The Foreign Investment and National Security Act of 2007: An assessment of its impact on sovereign wealth funds and state-owned enterprises

In 2007, the U.S. Congress passed the Foreign Investment in the United States Act (FINSA), the most recent in a series of calibrations to a basic regulatory framework that is now nearly 40 years old. FINSA has particularly significant effects on investment by sovereign wealth funds (SWFs) and state-owned enterprises (SOEs). Indeed, FINSA is properly understood as a response to SWF and SOE investment activity, and is designed to provide a framework in which U.S. regulators can weigh the particular risks presented with investment by state-controlled entities. Although in general FINSA has performed ably and as intended in its first five years of implementation, balancing the risks associated with SOE and SWF investment in a competitively neutral way has historically been a challenge, and now may be even more challenging after the passage of FINSA. The chapter outlines several difficulties for state-controlled firms in interpreting and complying with FINSA, and argues that regulators could make regulatory compliance more simple and predictable for these firms by creating reliable signposts that will help guide firms through the regulatory straits imposed by the legislation. At the same time, the need for an experienced pilot – usually in the form of sophisticated legal counsel – is more important than ever. However, the need for such assistance functions as a kind of tax on deals involving SOEs and SWFs, and, in some cases, these state-controlled entities may determine that the benefits are not worth the risks and costs, and so will seek to invest elsewhere.