 

sovereign wealth funds manage roughly one-seventh the amount 

managed by pension funds, one-sixth the amount managed by mutual funds, and one-sixth the amount managed by insurance company funds. On the other hand, as Chairman Dodd mentioned, sovereign wealth fund assets under management are approximately 

twice that of hedge funds, and roughly three times that of private 

equity funds. Furthermore, as noted by Treasury Under Secretary 

David McCormick, SWFs ‘‘are set to grow at a much faster pace’’ 

than these other investment vehicles. 

SWFs also often control relatively larger concentrations of 

wealth. For example, the largest SWF, the ADIA fund, is more 

than twice as large as the ten largest hedge funds combined. 

Since July 2007, sovereign wealth funds have made a number of 

investments in U.S. financial institutions, most of which occurred 


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since the Committee’s hearings in November. These investments 

alone provided approximately $39 billion in much needed capital 

for the financial institutions. The investments involve less than 10 

percent, and typically less than 5 percent, of the banks’ outstanding capital, with no control rights. Each investment was designed to be a passive investment, and the sovereign funds and 

banks have made a point of reassuring the public, other investors 

and regulators that these are stable, long-term investments. 

Three sets of regulations governing SWF investments in financial 

institutions have shaped the structure of these investments. 

The first set of regulations governs the CFIUS process, which, 

among other things, targets transactions in which a sovereign 

wealth fund would gain the ability to exercise functional control 

over a target company. 

The other two set of rules are the Bank Holding Company Act, 

the Change in Bank Control Act, which has been discussed, and 

also the SEC’s disclosure scheme under Section 13(d) of the Exchange Act. 

While this framework encourages commercial, non-political investment by SWFs, there are some limitations to the framework. 

With respect to SEC enforcement, SEC Chairman Christopher 

Cox has expressed concern that the SEC may not be able to regulate SWFs as it does other investors, and that considerable conflicts 

of interest might impair SEC efforts to obtain cooperation from the 

sovereign that controlled a fund under investigation. 

Additionally, sovereign wealth fund investment in financial institutions may create unique systemic risks. For example, sovereign 

wealth funds could cause significant turmoil if, for reasons of national exigency, a sovereign wealth fund was required to liquidate 

its positions. Given the importance of financial institutions to the 

overall economy, the risks created by quick divestment by sovereign wealth funds, although perhaps not likely, could be especially acute. 

Another concern with sovereign wealth fund investment that 

may be amplified by investment in financial firms is the potential 

for abuse of informational disparities. Easier access to financial 

firms, which are awash in material, non-public information, enhances the risk of exploitation of unfair market advantages. 

While recognizing that the concerns with sovereign investment in 

financial firms are significant, I do not believe that these concerns 

need be answered by adding to or amending existing statutes and 

regulations. First, as Deputy Treasury Secretary Robert Kimmitt 

has noted, SWFs ‘‘have not caused significant financial market disruption and . . . even for investments that do involve control, there 

is little evidence of any ulterior foreign policy motives in practice.’’ 

Second, imposing additional regulations on SWFs beyond the reasonable framework now in place may create other, more significant 

problems, such as a shift in sovereign wealth fund investment 

away from the U.S. The result of such a shift would be detrimental 

both because U.S. firms would miss the capital investments, and 

because the funds may flow to other jurisdictions that may be 

underregulated. Arguably, this could increase the danger that sovereign wealth funds would be used as political tools to harm our 


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national interests and make it less likely that our regulators could 

effectively work against such activities. 

In balancing these concerns, I believe the Treasury has ably 

worked to buttress our regulatory framework by promoting voluntary standards by working directly with sovereign wealth fund, 

in the case of Abu Dhabi and Singapore, and by encouraging efforts 

by the IMF to work with sovereign wealth funds on a set of best 

practices. The IMF’s efforts are also supported by the Financial 

Stability Forum, which is particularly focused on the health of financial institutions and markets. 

A robust set of best practices essentially encourages sovereign 

wealth funds to act like institutional investors: to operate transparently, to maintain adequate risk management structures, to 

provide adequate disclosures, and to create accountability to regulators, and, we should hope, the citizen beneficiaries of sovereign 

wealth funds. 

The primary limitation of voluntary best practices is, of course, 

the lack of an enforcement mechanism—other than the possibility 

of retaliatory economic and political responses, which is, I believe, 

a quite significant enforcement mechanism. On the other hand, it 

is not realistic to hold out for the successful negotiation of a multilateral foreign investment agreement that might provide a formal 

dispute resolution mechanism. Sovereign wealth fund are investing 

now, and they are here to stay. I believe we can rely on the regulatory tools currently at our disposal while continuing to encourage 

the creation of best practices for sovereign wealth funds and long 

term continuing to work on domestic and international initiatives 

that will ensure the stability of financial institutions and the capital markets. 

Thank you. 

Chairman DODD. Thank you, Mr. Rose. 

Mr. Marchick. 

STATEMENT OF DAVID MARCHICK, MANAGING DIRECTOR AND 

GLOBAL HEAD OF REGULATORY AFFAIRS, THE CARLYLE 

GROUP 

Mr. MARCHICK. Thank you very much. Mr. Chairman, Senator 

Shelby, it is great to be back here before the Committee. I am 

going to be very brief because I think there has been a thorough 

discussion. I am just going to address three or four points. I know 

how busy you are. 

Let me start by complimenting the two of you for your leadership 

on the FINSA. Senator Shelby, you were all over this issue well before Dubai Ports, focused on the importance of having a robust foreign investment screening process for national security. And if you 

think about the number of pieces of legislation that have passed 

the Congress in the last few years that affect billions of trillions 

of dollars of economic activity that were done in a bipartisan way, 

you can count them on your hands, and you all were really at the 

forefront of that. So I congratulate you. 

Just a few points. The first is I think we need to keep the size 

of sovereign wealth funds in perspective. One can say that they are 

large by comparing them to certain things or say that they are 

small by comparing them to other funds; $3.2 trillion is a huge 


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amount of money, but compared to the combined size of pension 

funds and mutual funds, which is about $55 trillion, it is fairly 

small. Second, even though the investment activity coming from 

sovereign wealth funds has grown significantly, it still represented 

about 1.5 percent of overall global M&A last year, so it is fairly 

small. 

Second, I think that there is consensus on the Committee that 

basically we want this investment in the United States, as opposed 

to elsewhere, so long as there is not a problem with a particular 

investment. So we want the investment if it is made for commercial 

purposes, if it is not going to compromise our national security, if 

it is not going to compromise our banking system, et cetera. So 

then the question is: If we want the investment, are our laws adequate to address any government interests that we have with particular investments? So if a sovereign investment fund invests in 

a Play-Doh factory for our 6- and 4-year-olds or 3-year-olds, you 

know, who really cares? If they invest in something that affects national security, we have FINSA, which was strengthened under 

your leadership. If they invest in a defense company, you not only 

have CFIUS, you have defense regulations that protect the defense 

supply chain and protection of classified information. If they invest 

in the chemical sector, there are more than a dozen chemical statutes that govern and five Federal regulatory agencies that govern 

chemical safety, security, et cetera. And so from my perspective, 

there is a robust regulatory structure that is adequate to deal with 

any legitimate government interest. 

Third, I think the professor highlighted the importance of the 

transparency initiatives. I think that you are familiar with those. 

I hope that you would support those. 

