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Reuters Edge

Money, politics mix as wealth funds eye U.S. assets

WASHINGTON (Reuters) - Government-controlled wealth funds, worth $2 trillion and growing fast, are muddling the debate over how the United States can attract foreign investment without sacrificing national security.

At the center of the regulatory discussion is CFIUS, the Treasury Department-led Committee on Foreign Investment in the United States, which was thrust into the spotlight last year with the political firestorm surrounding Dubai Ports World's DPW.DI purchase of a British company that owned U.S. ports.

CFIUS is responsible for vetting foreign acquisitions of U.S. assets for national security risk, but a law passed this year in the wake of the Dubai Ports controversy places special emphasis on transactions involving foreign governments. That means sovereign wealth funds will be under closer scrutiny.

“If it’s a government-owned case, there is a higher bar,” Clay Lowery, U.S. Treasury assistant secretary, told Reuters in a telephone interview. “That doesn’t mean that we stigmatize state-owned enterprises. It just means that there is going to be a higher bar.”

These sovereign wealth funds, which invest surplus reserves, are increasingly looking to the United States for investment opportunities, as evidenced by Abu Dhabi's purchase of a 4.9 percent stake in Citigroup C.N this week.

CFIUS, an inter-agency committee that includes the secretaries of the Treasury, Homeland Security and State, is in the process of rewriting its rules under the new law. The rise of wealth funds is complicating questions about what size stake constitutes control of a company amid concerns that even small shareholders can exert enormous influence.

The Citigroup deal did not involve CFIUS because there was no change in control, but some analysts and lawmakers argue that regulators should be paying closer attention when these wealth funds build up big positions in major U.S. companies.

At a hearing this month chaired by Sen. Evan Bayh, lawmakers across the political spectrum raised concerns about how the United States could protect itself from sovereign wealth funds that could potentially be motivated by political aims - such as acquiring sensitive technology or building potentially destabilizing financial market power - rather than purely financial interests.

“A lack of transparency that characterizes many sovereign wealth funds undermines the theory of efficient markets at the heart of our economic system,” said Bayh, an Indiana Democrat.

“Unlike private investors, pension funds and mutual funds, government-owned entities may have interests that will take precedence over profit maximization.”

CFIUS AT NYSE GATE?

CFIUS got its start in the late 1980s in the midst of a public and political outcry over foreign purchases of U.S. assets, notably the sale of a big stake in New York’s landmark Rockefeller Center to a Japanese company.

Filing with CFIUS is voluntary, but if a foreign buyer does not do so, the United States can dissolve the acquisition -- even after it has been completed -- if it deems it a threat to national security.

Once a filing is made, CFIUS has 30 days to decide whether a full investigation is warranted, which would trigger a 45-day review. Such full investigations are rare because deals are often withdrawn or modified when it becomes clear that there are national security concerns.

But there is a fine line between keeping watch and discouraging investment, which the debt-laden United States desperately needs now as the economy cools. The Treasury Department is eager to quell any protectionist sentiment sparked by increasingly powerful wealth funds.

Todd Malan, head of the Organization for International Investment, which represents U.S. subsidiaries of companies headquartered abroad, said if CFIUS were to vet all equity transactions involving wealth funds, it would be tantamount to “putting CFIUS at the gates of the New York Stock Exchange.”

Wealth funds buying shares of U.S. companies “are really no different than going on your ETrade account and buying 100 shares of Citibank,” he said.

While large investors may get more attention from company management, “that’s no different if you’re Abu Dhabi or Calpers,” Malan said, referring to the California Public Employees’ Retirement System, the largest U.S. pension fund.

Alan Larson, a senior adviser at law firm Covington and Burling and a former undersecretary of state for economic affairs, said the United States needs to be careful about restricting investment at home if it wants open markets abroad, and the new CFIUS rules will protect national interests.

“We need to monitor it closely but I think the laws that are established are really quite well designed to deal with wealth funds,” Larson said.

As companies and their lawyers try to get a grip on what the new regulations mean, CFIUS filings will likely spike, said Christopher Wall, a partner at law firm Pillsbury Winthrop Shaw Pittman who advises clients on CFIUS.

The new law is vague on what constitutes control of a company, and what sorts of assets will be deemed critical infrastructure, and those will be key topics of debate as CFIUS writes its new regulations.

“Until there is some clarity, you don’t know if what you’re buying is critical or not,” Wall said. “It’s a wide range. Until that whole issue becomes more clear in the regulatory process, people will probably file (with CFIUS) more.”

Editing by Andrea Ricci

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