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
Copyright © 2009 by K&L Gates LLP. All rights reserved.
Shariah Compliant Funds and Sovereign
Wealth Funds
 Shariah Compliant Funds
 Al Safi Platform
 Sovereign Wealth Funds
2
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
3
Shariah Compliant Funds (cont.)
Obligations
 Return based on actual fund earnings
 Share loss and profit
 Avoid uncertainty
 Avoid speculation akin to gambling
4
Shariah Compliant Funds
(cont.)
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
5
Shariah Compliant Funds
(cont.)
Ijara/Lease Fund
Lease Fund
Income/Dividend
SPV
Investment
Income
Investment
Investor
Purchase Price
Asset Pool
Ownership
Leased
Assets
Lease
Rent
Lessee
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Shariah Compliant Funds (cont.)
Islamic Equity Funds
 Stock selection
 Industry screen
 Financial screen
 Non-compliant stocks: temporary, short-term or
permanent?
 Disclosure concerns
7
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
8
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
9
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
10
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
11
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
12
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
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Sovereign Wealth Funds (cont.)
Key Elements
 Ownership
 Investments
 Purposes and Objectives
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Sovereign Wealth Funds (cont.)
Estimated Worth
 SWFs: $3.3 trillion
 Hedge funds: $1.9 trillion
 Private equity firms: $1.16 trillion
15
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
16
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
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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”
18
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
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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
Copyright © 2009 by K&L Gates LLP. All rights reserved.