Fourth, equally important is just as there is responsibility for the 

sovereign wealth funds to have a code of conduct and behave appropriately, it is equally, if not more important, that recipient 

countries remain open to investment, unless there is a particular 

problem with a particular transaction. 

There is cause for concern. If you look at in the last 2 years 

alone, countries that represent 40 percent of the—that are the recipients of 40 percent of global investment have either passed or 

are debating laws that limit investments. Some of this is narrowly 

tailored on national security, like the law that you passed. Some 

of it goes beyond. But China now regulates investment in a number 

of sectors. Russia regulates investment in 43 sectors. France regulates investment in 19 sectors, including gambling. Hard to see 

how that is a national security issue. And there is danger of a 

downward spiral. 

Finally, let me just reflect on Carlyle’s experience with sovereign 

wealth funds or with funds affiliated with government institutions. 

We have two investors that own a piece of the Carlyle partnership: 

one is CalPERS, which in 2000 bought 5.5 percent of Carlyle; and 

last year a fund based in the UAE called Mubadala Development 

Corporation bought 7.5 percent. Both of these investments are 

structured exactly alike—completely passive, they wrote us, they 

made a big investment in us. We work hard to provide an adequate 

return, strong return. So far we have done fairly well for CalPERS, 

and hopefully we will continue to do so. They have no control or 


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no influence over what investments we make. They have no control 

or influence over how we manage our investments. And they have 

no control or influence over when we exit. So they are completely 

passive. We control all our investment decisions. 

So that is an example in my view of a positive experience with 

two different entities affiliated with either the State of California 

or the state of the UAE in Abu Dhabi. And we are grateful for the 

confidence that CalPERS and Mubadala has shown us, and hopefully we will be good stewards of their money. 

So thank you very much. 

Chairman DODD. Thank you very much. 

Welcome to the Committee, Ms. Archibald. 

STATEMENT OF JEANNE S. ARCHIBALD, DIRECTOR OF INTERNATIONAL TRADE PRACTICE, HOGAN AND HARTSON LLP 

Ms. ARCHIBALD. Thank you, Chairman Dodd, Senator Shelby. Let 

me begin by saying that I am not here appearing on behalf of any 

client. I am here in my personal capacity sharing views that are 

based on 20 years or more of having looked at the issue of national 

security with respect to foreign direct investments, either in the 

Government or in the private sector. And let me just cut right to 

the chase. I think the issue has been framed well in this hearing 

so far this morning. People recognize the benefits to the U.S. of an 

open investment policy, but at the same time, they are trying to 

ensure that such investments, particularly from foreign government entities, are done in a way that does not endanger national 

security. 

And so the question is: Do we have the tools to give ourselves 

that assurance? And let me run through some. 

CFIUS is obviously a clear one. I do not need to tell anybody sitting in this room today what CFIUS has done in the past and also 

what it is going to be doing in the future in light of the strengthened statute that was put into place last year. But let me talk 

about some of the other regulatory schemes that are out there. Mr. 

Marchick has already referred to a few of them. 

Consider, for example, acquisitions in the telecommunications 

sector. The Communications Act of 1934 absolutely prohibits any 

foreign government or representative of a foreign government from 

holding a broadcast or common carrier radio license. The act also 

imposes an absolute limit of 20 percent on direct holdings by any 

foreign company, and it has a waivable limit of 25 percent on indirect holdings by foreign companies. In other words, if they establish a subsidiary in the U.S., they can own 25 percent. They can 

even own above that if there is an approval from the FCC. 

Now, it is true that broadcast and radio common carrier licenses 

are not as important today as they were in the past. But the SEC 

now has a practice—it is not codified, but it is a consistently applied practice with respect to any application involving telecommunications services by a foreign entity, but they do not approve the application without having it first looked at by the Team 

Telecom agencies—the Department of Justice, the FBI, the Department of Homeland Security, and, as appropriate, the Department 

of Defense. 


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Investors are aware of this practice, and, in fact, with my clients 

when they are investing in telecommunications, we know that we 

have to talk to Team Telecom and make sure that if they have any 

national security or law enforcement concerns, we need to work 

those out. And typically we attempt to do that before we even approach CFIUS with respect to their review because they will help 

make the CFIUS process go more smoothly. 

Another example, companies that have facility security clearances. Essentially, any company that is doing classified work for 

the U.S. Government, there is an obligation on the part of the U.S. 

entity that has a facility security clearance if it is, in fact, negotiating with a foreign entity and that entity is going to obtain foreign 

ownership, control, or influence over that facility security clearance 

holder to notify the Department of Defense and, indeed, they will 

have to work out a plan to mitigate the impact of that foreign ownership control or influence. And if they do not do so, then the facility security clearance will be suspended, and that company will not 

be able to bid on further classified contracts. 

Now, the requirements that are imposed by the Defense Department can be pretty significant. You either enter into a special security arrangement which would allow the foreign entity to have perhaps board representation, but would put in very strict controls to 

protect the security of the classified work. In other types of cases, 

when the contracts involved prescribe information, there is a requirement to establish a proxy agreement. And essentially the foreign entity can have an economic interest in the U.S. company, but 

it can have no management involvement in the company. The company is turned over to a proxy board that is made up solely of U.S. 

citizens whose appointment is approved by the Department of Defense. 

Similar types of restrictions apply in the nuclear power industry. 

Manufacturers of goods or technology that are made for military 

purposes require—the manufacturer is required to have a registration under the International Traffic in Arms Regulations. In those 

instances, if someone is going to take ownership or control, a foreign entity is going to take ownership or control of such a company, 

again, they are going to have to work with the State Department 

to ensure that ITAR registration is either amended as necessary or 

is going to be continued. 

I would also note that under the International Investment and 

Trade in Services Survey Act, there is a requirement for all foreign 

investments in U.S. business enterprises with assets of $3 million 

or more—a very small threshold—in which a foreign person owns 

a voting interest of 10 percent or more, they are subject to a reporting requirement and have to submit information about that investment within 45 days of the completion of the investment. 

This is just a very small sampling of what is out there. There 

could be a much longer list developed. But I think the point is that 

there are many aspects of U.S. regulation in industries particularly 

that are sensitive for national security purposes where there are 

very clear rules and clear opportunities for the U.S. Government to 

pay close attention to what is happening by way of foreign investment. 

I will stop there. Thank you. 


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Chairman DODD. Thank you very, very much. 

Mr. Johnson, thank you for being with us. 

STATEMENT OF DENNIS JOHNSON, DIRECTOR OF CORPORATE 

GOVERNANCE, CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM 

Mr. JOHNSON. Chairman Dodd, Senator Shelby, I am pleased to 

provide the perspective of an institutional investor on the virtues 

of transparency and the principled practices of the California Public Employees’ Retirement System, which I represent. 

CalPERS is the largest public pension plan in the Nation with 

more than $244 billion in assets under management. We provide 

retirement and health benefits to 1.5 million members who work in 

State and local government. 

Given our responsibility as a trustee and the fact that our investments span domestic and international markets, not only do we require transparency from our portfolio companies, we believe that 

we should lead by example in providing transparency into the activities related to our investment portfolio. 

We also believe it is crucial to have a principle-based approach 

for exercising our rights as shareowners in over 8,000 publicly 

traded companies around the world. 

That is why the CalPERS Board of Administration annually reviews and approves the CalPERS’ Global Principles of Accountable 

Corporate Governance. 

