Panel III of a Hearing of the Senate Banking, Housing and Urban Affairs Committee - Combating Genocide in Darfur: The Role of Divestment

Statement

Panel III of a Hearing of the Senate Banking, Housing and Urban Affairs Committee - Combating Genocide in Darfur: The Role of Divestment and Other Policy Tools

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SEN. REED: Well, thanks very much, Mr. Chairman.

And Treasurer Caprio, thank you for your testimony. And you are looking forward now and planning to move forward on this divestiture program. And you're confident that you can make wise judgments that will not inhibit and reduce the financial benefit to the funds that you're managing? That you can, in a fiduciary capacity, carry this out without doing anything that would jeopardize the funds, is that your position?

MR. CAPRIO: Correct, Senator. We're following a scrutinized list procedure. So as just elaborated by other witnesses, we have a targeted list of companies. We advised all our money managers that we do not want any investment in any of these companies. We've seen companies such as Rolls-Royce PLC recently pull out of the Sudan, citing humanitarian concerns. Siemens, a multinational giant, has also done likewise. So it's actions like what's going on in Rhode Island and other states and other institutions that are causing these companies that had material operations in the Sudan, that were assisting in the government carrying out this genocide, that is really bringing about the change that we are calling out for.

SEN. REED: Well, thank you.

And Mr. Reinsch -- again, thank you gentlemen, for your testimony.

I just want to, as a sort of a fundamental point, if Congress passes legislation that would effectively authorize these states to conduct these programs, is that your position? Or do you see other challenges to --

MR. REINSCH: Well, we've gotten different views from our -- from lawyers as to whether or not congressional action doing that would pass constitutional muster. We have not found any lawyers that believe that it would survive the foreign policy clause in the Constitution.

We've gotten different views on whether it would -- whether Congress can say, "It's okay to help states or the city of Takoma Park. It's okay to preempt us." I mean, why you would want to do that baffles me. But we do have some lawyers who say that if you do that, you know, the court might respect it. But I don't think that you can get over the hump of the foreign policy clause.

SEN. REED: Well, that's -- I think others would disagree with you, but that's why there are lawyers.

MR. REINSCH: That's why we -- (chuckles) --

SEN. REED: Thank you.

MR. REINSCH: Exactly what Senator Baucus told me two -- three weeks ago on a different matter, "That's why we have lawyers."

SEN. REED: But I just want it clear that one of the impediments, in your view right now, is the lack of a statutory -- a federal statutory preemption allowing the preemption by -- by states.

MR. REINSCH: It certainly makes things worse. I mean, one of the things that I -- I commented on was that the risk here is that each state may do it differently. And as they do it differently, they'll have different lists, and from the standpoint of fund managers, it puts them in very difficult -- a very difficult position.

I mean, a federal safe harbor, which is in 180 also, sort of helps because otherwise you're in the awkward position of, you know, mutual fund X being ordered by the state of California to divest and meanwhile New Jersey does not have -- you know, has not ordered that fund to do the same thing, because they don't have the same list. And then you've got the potential of shareholders in New Jersey suing the fund for having divested and lowered their return when, in fact, it's -- all this fund is doing is complying with California law. So there is an argument for uniformity.

If I may, I might make one more point, though, with respect to the comments from the general treasurer from Rhode Island. A lot of this has to do with how -- how states regulate their pension funds. And what we learned in --

SEN. REED: We regulate it very well in Rhode Island.

MR. REINSCH: Well, I'm sure you do, and I'm sure Mr. Caprio does.

MR. CAPRIO (?): Indeed.

MR. REINSCH: But what we learned in the case of Illinois was that one of the elements of good regulation -- for prudential reasons, not for foreign policy reasons -- is that the funds, particularly the municipal funds if there are any, are very strictly regulated in where they can invest. And they're often precluded from investing in equities directly, and so they buy mutual funds.

Now, that -- what that means is the way the divestment statute works is that the pension fund then has to go to the mutual funds that it has invested in and ask the mutual fund to certify that none of the mutual funds investments are in these companies that are on the list.

In the state of Illinois where this statute was in effect for some months before the judge threw it out, all but two of the mutual funds that the states were eligible to invest in in the first place, for prudential reasons, declined to make that certification. Now, in those cases, it was not because they couldn't. It was because they wouldn't, because it simply wasn't worthwhile for them to go through the work. And because of the way that state statute was constructed, it was a moving target.

What that meant for the pension funds, the practical matter was not simply that they had to get out of Siemens, you know, or PetroChina. It meant they had to get out of Fidelity Fund. And the way they were regulated meant the only things they could get into were bond funds, because there were no other mutual funds -- (inaudible) -- do that.

SEN. REED: I don't mean to cut you off -- time is short. But I think you've made a pretty good case for at least some action at the federal level, at least in my view.

Final point, because I know Senator Brown -- Mr. Prendergast, you made a very compelling argument that what moves this -- this regime in Khartoum is pressure. And there's technical, constitutional arguments about how we should proceed, should we proceed at all. But I would suspect that as we move forward, particularly if we can pass legislation here, that'll give the administration at least the psychological and symbolic clout to keep the pressure on. Is that your view too?

MR. PRENDERGAST: Strong view, and I think it's not just moving the administration that is -- that is crucial. It's -- as the assistant secretary's stated, we need a multilateral pressure. And what's fascinating about what divestment does, it gives you a twofer. It helps U.S. policy, it gives the U.S. leverage, but it also puts additional pressure on China.

And as they prepare for the Olympics in 2008, as they hire people like Steven Spielberg to present a new face to the world, it really matters to them that they don't have this noose around their neck called "Darfur" hounding this effort to present this new face. So it cannot be overstated that while the U.S. executive branch continues to engage the Chinese quietly and privately, to have the legislative branch and the divestment movement hammering away at what the Chinese are doing is of profoundly important consequence to how effective the peace process and the effort to deploy the hybrid force will be.

SEN. REED: Thank you very much.

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