Politicising US capital markets is bad public policy
There is a movement afoot in state legislatures and in our nation’s capital to impose capital market sanctions on companies doing business in countries such as Sudan and Iran.
Such efforts to politicise capital markets in the United States are gaining steam and threaten to set a dangerous precedent. This movement began at the state level over the ongoing humanitarian crisis in Sudan.
Today, dozens of legislatures are in the midst of considering bills that would encourage state pension funds to divest from companies that are doing business in countries including Sudan and Iran.
One such law — in Illinois — attempted to mandate that financial institutions and companies certify that they have no direct or indirect business ties to Sudan using a very broad standard.
In the case of financial institutions, the Act would have forbidden the state treasurer to use them as a depository for state funds unless they could so certify.
The National Foreign Trade Council joined seven Illinois taxpayers and seven Illinois public pension funds in a successful lawsuit against the State of Illinois.
On February 23, Judge Matthew Kennelly of Federal District Court for the Northern District of Illinois struck down the state’s “Act to End Atrocities and Terrorism in Sudan” in NFTC v Giannoulias.
The judge’s decision took account of the catastrophic genocide in Darfur, but found the law unconstitutional, indicating that it violated the Supremacy Clause and the Foreign Commerce Clause of the Constitution.
With regard to the banks that would have been affected under the law, his ruling was sweeping and unconditional.
He wrote that “the Act violates federal constitutional provisions that preclude the states from taking actions that interfere with the federal government’s authority over foreign affairs and commerce with foreign countries.”
The National Foreign Trade Council believes that capital market sanctions — including divestment — are not a suitable means of addressing complex foreign policy problems for a variety of reasons.
For one, divestment weakens fiduciary responsibilities. Broad divestment provisions would require pension funds to divest billions of dollars of investments in major multinational companies and would impart a disastrous mandate contrary to the fiduciary responsibility of the pension funds.
Divestment is a dangerous intrusion into the area of capital market sanctions. Divestment would undoubtedly harm individual pensioners and retirement systems.
For example, Florida officials estimate that divestment would cost its state pension funds $800 million a year in lost financial returns.
Overall, legislators must recognise that politicising U.S. capital markets is not a good idea.
While the social and foreign policy objectives of this type of legislation are beyond reproach, mandating divestment on any subject is a slippery slope.
Congress or states could require divestment regarding any issue it chooses.
America’s capital markets on political grounds — even sound political grounds — would set a dangerous precedent.”
It is also worth noting that the Bush Administration is opposed to state-level divestment which threatens to create a complex web of restrictions and regulations that would impede the President’s ability to conduct foreign policy.
The President’s Special Envoy to Sudan Andrew Natsios noted the Administration’s opposition to state divestment legislation in April 11 testimony before the Senate Foreign Relations Committee, saying, “There is a reluctance to support this.”
“Because the fear is that to have each state or municipality conducting its own foreign policy could create chaotic conditions.”
Mr. Natsios went on to say that “once the…crisis is over and you want to change the sanctions, some states may not do it.
That is still the case there is still sanctions against South Africa and some state pension funds because of something that happened 20 years ago.”
In addition, state-level divestment is likely unconstitutional. In a 2000 decision, NFTC v Crosby, the Supreme Court found that state sanctions that go beyond existing federal sanctions on any country intrude on the exclusive power of the national government to regulate foreign affairs subvert the policies and objectives of the federal sanctions regime.
The court ruled that “it is implausible to think that Congress would have gone to such lengths to empower the President had it been willing to compromise his effectiveness by allowing state or local ordinances to blunt the consequences of his actions.”
This ruling resulted in the repeal or suspension of a number of selective purchasing restrictions on Burma at the state and local level. The Crosby decision combined with the more recent NFTC v Giannoulias case, set limits on the ability of state governments to impose foreign policy sanctions.
Because federal sanctions on Sudan and Iran are in place, we believe that state sanctions are unconstitutional.
Finally, much like federal sanctions legislation that is currently in play in the U.S. Congress, state divestment distracts attention from issue at hand by refocusing attention away from the behaviour of the countries in question.
And onto the behaviour of European and Asian companies, divides our allies by jamming a stick in the eye of the countries whose cooperation we need to ensure successful outcomes to these volatile situations, and is an ineffective means of persuading Iran, Sudan or any other country to change its behaviour.
William A. Reinsch
President of the National Foreign Trade Council
Entry Filed under: SUPPLIER AND TECHNOFIN®, Legal & Regulatory Issues, Risk Management, Compliance
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