Our principles create the framework by which CalPERS executes 

its proxy voting responsibilities in addition to providing a foundation for supporting the system’s corporate engagement and governance initiatives. To promote transparency, the CalPERS Policy 

Subcommittee and Investment Committee discuss and approve the 

principles in open public sessions. In addition, we maintain a current edition of our principles on the CalPERS website. 

There are numerous ways that CalPERS provides transparency 

for its investment and related activities. Some of the methods for 

promoting transparency include but are not limited to the following: 

The CalPERS Board of Administration has a fiduciary duty to 

employees, contracting public agencies, and retirees of the pension 

fund. As a public government entity, this stewardship entails public reporting. 

The California Constitution and case law clearly establishes that 

the CalPERS Public Employees’ Retirement Fund is a trust and 

that the board acts in a fiduciary capacity as the body responsible 

for managing and administering that trust. Article XVI, Section 17, 

of the California Constitution provides that the assets of a public 

pension and retirement system are trust funds and that the retirement board responsible for administration of the retirement system 

has the sole and exclusive fiduciary responsibility for those assets. 

The 13 members of the Board of Administration are either elected by members of the system, appointed, or are designated by law 

to be on the CalPERS Board of Administration. The board has established various committees that review issues and recommend 

actions to the full board. The board meets monthly in Sacramento, 


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but holds one meeting a year in Southern California. Each 

CalPERS trustee is identified on the CalPERS website. 

The Constitution requires that CalPERS assets are held in trust 

for the exclusive purposes of providing benefits to system members 

and their beneficiaries, and to defray reasonable expenses of administering the system. 

Board members, individually, are responsible for maximizing investment returns to the pension fund, thereby minimizing contributions required of active State, public agency, and school employees 

and California taxpayers who support employer contributions to 

the fund. As of June 30, 2007, CalPERS assets included $3.3 billion 

in employee contributions, $6.4 billion in employer contributions, 

and investment returns on all such contributions through the 

2006–07 fiscal year. Investment income pays 75 cents of every pension dollar received by CalPERS retirees. 

CalPERS also posts its investment portfolio in public printed reports and on-line on its website. CalPERS records are readily accessible. 

Investment performance results are made available to the public 

on-line and in printed materials. This includes a Comprehensive 

Annual Financial Report, the annual Investment Report, monthly 

Consolidated Investment Activity reports, a Total CalPERS Fund 

Quarterly Report, and detailed quarterly reports of sub-asset classes, monthly activity reports, and all investment transactions. The 

CalPERS website also has a complete report of our Alternative Investment Management Program showing investments in hundreds 

of private equity funds, and their performance. 

Proposals to contract with external portfolio managers are also 

publicly reported, as are investment allocations, commitments, and 

deployment of capital into the market. 

The CalPERS Investment Committee meets in open session, and 

all policies are presented first in the Policy Subcommittee, then in 

the full committee, which comprises all 13 board members. Agendas are made available for the public prior to open session meetings. Minutes from the previous meeting are also included in the 

agenda package. 

We appreciate the opportunity to share our experience as a major 

investor. We hope that this account of our practices regarding 

transparency, accountability, and our unique fiduciary responsibility to our members will help in addressing the difficult questions 

that are before this Committee. 

Thank you. 

Chairman DODD. Thank you very, very much, and I am going to 

turn to Senator Shelby for some questions. Then Senator Reed will 

be coming back, and I will have a few questions myself. And we 

will find we will not have to delay too long as a result of these 

votes. 

Senator SHELBY. Thank you, Mr. Chairman. 

Ms. Archibald, in your testimony you write that some regulatory 

regimes can, and I quote you, ‘‘provide an avenue by which the 

U.S. Government can be made aware of a contemplated or completed investment.’’ Would you give the Committee an example of 

how this would occur specifically in the financial services sector we 

are focusing on today? And do you think that the regulatory agenVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\A400.XXX A400

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cies often find out about sovereign investments in this manner? Or 

in your experience, did most potential investors come directly to 

CFIUS? 

Ms. ARCHIBALD. Let me try to answer both those questions. An 

example of how agencies can learn about investments either before 

or after the fact, one was the Investment Survey Act that I mentioned, where within 45 days of making the investment, there is a 

requirement to fill out a form notifying the Department of Commerce. You heard the witnesses this morning talk about the requirements when certain thresholds are triggered to notify, for example, the SEC in the acquisition of a public company when it is 

a percent holding. So there are these various statutes out there 

that do require disclosure. 

In my own experience, I have found that most of the foreign companies that I represent in U.S. acquisitions, in fact, do want to 

make a CFIUS filing, and they do that in part because if they are 

planning on making more than one acquisition, or if even the single acquisition is likely to get public attention, they want to be seen 

as good corporate citizens who are following through on the regulatory structures of—— 

Senator SHELBY. So transparency is very important here, is it 

not? 

Ms. ARCHIBALD. I think being seen as cooperative and wanting 

to abide by the regimes that the U.S. Government is setting up is 

important to them. 

Senator SHELBY. OK. Mr. Johnson, your CalPERS, as we all 

know—and you represent them here—is a huge investor. But do 

you believe as the Director of Corporate Governance for your pension fund, do you feel that your fund has a level playing field in 

its competition with sovereign investors? 

Mr. JOHNSON. Senator, I am not in a position to say, but I would 

just indicate that we obviously have a fiduciary duty to our members to maximize the returns for our portfolio, and our board works 

very vigorously—— 

Senator SHELBY. When you speak of your members, it would be 

the members of the California pension fund. 

Mr. JOHNSON. That is correct. 

Senator SHELBY. State pension fund. 

Mr. JOHNSON. That is correct. 

Senator SHELBY. OK. Mr. Marchick, do you have concerns about 

the increasing size of the sovereign wealth funds and the ability of 

our current regulatory system which we talked about here today to 

be able to effectively monitor their activities? You heard the questions earlier, and you are very familiar with them. 

Mr. MARCHICK. I guess my concern about the size of the sovereign wealth funds—— 

Senator SHELBY. Turn your microphone on. Is your microphone 

on? 

Mr. MARCHICK. Sorry, sir. I think my concern focused on less the 

fact that they are getting larger and more—it is indicative of some 

fundamental problems in the U.S. economy with our deficit going 

through the roof, current account deficits in China and elsewhere. 

Senator SHELBY. Lack of savings? 


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Mr. MARCHICK. Lack of savings. And so when you have oil prices 

that are so high and you have China and a few other countries 

with huge external surpluses, they have to do something with the 

money. And so, you know, they are growing. I guess my focus is 

that if they are going to invest the money, I would rather have it 

invested in the United States than anywhere else, so long as a particular investment does not present a problem. 

Senator SHELBY. OK. Professor Rose, in your testimony you 

quote Under Secretary McCormick’s statement that sovereign 

wealth funds are set to grow at a much faster pace than other investment vehicles. Do you believe that the growth in size of sovereign wealth funds are a greater policy challenge than the fact 

that they are government owned? Or how do you differentiate here? 

Mr. ROSE. Well, the growth certainly does worry me. When you 

look at present investment levels, I feel comfortable with the regulations that we have in place. I think that the hearing today and 

the witnesses have done a good job of spelling those out. And if we 

are thinking about, say, banking, financial services, the testimony 

seems to have been, well, right now we feel comfortable. If they 

keep growing, they keep investing, we start to have not just one 

5-percent shareholder but, as you mentioned, a number of them, 

well, then I think maybe the ability to monitor those is diminished 

and we may need to revisit the regulations that are in place. And 

I think this Committee is obviously attuned to that issue and is 

prepared to continue to make sure that the Federal Reserve Board 

and the SEC are doing their jobs and monitoring it. 

