Despite a warning from IFLR, the European Commission (EC) will press ahead with a voluntary code of conduct for sovereign wealth funds.
On Tuesday, European Commission president José Manuel Barroso issued a statement during his official visit to Norway. While admitting that sovereign wealth is "not a big bad wolf at the door", he drew upon the transparency of Norwegian funds as a paradigm for other funds in Europe.
"A code of conduct has been inevitable since the furore over sovereign wealth started at the turn of the year," said a funds partner at one US law firm. "But that doesn't mean it was required. This will just quieten political panic and make it look like serious action is being taken."
But Barroso justified his statement by saying that a level playing field will benefit Europe as a whole: "We will propose a common approach at European level, avoiding distorting the single market with incompatible national responses. This EU approach should benefit both investor and recipient countries."
Barroso's plans were confirmed in Commission proposals released today, which have been designed to direct discussions of European leaders at the spring European Council on March 13 and 14.
The proposals call for the leaders to agree to a voluntary code of conduct. In particular, it hopes this will encourage some "opaque" funds to disclose the value of their assets, investment objectives and the nature of their risk management systems.
Ironically, these proposals may actually prevent regulation. By calling for a code of conduct the Commission has stumbled across a middle ground. European leaders such as German Chancellor Angela Merkel and French President Nicolas Sarkozy will find it hard to get backing for legislation with a more moderate proposal on the table. Neither has declared their desire for heavy regulation, but their stance has been obvious from anti-sovereign wealth statements.
But opponents to sovereign wealth regulation should not rest easy. Any voluntary code of conduct could be hardened at a later date. This was a lesson learnt by the private equity code of conduct in the UK last year.
And Barroso refused to rule out further action: "We will not propose European legislation. Though we reserve the right to do so if we cannot achieve transparency through voluntary means."