The 24 "Santiago Principles" - The International Working Group on Sovereign Wealth Funds

The International Working Group on Sovereign Wealth Funds has released its Generally Accepted Principles and Practices (GAPP), also known as the Santiago Principles.

At the Ministerial Meeting of the International Working Group of Sovereign Wealth Funds (IWG), held on October 11, 2008, Mr. Joaquín Almunia, European Commissioner for Economic and Monetary Affairs, made the following statement:

"Let me first congratulate the International Working Group of Sovereign Wealth Funds and the IMF for the major effort they have made to complete the Generally Agreed Principles and Practices (GAPP).

"When the IMFC and the G7 last April asked the IMF and the OECD respectively to prepare a set of best practices for SWFs and principles for recipient countries, it was difficult to imagine that so much would be accomplished in less than one year.

"The principles and practices of the GAPP amount to a global public good that can help foster trust and confidence between sovereign wealth funds, their originating countries, and the recipient countries. This is what we need in these turbulent times: a strong commitment to enhance mutual trust and maintain and preserve an open investment environment.

"The European Commission has pleaded from the very beginning for a cooperative and multilateral solution. In February 2008, the Commission issued a Communication on a common European approach to sovereign wealth funds. There we stated that: "Europe must remain committed to its tradition of openness to capital investments, as they are a vital source of strength for the European economies in a globalised world."

"There we made the case for engaging SWFs in a cooperative effort to enhance their governance standards and the quality of information they provide to markets in the mutual interest of both recipient and sponsor countries.

"I am very pleased to see that this approach is now generally accepted by both originating and recipient countries of the funds, and it is part of the cooperative philosophy that has produced the GAPP.

"I believe that reaching an agreement on a common European approach to sovereign wealth funds at an early stage was particularly important for the success of the process that produced the GAPP. In fact: (1) it pre-empted uncoordinated national actions by European countries with respect to sovereign wealth funds, and (2) it provided to originating countries the reassurance that they would continue to find in the EU a clear, predictable, and reliable legal environment for their investments, with the European Commission playing its full role in enforcing the European Treaty provisions on free movement of capital and openness.

"I think that the GAPP rewards all those of us who recognised from the beginning that sovereign wealth funds represent a major source of investment for recipient economies and that, as long-term investors, they will continue to bring benefits to global financial markets.

"Sovereign wealth funds, that today are a powerful class of investors in global finance, also needed to dispel concerns in recipient countries, through commitments towards higher transparency, better governance and greater accountability. All the more so given that the growth of SWFs is often the result of persistent imbalances in the global economy. Such imbalances need to be addressed with appropriate policy actions by originating countries of the sovereign wealth funds.

"I believe that by individually implementing the set of generally accepted principles and practices voluntarily agreed, and that are presented here today, SWFs will prove that they are responsible and reliable players in the global financial system.

"The European Union acknowledged from the start that the process of confidence building should not be one-sided and that recipient countries have also to take firm commitments. This is why we support the work of the OECD aimed at identifying best practice guidelines for recipient countries. Such work is in progress and we expect that it will provide greater predictability for sovereign fund investors and reassure that foreign investments are welcomed in our economies.

"With regard to the follow up, we strongly support the proposal contained in the GAPP to create a standing group of Sovereign Wealth Funds that would keep the GAPP under review, monitor its implementation, and continue the dialogue with recipient countries. I see the usefulness and importance of this group, in particular if it will continue to operate in a multilateral framework and provide a platform for a strengthened dialogue with recipient countries. The Commission remains committed to support the work of this standing group, and to facilitate the debate and continue to promote a common European approach."

In furtherance of the "Objective and Purpose", the IWG members either have implemented or intend to implement the following principles and practices, on a voluntary basis, each of which is subject to home country laws, regulations, requirements and obligations. This paragraph is an integral part of the GAPP.