Senator SHELBY. And this Committee? 

Mr. ROSE. Yes, this Committee. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

You know, I raised the issue before just as a thought. You mentioned the CFIUS legislation. What did you call it, Ms. Archibald? 

Team—— 

Ms. ARCHIBALD. Team Telecom. 

Chairman DODD. Team Telecom, sort of an example where instead of talking about new authority per se, you get a sense of at 

least requiring some coordination that goes on, and done expeditiously. One of the things we have tried to do—and I appreciate, 

Mr. Marchick, your kind comments about the efforts on the CFIUS 

legislation; Senator Shelby and I were deeply involved in that 

here—is to make sure that we structured that in a way that would 

allow you to get answers but do it quickly, and so you do not end 

up becoming a drag in terms of that very welcomed investment to 

occur in the country. 

It occurs to me here, as I was looking at the various Federal 

agencies and departments that have some piece of all of this, that 

we might want to structure something similar to that. If this is 

going to be a growing issue and you end up with an example that 

will happen, a Dubai Ports that provokes the kind of public reaction without understanding the issue maybe as thoroughly as we 

should have at the time, but, nonetheless, it certainly provoked us 

taking a harder look at CFIUS and structuring it in a way, I think, 

that satisfied everyone involved. There may be an anticipation of 

something like that occurring, which may not always be fair, but, 


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nonetheless, provokes the kind of public response, where the pendulum can swing, as we have seen, periodically, that we might 

want to look at something like Team Telecom or the CFIUS structure. 

I wonder if any of you have any particular comments on that 

idea. Mr. Marchick? 

Mr. MARCHICK. I think it is a very good idea for the following 

reasons: First, there were two major problems with Dubai Ports. 

One was just the facts and the politics, and the second was that, 

notwithstanding Senator Shelby’s great efforts when he was the 

Chairman and he had a hearing on this before anybody else frankly cared about it, there was not enough communication with the 

Congress so that when a hard case came, nobody had visibility into 

the process and nobody had confidence in it. And so when you have 

bad facts and lack of transparency, the system broke down. 

So it seems to me that there could be some type of interagency 

coordination among all the agencies that have any relationship 

with sovereign wealth fund activity to monitor it, to make sure that 

they look to see that every government concern is addressed adequately, and if not, they should communicate with you. 

So, to my knowledge, there has not been a sovereign wealth fund 

investment in the United States that has been problematic in 50 

years, and some of these funds have been around for 50 years. Does 

that mean that there are not holes in the system? You know, nobody knows, but they need to be vigilant in this type of coordination and communication not only internally but, equally important, 

with you and your colleagues so that people up here have confidence in what is going on down there. That is a good idea. 

Chairman DODD. Ms. Archibald? Anybody else? 

Ms. ARCHIBALD. I agree with that, and one thing I would add to 

it is perhaps it would be worth considering whether or not one 

structure to use for that would be to look at this on an industry 

basis, because sometimes the national security issues will vary industry by industry. So perhaps in the banking and finance industry, you want to get the agencies—and there are many of them in 

the banking area—to be working together and, in fact, sharing 

knowledge with each other about these investments. 

I do note that one of the changes I have seen in the proposed regulations on CFIUS for foreign government acquisitions, which 

would include sovereign wealth funds, is the requirement to talk 

about agreements that the investor may have with others that 

would get at one of the issues that I know was of concern to Members here, which is the idea of cooperation and acting in concert to 

beat a particular threshold. 

So I think you have got mechanisms in place, and if you just applied them in a couple of other areas, even in an informal way, you 

will have a much greater sense of confidence that the investments 

are being monitored in a way that will properly protect national security. 

Chairman DODD. Professor Rose. 

Mr. ROSE. Well, I agree with both of those comments. I think one 

argument for a quite broad interagency communication framework 

would be that, you know, if you have a sovereign wealth fund investor in financial services that starts behaving badly, then cerVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HR\OC\A400.XXX A400

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tainly the telecommunications folks should know. These are going 

to be diversified investors with investments all over companies in 

the United States and, frankly, I think that having that made public will also help investors in—or, rather, regulators in other countries become aware of this problem. And I think this is part of the 

important policing effect, I think, that this kind of interagency 

communication could have. 

Chairman DODD. Mr. Johnson. 

Mr. JOHNSON. Chairman Dodd, this is an interesting idea, and 

CalPERS would welcome the opportunity to support you and this 

Committee in this effort in any way. 

Chairman DODD. Well, thanks. Let me ask about the definitions. 

Treasury Deputy Secretary, despite the fact they are not here 

today, which we will constantly remind them of this, they defined— 

Bob Kimmitt defines ‘‘sovereign wealth’’ as ‘‘government investment vehicles funded by foreign exchange assets and managed separately from other reserves.’’ Mr. Alvarez in the first panel defines 

‘‘sovereign wealth’’ as ‘‘an investment fund that is owned by a national or state government.’’ 

Is CalPERS a sovereign wealth fund? 

Mr. JOHNSON. CalPERS is not a sovereign wealth fund, Chairman Dodd. As I stated in my testimony, we receive assets from the 

members that we represent, and only a small percentage of—— 

Chairman DODD. So you are not owned by the State of California? 

Mr. JOHNSON. We operate under the Constitution of the State of 

California. 

Chairman DODD. But you are not owned by them? 

Mr. JOHNSON. That is correct. 

Chairman DODD. Distinguish for me, if you can, these two definitions. Is there something that we as a Committee ought to be—our 

ears ought to be particularly sensitive to? Is it the last part of this 

thing, that it is managed separately from official reserves in the 

Treasury definition as opposed to the Federal Reserve definition? 

Or is it a distinction without a difference? 

Mr. ROSE. Well, I think the Treasury—you know, that was his 

definition. I do not know if the Treasury has an accepted—if this 

is their accepted—— 

Chairman DODD. I do not know either. 

Mr. ROSE. I know that the European Union defines ‘‘sovereign 

wealth funds’’ quite broadly, and they will include these other categories that I mentioned in my statement in there. 

I think that the reason why these distinctions can matter is because the different funds may perceive risk differently. They may 

have different kinds of investment strategies. And for regulators, 

those differences could matter. 

Mr. MARCHICK. The first thing I will do is agree with CalPERS 

since they are a good investor in Carlyle. 

The second thing I would say is I think you have to look at control and who controls the decisions. So if you have an organization 

like CalPERS, which I think the majority of the board members are 

not government officials, but they are elected or appointed by their 

members, that control is not with the government. There are other 

pension funds where the government in Canada and elsewhere apVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HR\OC\A400.XXX A400

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points all the members or a majority of the members. So, therefore, 

you know, you have control. 

So sovereign wealth funds have been—you know, SWFs, they are 

almost like a four-letter word now, even though it is just three. I 

think the key thing is, you know: Is there control? Is there government direction? Are they making decisions for economic reasons or 

for non-economic reasons? If they are non-economic reasons, how do 

we react? When an investor invests in the United States, the 

United States is sovereign, not them. And are our laws and regulations adequate? 

Chairman DODD. Let me ask you—— 

Senator SHELBY. Mr. Chairman, can I ask him one thing along 

that line? 

Chairman DODD. Certainly. 

Senator SHELBY. Excuse me. 

Chairman DODD. No. Go ahead. 

