The SEC is concerned that sovereign wealth funds could undermine the integrity of U.S. financial markets through insider trading or other market abuses, Linda Chatman Thomsen, director of the SECs enforcement division, said today at a hearing by the U.S.-China Economic and Security Review Commission.
Sovereign wealth funds are similar to hedge funds in that their operations are relatively opaque to regulators and both often have sufficient asset size to give them power in U.S. financial markets, Ms. Thomsen testified. But unlike hedge funds, sovereign wealth funds are controlled by governments, and that connection could give them access to information that is not available to other investors, Ms. Thomsen said.
There is the potential for these powerful market participants to obtain material, non-public information, either by virtue of their financial and governmental powers or by use of those powers, to engage in illegal insider trading using that information, Ms. Thomsen said. The magnitude of any such conduct could be quite large given the assets these funds have at their disposal.
She said China Investment Corp., which has estimated assets of $200 billion and is run by the Chinese government, appears to be taking a measured approach to its investments and is acting as a passive investor.
The commission, created by Congress, is charged with monitoring the national security implications of trade and economic relationships with China.