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CRITICAL LEGAL AND REGULATORY ISSUES FOR INVESTMENT MANAGERS AND FUNDS SHARIAH COMPLIANT FUNDS AND SOVEREIGN WEALTH FUND

CRITICAL LEGAL AND REGULATORY ISSUES FOR INVESTMENT MANAGERS AND FUNDS SHARIAH COMPLIANT FUNDS AND SOVEREIGN WEALTH FUNDS. Jonathan Lawrence, Moderator Clifford J. Alexander Cary J. Meer. 26 January 2009. DC #1288846. Shariah Compliant Funds and Sovereign Wealth Funds.

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CRITICAL LEGAL AND REGULATORY ISSUES FOR INVESTMENT MANAGERS AND FUNDS SHARIAH COMPLIANT FUNDS AND SOVEREIGN WEALTH FUND

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  1. CRITICAL LEGAL AND REGULATORY ISSUES FOR INVESTMENT MANAGERS AND FUNDSSHARIAH COMPLIANT FUNDS AND SOVEREIGN WEALTH FUNDS Jonathan Lawrence, Moderator Clifford J. Alexander Cary J. Meer 26 January 2009 DC #1288846

  2. Shariah Compliant Funds and Sovereign Wealth Funds • Shariah Compliant Funds • Al Safi Platform • Sovereign Wealth Funds

  3. Shariah Compliant Funds • Divine law as revealed in the Quran and the words and acts of the Prophet Mohammed governing the practical aspects of a Muslim’s life • Shariah Supervisory Board or Committee (3 – 5 scholars) • Investors elect to have fewer rights

  4. Shariah Compliant Funds (cont.) Obligations • Return based on actual fund earnings • Share loss and profit • Avoid uncertainty • Avoid speculation akin to gambling

  5. Prohibitions Guaranteed fixed rate of return Earning money solely by passage of time Dealing with traditional banks on an interest basis or for fixed term returns Alcohol, illegal drugs, gambling, pork, adult entertainment, traditional insurance and reinsurance Weapons manufacturing and sales Lack of knowledge or excessive risk Shariah Compliant Funds(cont.)

  6. Income Rent Shariah Compliant Funds(cont.) Ijara/Lease Fund

  7. Shariah Compliant Funds (cont.) Islamic Equity Funds • Stock selection • Industry screen • Financial screen • Non-compliant stocks: temporary, short-term or permanent? • Disclosure concerns

  8. Al Safi Platform • May 2008 Cayman Islands mutual fund • Shariah compliant alternative investments • Multi-class unit trust with multiple sub-trusts • Specific investment objective and strict segregation between sub-trusts

  9. Al Safi Platform (cont.) • Shariah Adviser (Shariah Capital): advises on each sub-trust’s compliance with Shariah investment guidelines and provides reports • Shariah Supervisory Board: supervises the Trust and each sub-trust’s business, activities and investments

  10. Al Safi Platform (cont.) • Shariah compliant “short sale” of securities • “Arboon”: down payment; a non-refundable deposit equal to a percentage of securities’ fair market value • Closing date for payment of unpaid portion with right of acceleration

  11. Al Safi Platform (cont.) Barclays Capital: prime broker and structured product distributor Dubai Multi Commodities Centre Authority (DMCC) seeded $50m each to: Tocqueville Asset Management: Gold Lucas Capital Management: Energy/Oil and Gas Zweig-DiMenna Intl Managers: Natural Resources Black Rock: Global Resources and Mining

  12. Sovereign Wealth Funds • Special purpose investment funds owned by the central government and created for macroeconomic purposes • SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies, which include investing in foreign financial assets

  13. Sovereign Wealth Funds (cont.) SWFs are commonly established out of: • balance of payments surpluses; • official foreign currency operations; • proceeds of privatisations; • fiscal surpluses; and/or • receipts resulting from commodity exports

  14. Sovereign Wealth Funds(cont.) Key Elements • Ownership • Investments • Purposes and Objectives

  15. Sovereign Wealth Funds (cont.) Estimated Worth • SWFs: $3.3 trillion • Hedge funds: $1.9 trillion • Private equity firms: $1.16 trillion

  16. Sovereign Wealth Funds (cont.) UK Regulation of SWFs • One of the least restrictive regulatory regimes • November 2007: Walker Guidelines for Disclosure and Transparency in Private Equity? • Qatar Investment Authority vehicle Delta Two Limited in bid for Sainsbury’s

  17. Sovereign Wealth Funds (cont.) US Regulation of SWFs • US Office of Foreign Assets Control • 2007 Foreign Investment and National Security Act (FINSA) • Review by Committee on Foreign Investment in the United States (CFIUS) • March 2008: US Treasury Principles for SWF Investment with Abu Dhabi and Singapore • April 2008: Withdrawal of proposed California ban on pension funds investing in PE firms backed by SWFs

  18. Sovereign Wealth Funds (cont.) International Regulation of SWFs • June 2008: OECD Declaration on SWFs and Recipient Country Policies • July 2008: European Parliament resolution • October 2008: IMF International Working Group of SWFs Generally Accepted Principles and Practices (GAPP) – the “Santiago Principles”

  19. Sovereign Wealth Funds (cont.) Issues for Contracting with SWFs • Authority to invest • Willingness to make representations and warranties • Willingness to waive sovereign immunity • Consent to jurisdiction in foreign courts • Regime change

  20. CRITICAL LEGAL AND REGULATORY ISSUES FOR INVESTMENT MANAGERS AND FUNDSSHARIAH COMPLIANT FUNDS AND SOVEREIGN WEALTH FUNDS Jonathan Lawrence, Moderator Clifford J. Alexander Cary J. Meer 26 January 2009 DC #1288846

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