Senator SHELBY. What if they are both? In other words, you are 

investing for a return, obviously, but you are also going to influence 

how that institution is run. Two different things, aren’t they? 

Mr. MARCHICK. It is a very good question—— 

Senator SHELBY. One is benign, one is not. 

Mr. MARCHICK. Right. You take Norway. OK? Everybody is saying Norway is the panacea of transparency. Norway does make 

some decisions—this is their oil fund—for non-pure economic reasons. They invest in, for example, broadband in Norway, and they 

say we are doing this because we want broadband to be ubiquitous 

in Norway. Is that a problem? I do not know. If they invested in 

the United States and were making investments for reasons that 

were not perfectly economic, as long as it did not undermine important government interests or trigger any particular regulation or 

law that does not create problems—you know, that indicates a 

problem, I guess I would rather—I would love to have their investment in the United States. 

Chairman DODD. Well, you raise an interesting point. Let me 

raise this question with you. It might require a longer answer than 

the time will permit us at this juncture. But Carlyle is both a recipient of foreign investment funds and an investor, benefiting 

from—— 

Mr. MARCHICK. Absolutely. 

Chairman DODD [continuing]. Those protections and from the 

protections of the U.S. securities laws. How would you recommend 

addressing the conflicts cited if they limit the ability of U.S. authorities to investigate or prosecute insider trading, for example, 

market manipulation, or other misconduct by rogue sovereign 

funds? 

Mr. MARCHICK. That is not my area of expertise, securities law. 

I would say that in our case, all of our investors are completely 

passive, so there is no real issue in terms of how they impact any 

decisions that Carlyle makes because our investment professionals, 

whether they are in the United States or Europe or Asia, make 

their investment decisions based on what they believe is the best 

opportunity for increasing return for our investors. And if we do a 

good job, hopefully our investors will keep investing. But I do not 

have a particular answer to your—— 


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Chairman DODD. Well, I would like you to raise that with folks 

at your shop. 

Mr. MARCHICK. Sure, absolutely. 

Chairman DODD. Because it raises that issue for us on this side 

of the panel here. 

Do you have any comment on that question? 

Ms. ARCHIBALD. Not that I am in the business of trying to encourage lots and lots of mitigation agreements in the context of a 

CFIUS review, because there are places where they are proper and 

useful, and you could get carried away. But if there is an area 

where you are really concerned about a sovereign investor in a particular industry and where there may be a concern about willingness to work cooperatively with law enforcement when issues do 

arise, you know, that could always be something that is included 

as part of a mitigation agreement which is imposed as a condition 

of agreeing to the investment. 

So, again, I think there is a tool—not that it would be used in 

every case, but there is something that is available there. 

Chairman DODD. And, of course, the ideal situation would be to 

know that in advance to be talking about it, rather than have 

something come up after the fact. 

Ms. ARCHIBALD. That is exactly right. But, again, this may be an 

area where it is worthwhile getting a little bit of experience. Certainly once there ever were such an issue, I think someone mentioned before the agencies should share this kind of information. It 

could certainly become a requirement thereafter. 

Chairman DODD. Professor Rose, any comments on this? 

Mr. ROSE. No. I agree with those comments. It certainly is a 

problem, I would imagine—I would hope—that the banks would be 

aware of this and that they might just as a sort of market mechanism structure deals so that they would prevent this kind of activity. 

Chairman DODD. Mr. Johnson. 

Mr. JOHNSON. No comment, Mr. Chairman. 

Chairman DODD. Well, there will probably be some additional 

questions I may have for you. We are going to take a slight recess 

here. Senator Reed is coming back to complete his questioning. He 

will be a few minutes because there are two votes here. I want to 

make the first vote and the second vote. But I am very grateful to 

all of you for being a part of this discussion. And when I said at 

the outset of my comments—and, that is, striking the balance here, 

again, I think your point, Mr. Marchick, again, is this is a large 

amount of money. It depends how you look at it in the context of 

other resources. And, of course, particularly now because we find 

ourselves vulnerable with our economy being what it is, the foreclosure issues, the seizing up of capital and credit, and so they are 

going out and seeking capital elsewhere. And there are different 

motivations that are involved here, and as a result, that is raising 

some additional concerns that otherwise probably would not be 

present, at least at this juncture. 

So it is important to understand the context in which we are 

talking about this, not so much the size of it at this juncture, although that is a legitimate issue to raise, but the potential ability 

for those funds to have a greater influence than they might otherVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HR\OC\A400.XXX A400

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wise have since your ability to shop elsewhere has been limited by 

what we are dealing with. And that is a concern I have as Chairman of the Committee. 

So I thank you all very, very much. You gave excellent testimony, and it is tremendously helpful. 

The Committee will stand in recess for a few minutes. 

[Recess.] 

Senator REED [presiding]. Chairman Dodd has asked me to reconvene the hearing and, on my behalf, thank you for your testimony and participation. And let me ask a few questions. The 

Chairman is returning, I assume in a few minutes, and he will ask 

other questions and wrap up. But thank you very much. 

Mr. Marchick, you explained that Carlyle Group has received investments from two government-affiliated entities—a State employees’ pension fund and a sovereign wealth fund. Can you describe 

the extent of information that is available to you about these 

funds? And would it be useful to you as a company to have additional information that is readily accessible? 

Mr. MARCHICK. Thank you for your question. I will call you ‘‘Mr. 

Chairman’’ for the moment. We are very comfortable with the level 

of information that we have. Obviously, before taking an investment, we spend a lot of time doing due diligence on the investors, 

and they spend a lot of time doing due diligence on us, and we get 

to know each other. We get to know their culture, their goals. Obviously, CalPERS is very well known. They have a phenomenal track 

record of being good investors and responsible stewards for the 

pensioners of California. And we have enjoyed that relationship for 

many, many years, and the investment they have made has been 

a fantastic investment. When that is realized, it is going to be 

worth quite a bit of money for the pensioners of California. So we 

are pleased with it, and hopefully they are pleased with it. 

With respect to Mubadala, we did not know much about them. 

We got to know them last fall, and we are very impressed with 

them. We got to know their business, their people. What was interesting to us is that most of their leadership are people that either 

grew up in the United States that are of origin in that region or 

were trained in the United States, you know, at some of our best 

institutions—Harvard, Stanford, and others, either for undergrad 

or business school. And most of the senior leadership at Mubadala 

spent a number of years at some of our finest institutions, you 

know, Citibank and Goldman Sachs and others. 

So we have a good comfort level with both of our investors and 

feel very good about their investments and are grateful that they 

have confidence in us, and hopefully we can continue to enjoy their 

confidence. 

Senator REED. In line with the questions I was addressing to the 

SEC, just trying to get a handle on the amount of either equity or 

debt that a sovereign wealth fund is investing in a private equity 

fund or a hedge fund, that then in turn invests in any publicly held 

company or financial institution, is that something that you think 

would be easily obtained or willingly given? 

Mr. MARCHICK. It is a good question. We have a number—if you 

look at the typical investors in private equity funds, the biggest 

chunk by far are public pension funds like CalPERS and Rhode IsVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HR\OC\A400.XXX A400

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land Pension and others. There are also institutional funds, say insurance companies, other private pension funds, pension funds endowments, foundations, et cetera. Then there are individual investors, oftentimes wealthy individuals who either invest directly or 

invest through aggregators like a Merrill Lynch will raise money 

from a hundred different wealthy individuals and invest in Carlyle 

or Blackstone or others. And then, finally, you know, a sovereign 

wealth fund. 

