SEC chairman Christopher Cox

On December 5, Securities and Exchange Commission (SEC) chairman Christopher Cox delivered the AEI Legal Center for the Public Interest's annual Gauer Distinguished Lecture in Law and Public Policy. Excerpts follow. For the full text, visit www.aei.org/event1599/.

Two recent phenomena--state-owned or controlled corporations in our public markets and government-owned commercial investment funds--are challenging conventional approaches to the respective roles of government and the private sector.

We now are dealing with the growing phenomenon of the state-owned, but publicly traded, company. This is a trend being driven by the semi-privatization of government enterprises in areas such as banking, oil and gas, infrastructure, transportation, and real estate, among others. . . . Of the twenty largest publicly traded companies in the world, eight are state-owned sovereign businesses.

A related, and growing, phenomenon is government ownership of large investment funds, or so-called sovereign wealth funds. This phenomenon is not new, but it is a markedly growing trend that raises many of the same issues of government ownership, and others as well. In operation, sovereign wealth funds are simply the investment arms of governments. But while they have existed in one form or another for many years, today they are making an increasingly obvious footprint in the global financial marketplace, growing in size relative to private assets.

Today, the world's sovereign wealth funds are significantly larger than all of the world's hedge funds combined. According to some estimates, they could grow as large as $12 trillion over the next eight years.

The fundamental question presented by state-owned public companies and sovereign wealth funds does not so much concern the advisability of foreign ownership, but rather of government ownership. Precisely because the rise of sovereign wealth funds and publicly traded state-owned corporations portends a greater degree of state ownership in the economy, their new prominence raises many of the same questions that any program of state ownership entails.

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It would be easy, and wrong, to consider restrictions on such investment for the purported reason of protecting the integrity of our free markets. Indeed, one need only consult the ongoing debate in parliaments around the world about sovereign wealth funds and sovereign business to observe that these developments are provoking a new round of protectionism. For America to address one problem (the special concerns that arise from government ownership of business) by creating another one (betraying our commitment to open markets) would only result in more government interference in our own markets. Far better would be to address the underlying issues of transparency, independent regulation, depoliticization of investment decisions, and conflicts of interest.

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From the SEC's standpoint, working to ensure the transparency of sovereign business and investment will be of paramount importance. The mutual trust and investor confidence that this would establish will address many of the special concerns these activities raise. To the extent sovereign investing is conducted through professional management of these funds, this could help to depoliticize the process both in practice and in perception.

America has embraced markets: it is because in doing so, we give substance to our support for individual freedom, our suspicion of government excess and abuse of power, and our skepticism that the few can make wiser choices than the many. And by our commitment to arm's length regulation of those markets, we have simultaneously acknowledged the need for the policeman and the referee--in other words, for the rule of law and the role of the SEC.

Our nation's support for markets and our commitment to independent regulation represent a fragile balance--yet one of such enormous strength, it has supported the hopes and dreams of the world's most powerful and prosperous nation.