Last week, the New York hedge fund Och-Ziff Capital Management disclosed that it was selling a $1.3 billion ownership stake to an investment firm controlled by the government of Dubai. In September, another Dubai-controlled fund announced that it was buying about a fifth of the Nasdaq stock exchange. A Chinese government bank just entered into a partnership with the investment bank Bear Stearns Companies Inc. And the Blackstone Group private equity firm recently sold a $3 billion ownership stake to China's state investment company.

Flush with cash thanks to big trade surpluses and high oil prices, some foreign governments are looking for new ways to invest. Instead of playing it safe and buying U.S. Treasury securities, many are using special investment arms known as sovereign wealth funds to take ownership stakes in U.S. companies in such sectors as financial services and technology to maximize their returns. Many of the deals will not be subject to government review because, while the dollar amounts are large, the purchasers won't be controlling the companies.

The buyout activity is nonetheless posing a dilemma for Congress, which just addressed concerns about foreign investment that grew from a deal last year, quickly scuttled, that would have given a firm linked to the Dubai government control of operations at some U.S. ports. Last month a new law took effect to strengthen and clarify the rules governing the Committee on Foreign Investment in the United States, or CFIUS, a panel of executive branch agencies that screens the sale of American businesses to foreign interests; the Bush administration is now developing regulations to implement it.

The rapid growth of sovereign wealth funds is prompting some U.S. officials and policy experts to question whether the nation needs to consider more safeguards -- or at least a more consistent approach to regulating foreign acquisitions that would both assuage national security concerns and enable foreign investors to know what to expect when they contemplate making a deal in the United States. ...

So far, members of Congress have primarily focused on individual deals. That will have to change, said Douglas Rediker, a global finance expert at the New America Foundation, a public policy think tank. Sovereign wealth funds bring "this whole level of influence that's brought to bear on the markets as a whole, that involves currencies and the subtleties of specific investments and broader investment classes," he said. "That traditionally has not been within the realm of what Congress deals with." ...

Rediker notes must purchasers in several high-profile deals, including the Chinese purchase of part of Blackstone and the agreement between Dubai and Och-Ziff, each took 9.9 percent stakes of the U.S. firm. He speculates that the acquiring companies reasoned that a 10 percent stake constituted a de facto threshold for heightened scrutiny.

Rediker and his wife, Heidi Crebo-Rediker, recently wrote a paper arguing that the United States needs a comprehensive review of all its legislation and regulations governing foreign investment, then needs to develop a policy for monitoring foreign government investments smaller than the "controlling" interest that triggers a CFIUS review.

The Redikers contend that this would not scare away foreign investors but encourage more deals, as long as funds were certain about the treatment they would receive.

"You put some vigorous rules in place, but they are absolute, so people know [if] they make X investment, there's going to be Y result. Right now the area below which a full-blown CFIUS review is triggered is fraught with political risk, and political risk takes its toll on investment," Douglas Rediker said. ...

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