Most of our clients, most of our investors prefer or demand confidentiality. Some of our investors do not. CalPERS for their own 

purposes discloses every investment they make, and if they are 

comfortable disclosing it, then we are comfortable disclosing it. 

In certain regulatory instances where there is a sensitive investment, some regulators have asked us for a list of investors, and we 

obviously comply with that if there is a reason for them to be focused on the list of investors. In my view, it does not really matter 

because all of our investors are completely passive. So it is just like 

when you invest in your 401(k) or TSP, you put your money in, 

someone else manages it, and hopefully they do a good job for you. 

In our case, they invest with us. We hopefully will do a good job. 

We have a pretty good track record, and if we are good shepherds 

of their money, then they will keep investing with us. 

But who invests with us does not matter in terms of, you know, 

how the investments are made. When we invest in a particular sector, we are subject to the regulations in that sector. So a telecom 

company, we are under FCC jurisdiction. 

Sorry for going on. 

Senator REED. No, no. It is quite helpful. Thank you. 

Mr. Johnson, from your perspective, this issue of the level and 

identity of investors, sovereign wealth funds in particular, any comments? 

Mr. JOHNSON. Senator Reed, I would just promote the point that 

CalPERS advocates disclosure and transparency by investors at 

large. We try to lead by example. We try to advance this in the 

marketplace with the development of our own principles in this 

area. 

Senator REED. Thank you. 

Let me shift gears for a moment. Professor Rose and Ms. Archibald, we have talked a lot about the Federal securities laws, the 

Change in Bank Control Act, the Bank Holding Company Act, but 

there are State laws which are implicated at certain times. Can 

you comment, Professor, first on any implications that State laws 

have with respect to these sovereign funds, or either what they are 

doing now or what they may do? 

Mr. ROSE. Well, the only thing that I could offer that I think 

would be of value is if you were thinking about a sovereign wealth 

fund and worrying that they would be controlling a company— 

maybe it is at a level that falls under 4.9 percent—I frankly would 

be concerned about whether fiduciary duties would be implicated, 

frankly, if they are acting as a controlling entity and, I suppose, 

pushing around a board. So from that angle, conceivably you could 

have State laws implicate. As far as perhaps insurance laws or 

other State regulations, I do not have as much experience, and I 

cannot offer any comments on those. 


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Senator REED. Thank you. 

Ms. Archibald, your perspective? 

Ms. ARCHIBALD. Yes, I would have to say the same thing. I am 

not aware of any specific State law that is directly aimed at sovereign wealth funds. Certainly for some of the sectors that we have 

talked about this morning that are subject to regulation generally, 

there are State regulations that must be adhered to at the time of 

a change in control or an acquisition by a foreign entity. But I am 

not aware of any that are specific to sovereign wealth funds. 

Senator REED. Shifting back again to the Federal forum, last 

year we took action on the Foreign Investment and National Security Act, and it requires that Treasury propose new rules, which 

also talks about the definition of ‘‘control.’’ And under these regulations, the presumption is that 10 percent would be considered a 

controlling stake. Is that your view, Ms. Archibald? Or I do not 

want to—this is not a final exam. 

Ms. ARCHIBALD. No. Actually, I am glad you asked this question. 

I was discussing during the break that there has been a misunderstanding, I think, about the regulations that have been in effect for 

some time. 

It is not quite correct to say that there is a presumption that 

anything that is over 10 percent is controlling or that everything 

under 10 percent is not controlling. The test that has always been 

in the regulations but I think is clarified to a much greater degree 

in the proposal that was issued this week is that where an investment is at or below 10 percent and is purely for passive purposes, 

then the presumption is that there is not control. 

Now, the proposed regulations go on to make very clear that in 

order to be purely for passive purposes, there can be no action that 

is taken by the investor that would be inconsistent with a purely 

passive investment. And so, for example, it would appear that having a single board seat, even if there are no minority shareholder 

protections, even if there is no special class voting, et cetera, that 

that is an action that is considered inconsistent with a passive investment. That simply means then that the transaction is appropriate for review by CFIUS. They may still determine that it is not 

a controlling share, but it is certainly a reviewable transaction. 

Senator REED. Well, that circles back to the point that Professor 

Rose suggested, that on the other side of the transaction, if, in fact, 

an investor disregards the passive nature, there would be a duty 

by the directors and the management to resist any measures like 

that to publicize them. Do you think that would be, you know, 

under standard corporate law where the fiduciary duty is to ensure—or is there no duty on the other side of the transaction? 

Ms. ARCHIBALD. I do not want to hold myself out as an expert 

on all the rules that apply to public corporations, but certainly in 

any instance in which an investment was made with the approval 

of the other shareholders of the company that was purely for passive purposes and there is behavior that is inconsistent with that, 

I would certainly expect the management of the company to share 

that information with the rest of the board and to determine what 

action, if any, was appropriate and available. 

Senator REED. I have exhausted my questions, but I do not see 

the Chairman. So I hesitate to stand in recess for a moment. 


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We are trying to clarify his—I have guidance that we should 

stand in recess for a moment. But don’t mill around. Hopefully he 

will be here in a moment. Thank you. The Committee stands in recess. 

[Recess.] 

Senator REED. Just if I may for a moment reconvene the hearing, 

Senator Dodd has just informed the staff that he is unable to return. So I want to thank all of you on behalf of the Chairman and 

the Ranking Member, Senator Shelby, and all of my colleagues for 

your testimony and for your participation today and for your good 

work outside this hearing room. Thank you very, very much. 

The hearing is adjourned. 

[Whereupon, at 1:01 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM ETHIOPIS TAFARA 

CONCERN OVER SWF SIZE AND SEC CAPACITY

Q.1. Mr. Tafara, there is a wide range in market participants from 

the small single investor all the way to multi-billion dollar sovereign wealth funds. 

Does the SEC take any particular steps to address this broad 

range and do you have any concerns that, as sovereign investors 

grow larger, the task of policing the markets will grow more difficult? 

A.1. In general, the federal securities laws do not distinguish 

among investors due to their size, but rather offer the same protections to and impose the same obligations on each investor, regardless of the amount of assets it has or its sophistication. 

Holdings in relation to an issuer 

The federal securities laws impose disclosure requirements on investors once their interest in a given issuer reaches a certain size. 

For example, beneficial owners of more than 5% of a voting class 

of an issuer’s registered equity securities are required to file a 

Schedule 13D. This disclosure schedule must be filed within 10 

days of the purchase and is designed, among other things, to disclose possible takeover attempts of an issuer. Schedule 13D also requires the beneficial owner of the securities to disclose the source 

and amount of funds being used to purchase the shares, and announce whether the purpose of the purchase is to acquire control 

as well as any plans or proposals with regard to future actions by 

the purchaser. 

Instead of reporting beneficial ownership of more than 5% of a 

voting class of an issuer’s registered equity securities on Schedule 

13D, certain types of beneficial owners are eligible to report their 

holdings on the abbreviated ‘‘short-form’’ Schedule 13G. These investors are commonly referred to as Qualified Institutional Investors or Passive Investors. When filing a Schedule 13G, an investor 

must certify that the securities were not acquired and are not held 

with the purpose or with the effect of changing or influencing control of the issuer. Depending on the facts and circumstances, beneficial owners who report their holdings on Schedule 13G must file 

that disclosure schedule in as few as 10 days from the date of acquisition or as many as 45 days at the end of the calendar year 

to the extent their holdings exceeded 5% on the last day of that calendar year. 