• GAPP 1. Principle
  The legal framework for the SWF should be sound and support its effective operation and the achievement of its stated objective(s).
  • GAPP 1.1 Subprinciple The legal framework for the SWF should ensure the legal soundness of the SWF and its transactions.
  • GAPP 1.2 Subprinciple The key features of the SWF's legal basis and structure, as well as the legal relationship between the SWF and the other state bodies, should be publicly disclosed.
• GAPP 2. Principle
  The policy purpose of the SWF should be clearly defined and publicly disclosed.
• GAPP 3. Principle
  Where the SWF's activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with the domestic fiscal and monetary authorities, so as to ensure consistency with the overall macroeconomic policies.
• GAPP 4. Principle There should be clear and publicly disclosed policies, rules, procedures, or arrangements in relation to the SWF's general approach to funding, withdrawal, and spending operations.
  • GAPP 4.1 Subprinciple The source of SWF funding should be publicly disclosed.
  • GAPP 4.2 Subprinciple The general approach to withdrawals from the SWF and spending on behalf of the government should be publicly disclosed.
• GAPP 5. Principle
  The relevant statistical data pertaining to the SWF should be reported on a timely basis to the owner, or as otherwise required, for inclusion where appropriate in macroeconomic data sets.
• GAPP 6. Principle
  The governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF to pursue its objectives.
• GAPP 7. Principle
  The owner should set the objectives of the SWF, appoint the members of its governing body(ies) in accordance with clearly defined procedures, and exercise oversight over the SWF's operations.
• GAPP 8. Principle
  The governing body(ies) should act in the best interests of the SWF, and have a clear mandate and adequate authority and competency to carry out its functions.
• GAPP 9. Principle
  The operational management of the SWF should implement the SWF’s strategies in an independent manner and in accordance with clearly defined responsibilities.
• GAPP 10. Principle
  The accountability framework for the SWF's operations should be clearly defined in the relevant legislation, charter, other constitutive documents, or management agreement.
• GAPP 11. Principle
  An annual report and accompanying financial statements on the SWF's operations and performance should be prepared in a timely fashion and in accordance with recognized international or national accounting standards in a consistent manner.
• GAPP 12. Principle
  The SWF's operations and financial statements should be audited annually in accordance with recognized international or national auditing standards in a consistent manner.
• GAPP 13. Principle
  Professional and ethical standards should be clearly defined and made known to the members of the SWF's governing body(ies), management, and staff.
• GAPP 14. Principle
  Dealing with third parties for the purpose of the SWF's operational management should be based on economic and financial grounds, and follow clear rules and procedures.
• GAPP 15. Principle
  SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate.
• GAPP 16. Principle
  The governance framework and objectives, as well as the manner in which the SWF's management is operationally independent from the owner, should be publicly disclosed.
• GAPP 17. Principle
  Relevant financial information regarding the SWF should be publicly disclosed to demonstrate its economic and financial orientation, so as to contribute to stability in international financial markets and enhance trust in recipient countries.
• GAPP 18. Principle
  The SWF's investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.
  • GAPP 18.1 Subprinciple The investment policy should guide the SWF's financial risk exposures and the possible use of leverage.
  • GAPP 18.2 Subprinciple The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored.
  • GAPP 18.3 Subprinciple A description of the investment policy of the SWF should be publicly disclosed.
• GAPP 19. Principle
  The SWF's investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.
  • GAPP 19.1 Subprinciple If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.
  • GAPP 19.2 Subprinciple The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.
• GAPP 20. Principle
  The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.
• GAPP 21. Principle
  SWFs view shareholder ownership rights as a fundamental element of their equity investments' value. If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments. The SWF should publicly disclose its general approach to voting securities of listed entities, including the key factors guiding its exercise of ownership rights.
• GAPP 22. Principle
  The SWF should have a framework that identifies, assesses, and manages the risks of its operations.
  • GAPP 22.1 Subprinciple The risk management framework should include reliable information and timely reporting systems, which should enable the adequate monitoring and management of relevant risks within acceptable parameters and levels, control and incentive mechanisms, codes of conduct, business continuity planning, and an independent audit function.
  • GAPP 22.2 Subprinciple The general approach to the SWF’s risk management framework should be publicly disclosed.
• GAPP 23. Principle
  The assets and investment performance (absolute and relative to benchmarks, if any) of the SWF should be measured and reported to the owner according to clearly defined principles or standards.
• GAPP 24. Principle
  A process of regular review of the implementation of the GAPP should be engaged in by or on behalf of the SWF.

October 12, 2008

http://www.iwg-swf.org/pr/swfpr0808.htm