On February 3, President Trump signed an Executive Order entitled A Plan for Establishing a United States Sovereign Wealth Fund. The Order directs the Secretary of the Treasury and Secretary of Commerce to develop a plan within 90 days addressing the creation of such a fund, including funding mechanisms, investment strategies, fund structure, and a governance model.
The idea of a sovereign wealth fund is not entirely new. A half-dozen countries—typically low-population/high-wealth nations, including Norway, Singapore, and the Kingdom of Saudi Arabia—operate such funds. In general, they are designed to allow a nation that has a large trade surplus, or that derives substantial revenue from sale of a depleting asset such as oil and gas, to invest the proceeds in long-term assets. The funds’ investments are intended to diversify the asset base of the nation, to promote financial stability in case of declines in commodity prices or sales, and to pursue national or foreign policy objectives.
The United States has never operated a sovereign wealth fund. While some U.S. government revenues are derived from depleting assets, such as royalties from oil and gas produced from public lands and the outer continental shelf, Congress has generally specified where these funds are to be expended. For example, OCS revenues both support state budgets of coastal states and fund the Land & Water Conservation Fund, which acquires and conserves lands and waters, investing in a non-wasting asset with the proceeds from a depletable one.
The nearest analogue to a sovereign wealth fund under U.S. federal law is the system established under the Alaska Native Claims Settlement Act of 1971 (ANCSA). In ANCSA, Congress compensated Alaska Natives for extinguishing their aboriginal claims by creating 12 regional Alaska Native Corporations and more than 200 Alaska Native village corporations. These new entities received select Alaska lands (44 million acres) and over $960 million in federal funds. Their boards of directors were tasked with authority to manage and invest the proceeds (the sovereign wealth derived from extinguishment of native claims) for the long-term benefit of their enrolled native members.
Some of the corporations quickly diversified into commercial real estate or acquisition of telecommunications companies far from Alaska; others pursued more traditional courses within Alaska. Some succeeded spectacularly; others lost much of their value. However, a revenue-sharing requirement for revenues derived from timber sales, mining, and oil and gas extraction has aided stability across the range of corporations.
The U.S. government presents an anomalous case for a sovereign wealth fund. For the most part, the nation’s financial stability does not rest on sales of depleting assets, nor are there limited opportunities for domestic investment in public goods. Moreover, the U.S. (unlike, say, China) has traditionally eschewed government ownership of industrial facilities, financial institutions, media companies, airlines, or foreign assets. National financial stability rests on the dynamism of the U.S. economy, tax receipts, and the value of U.S. government obligations—with the dollar serving as the world’s de facto reserve currency. Recognizing this, Congress has specified by law that the Social Security Trust Fund must be invested in U.S. Treasury instruments—the world’s most stable and trusted asset.
If the Trump Administration seeks to place U.S. funds elsewhere via a sovereign wealth fund, it will be extremely important for Congress to define who selects these acquisitions, what are the rules for managing them, what are the objectives, what actions are prohibited, and what conflict-of-interest rules may apply. To whom are such a U.S. fund’s managers effectively accountable, and what interests would control investment decisions?
For example, Qatar’s fund owns interests in entities that during the first Trump presidency made substantial investments in presidential son-in-law Jared Kushner’s Manhattan office tower, while the Saudi fund controlled by Prince Mohammed bin Salman in recent years has bankrolled creation of a new professional golfers’ association (LIV). Without clear and stringent controls and oversight, a U.S. sovereign wealth fund conceivably might be invested in social media companies, resource companies, cryptocurrencies, or companies controlled by influential donors. Such a fund might also engage in speculative investments abroad that could lead to changes in foreign policy to protect the value of those investments from political turmoil or war.
President Trump’s Executive Order calls for “evaluation of the legal considerations for establishing and managing such a fund, including any need for legislation.” Both Treasury analysts and the Congress would need to consider what consequences might occur in connection with creation of a sovereign wealth fund, whether such a fund can be operated in the public interest, and whether investments of public assets in private enterprises is in the national interest.
Historically, most U.S. investments abroad have been through entities such as the World Bank and International Monetary Fund via pooled assets and international boards of directors, and without expectation of net returns to the federal treasury—while domestic investments have been through congressionally authorized loan programs intended to jump-start certain industries, subject to stringent competition and internal review. These latter investments have largely been intended to achieve policy objectives at low cost to the public, rather than intended to produce positive returns to the Treasury, which is the function of a sovereign wealth fund.