The federal securities laws also require beneficial owners of more 

than 10% of a voting class of registered equity securities to file a 

Form 3 to disclose their share ownership, and a Form 4 if the 

amount of share ownership changes. Form 3 is due within 10 days 

of becoming a 10% beneficial owner and Form 4 is due within 2 

business days after the transaction that causes a change in beneficial ownership. 

Holdings in relation to the market 

Investors in U.S. exchange-traded equities are required to file 

Form 13F reports once the size of their discretionary assets under 


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management reaches a certain amount. Exchange Act Section 13(f) 

requires institutional investment managers that exercise investment discretion over accounts holding registered securities, the aggregate fair market value of which is $100 million or more, to file 

quarterly reports of their holdings in SEC-registered securities 

within 45 days of a quarter’s end. 

Enforcement 

With regard to whether policing the markets will become more 

difficult as sovereign wealth funds grow larger, the SEC has a variety of tools with which to enforce the federal securities laws that 

allow it to be an effective regulator despite constant evolution in 

the capital markets. These tools include strong ties with securities 

regulators around the world that facilitate gathering evidence located abroad, thus allowing the Commission to pursue wrongdoing 

even if the perpetrators are outside U.S. borders. Even if another 

government is recalcitrant in its cooperation, illegal activities such 

as market manipulation and insider trading generally leave sufficient evidence in the United States that the SEC can proceed with 

its enforcement duties. 

SWF HOLDINGS OF U.S. EXCHANGE-TRADED EQUITY SECURITIES

Mr. Tafara, in your testimony you point out that institutional in- vestment managers who control more than $100 million of U.S. exchange-traded securities must file Form 13F at the end of each calendar quarter, which requires a manager to disclose the name of 

each reportable issuer, the number of shares, and the market value 

of the manager’s portfolio. 

Q.2.a. How active is the SEC’s oversight with respect to ensuring 

adherence to the disclosure requirements of the Securities Laws? 

A.2.a. There are over 12,000 companies that are registered with 

the SEC. SEC staff regularly reviews the filings of those companies, as mandated by the Sarbanes-Oxley Act. SEC staff, primarily 

in the Division of Enforcement and the Division of Corporation Finance, relies on a variety of public sources of information about 

registered companies for purposes of conducting surveillance for 

compliance with the US federal securities laws. In addition, the 

staff receives, on a continuous basis, information provided from 

nonpublic sources, such as investor or issuer complaints and tips 

from purported insiders or other sources. For example, in the context of proxy contests or hostile tender offers, issuers and other investors are the Commission’s most common source of information 

about undisclosed shareholdings. Information indicating a material 

non-compliance with SEC disclosure requirements could become 

the basis of an SEC investigation. Once the SEC undertakes an enforcement action, depending on the facts and circumstances, it can 

seek various remedies, including enjoining further violations of the 

federal securities laws and imposing fines. 

The SEC has taken action against institutional investment managers for not complying with Section 13(f) disclosure requirements. 

In 2007, the SEC brought actions against two funds for not complying with Section 13(f) reporting requirements, among other 

things. In August 2007, the SEC filed an administrative action 

against Quattro Global Capital LLC, a registered investment adVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00159 Fmt 6602 Sfmt 6602 E:\HR\OC\A400.XXX A400

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1 In the Matter of Quattro Global Capital, LLC, ADMINISTRATIVE PROCEEDING File No. 

3–12725; 2007 SEC Lexis 1807 (August 15, 2007). The SEC administrative proceeding release 

on this matter is located at http://www.sec.gov/litigation/admin/2007/34–56252.pdf. 2SEC v. Scott R. Sacane, et al., Civil Action No. 3:05cv1575–SRU (D. Conn., filed October 12, 

2005); 2007 SEC Lexis 1929 (August 19, 2007). The SEC litigation release on this matter is located at http://www.sec.gov/litigation/litreleases/2007/1r20258.htm. 

viser that failed to file Form 13F reports for a period of five years.1

This failure to file was discovered as a result of an inspection of 

Quattro by the SEC’s Office of Compliance Inspections and Examinations. Quattro agreed to a cease-and-desist order against further 

violations of the federal securities laws, as well as to pay a fine of 

$100,000. In a separate matter, also in 2007, the SEC filed a claim 

against two persons, Scott Sacane and J. Douglas Schmidt for their 

failure to file Form 13F reports and other disclosure documents in 

connection with their alleged fraudulent schemes concerning the 

purchase and sale of the common stock of two biotechnology companies.2

Q.2.b. Are there any sovereign investors, either sovereign wealth 

funds or state-owned enterprises, which file a form 13F and if so, 

which entities are they? 

A.2.b. Through the SEC’s Electronic Data Gathering and Retrieval 

system (EDGAR), a search can be conducted on any identified sovereign wealth fund or state-owned enterprise. This search would 

show all of the public filings that each entity has made, including 

Form 13F reports. We are aware of some sovereign wealth funds 

that have filed Form 13F reports, including the following: 

• Norges Bank (Norway) 

• Temasek Capital (Private) Ltd. (Singapore) 

• Temasek Holdings (Private) Ltd. (Singapore) 

Please note that this list may not be complete for the following 

reasons: (1) There is no SEC requirement that 13F filers identify 

themselves either as sovereign wealth funds or state-owned enterprises. (2) Sovereign wealth funds and state-owned enterprises 

would be required to file Form 13F only if they manage their assets 

themselves. If they hire other entities to manage their assets, those 

entities would be required to file Form 13F if they meet the criteria 

of Section 13(f) of the Exchange Act. However, those entities are 

not required to name their clients. (3) There are a large number 

of entities that have filed Forms 13F, most of which are not sovereign wealth funds or state-owned enterprises. Because Form 13F 

filers identify themselves only by name and address, a systematic 

search of EDGAR’s Form 13F database for sovereign wealth funds, 

state-owned enterprises, or any other category of filer is impracticable. 

In the past, the SEC staff has undertaken efforts to contact large 

private funds with US investments that had not filed Form 13F reports. The purpose of this exercise was to determine whether these 

funds should be filing Form 13F reports, and, if so, to bring them 

into compliance. Based on the staff’s experience with these funds, 

we believe it is possible that some sovereign wealth funds may not 

be aware of their Form 13F reporting obligation. SEC staff is 


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3Securities Act of 1933 Release No. 6937; 1992 SEC LEXIS 1041; 50 S.E.C. 980 (May 2, 1992). 

4Securities Act of 1933 Release No. 8036; 2001 SEC LEXIS 2430 (Nov. 19, 2001). The SEC 

administrative proceeding release on this matter is located at http://www.sec.gov/litigation/ 

admin/33–8036.htm. 

weighing various options for addressing sovereign wealth funds’ 

compliance with Form 13F reporting requirements. 

RECORD OF SETTLED SOVEREIGN INVESTMENT CASES

Q.3. Mr. Tafara, the Committee is aware of the inability of SEC 

staff to comment on the substance of any issue where there may 

be an ongoing investigation or enforcement action. I would like to 

ask however, about completed and settled cases. 

Do you know of examples of any sovereign investor or stateowned enterprise that has been implicated in an enforcement action in the past? 

A.3. We cannot report any recent SEC enforcement action against 

a sovereign investor or state-owned enterprise. Below are two matters in which the SEC brought actions against state-owned enterprises for making unregistered offers of bonds in the United States: 

• In 1992, the SEC brought an administrative proceeding 

against the State Bank of Pakistan in In the Matter of State 

Bank of Pakistan 3 for violations of Section 5(c) of the Securities Act of 1933. The State Bank of Pakistan had offered bearer bonds in the United States without registering them with 

the Commission. This action was settled after the State Bank 

of Pakistan withdrew the offer and the SEC instituted a ceaseand-desist order against further violations of Section 5 of the 

Securities Act. 

• In 2001, the SEC brought an administrative proceeding 

against the State Bank of India in In the Matter of The State 

Bank of India and Citibank, N.A.,4 also for violations of Section 5(c) of the Securities Act. This action was in response to 

an unregistered US offering of bonds made by the State Bank 

of India in 1998. In a settled action, the Commission ordered 

the State Bank of India to cease and desist from further violations of Section 5 of the Securities Act. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM PAUL ROSE 

U.S. APPROACH TO REGULATING FOREIGN INVESTMENT

Q.1. The U.S. Government has pursued a transaction and sectoral 

based system of regulation for sovereign investment, rather than 

regulating types of investors. 

I would like each of the witnesses to comment on the merits of 

this approach and any concerns you may have. 

A.1. I believe that the general transaction and sectoral based system of regulation, as applied to all types of investors, has provided 

a strong framework that has served companies, investors and consumers well. However, sovereign investments do not fall neatly into 

the regulatory framework and often present risks that are not 

present with most other types of investment. Nevertheless, it is my 


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opinion that the existing regulatory structure, as recently buttressed through the Foreign Investment and National Security Act, 

is flexible enough to address these risks. However, improvements 

could be made in the implementation of the existing regulations. 

For example, I am concerned that the sectoral focus does not provide a holistic view of a sovereign’s investment in U.S. enterprises. 

The judgment of an agency with regard to a particular transaction 

could be affected if the agency were aware of the various investments that were approved by other agencies. To my knowledge, 

there is no formal mechanism (except to the extent certain agencies 

coordinate through CFIUS) to ensure that information is shared 

between all agencies, and that this information is relied upon in 

making judgments about the propriety of particular sovereign investments. At a minimum, a central repository of such information 

would be helpful for agencies, CFIUS and Congress in regulating 

sovereign investment. 

With respect to regulating types of investors rather than regulating transactions, I have two concerns specific to the application 

of such a system to investment by sovereign wealth funds. First, 

sovereign wealth funds vary widely in their investment objectives, 

risk management systems and transparency. Regulating all investors of a given type in the same way would seem to apply blunt 

force where precision is needed; that precision is more likely 

achieved through a transaction-by-transaction approach. 

Second, there are real risks that investor-specific regulation 

would raise the regulatory burden on sovereign wealth funds without correspondingly increasing the benefits of regulation beyond 

those provided by the existing framework. For example, imposing 

rules for fund governance (which would most likely be a feature of 

sovereign wealth fund-specific regulation) would likely drive funds 

to less-regulated jurisdictions where we would have even less information on and regulatory authority over their activities than we do 

under our present regulatory system. A useful illustration of this 

possibility is California’s recent efforts to regulate hedge funds. 

Proposed legislation in California would have required registration 

of hedge funds if the funds were not already registered with the Securities and Exchange Commission. California abandoned the proposed legislation earlier this month for a variety of reasons, but 

certainly among them was the fact that California’s legislators ultimately recognized that hedge funds would simply move to other jurisdictions like Connecticut and New York, and that California 

would lose the benefits of the hedge funds’ operations within its 

borders. 

For these reasons, I believe that we should address concerns in 

the present system not by replacing regulation, but instead continuing to ensure that the existing regulation works as intended by 

Congress. As noted above, this effort should include inter-agency 

information-sharing and coordination. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM DAVID MARCHICK 

U.S. APPROACH TO REGULATING FOREIGN INVESTMENT

Q.1. The U.S. Government has pursued a transaction and sectoral 

based system of regulation for sovereign investment, rather than 

regulating types of investors. 

I would like each of the witnesses to comment on the merits of 

this approach and any concerns you may have. 

A.1. This answer is partially drawn from a paper that Matt 

Slaughter, Assistant Dean of the Tuck School of Business, and I 

have written for the Council on Foreign Relations. 

Based on my experience, CFIUS examines a number of factors 

when evaluation the national security threats (or lack thereof) associated with a particular investment. CFIUS considers the origin 

of the investment, the individuals that control the foreign entity, 

past compliance with U.S. laws and regulations by the foreign investor, the sensitivity of the asset being acquired and the ability 

of the U.S. government to mitigate any national security concerns. 

Some countries, including the United States and (if it adopts its 

new draft law) Germany, use broad-based national security review 

mechanisms without identifying specific sectors for which reviews 

are required. Other countries, including France and Russia, have 

chosen a sector-based approach in which they identify the sectors 

that require government approval for foreign takeovers. 

There are benefits and drawbacks to each approach. Sector-based 

lists can provide a measure of clarity and predictability for foreign 

investors because they know with certainty whether an investment 

requires pre-approval. In the United States, the lack of a sectorbased list leaves some investors and their advisors guessing as to 

which transactions should be filed with CFIUS. FINSA, the new 

statues governing CFIUS, makes clear that foreign investments in 

‘‘critical infrastructure’’ are within the scope of CFIUS reviews. Yet 

the statute does not define critical infrastructure, and in four different reports in recent years the Department of Homeland Security has used four different definitions. On the other hand, publishing a sector-based list is very difficult for regulators because 

the facts and circumstances in which a foreign investment may 

raise national security issues vary significantly. Moreover, the 

ever-increasing complexity of global business structures makes it 

very hard to apply clear ex-ante lists to actual transactions. In 

practice, then, a list that is intended to boost investor certainty can 

end up actually reducing it. Overall, the possible investor-certainty 

benefit of sector-based lists is outweighed by the practical implementation problems of sensibly creating and applying these lists. 

Accordingly, a better approach is for countries not to create such 

lists. If a government does choose to create a sector-based list, however, it should be tailored to those transactions that are at the core 

of a government’s national security interests. When drafting a sector-based list, regulators—who tend to be cautious and conservative in the first place—may be inclined to draft an extremely 

broad list that covers every conceivable transaction that could raise 

national security issues. This tendency should be resisted. For example, while foreign investments in energy have become more senVerDate Nov 24 2008 03:06 Mar 20, 2010 Jkt 050400 PO 00000 Frm 00163 Fmt 6602 Sfmt 6602 E:\HR\OC\A400.XXX A400

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sitive and of greater interest to governments in Europe, Asia and 

North America, not all energy investments are sensitive. A government has a keen and legitimate interest in regulating nuclear energy, including who owns a nuclear energy company. Alternatively, 

it is hard to see how a foreign investment in, for example, a wind 

farm could raise national-security issues. Thus, instead of deeming 

energy as a broad sector of interest to government regulators, it 

would be better to identify, as narrowly as possible, those specific 

subsectors that raise national security concerns. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM DENNIS JOHNSON 

U.S. APPROACH TO REGULATING FOREIGN INVESTMENT

Q.1. The U.S. Government has pursued a transaction and sectoral 

based system of regulation for sovereign investment, rather than 

regulating types of investors. 

I would like each of the witnesses to comment on the merits of 

this approach and any concerns you may have. 

A.1. CalPERS does not have a policy position on the U.S. Government’s system of regulating sovereign investments. 


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