Although proposed rules have not yet been issued to deal with the influence of sovereign wealth funds on U.S. business, some Democratic lawmakers and analysts are already looking to expand regulatory oversight over those deals.

Several foreign-based funds recently invested billions of dollars in a handful of U.S. investment banks. The deals garnered little regulatory scrutiny, however, because the stakes involved were usually under 5%. The Chinese sovereign wealth fund, in particular, has been a cause for concern due to its perceived lack of transparency and its interest in both active and passive investing.

It’s time to start asking questions about these Wall Street investments,” said Sen. Evan Bayh (D-Ind.), who testified today before a bipartisan committee of analysts, researchers, and academics set up to examine U.S.-China economic and national security issues.

Mr. Bayh and other senators on the banking committee held a hearing last year about the economic and national security threats posed by sovereign wealth funds. He told reporters after his testimony that additional hearings could be on the way, as well as additional legislation. Next week, Mr. Bayh is heading to the Persian Gulf, where he may meet with some managers of Middle Eastern sovereign wealth funds.

In the meantime, the Treasury Department is drafting rules on how the Committee on Foreign Investment in the United States (CFIUS) will vet deals by sovereign wealth funds. Those rules are expected as soon as this month, and are due no later than April 21.

The International Monetary Fund has also been crafting voluntary best practices, which may be released next fall.

Last month, President Bush issued an executive order laying out the new framework in which CFIUS would act. While the order was praised by many lawmakers, including House Financial Services Committee chairman Barney Frank (D-Mass.), some said it didn’t go far enough. For one, the executive order removed a provision requiring CFIUS to monitor the effects of foreign investment at a macro level, said Rep. Marcy Kaptur (D-Ohio).

Mr. Bayh said CFIUS members—federal agency heads and economic advisers—have been too ideological in their approvals of past deals, rather than pragmatic. “CFIUS has largely been a toothless watchdog,” he said, adding that Congress should tighten regulations now. “Otherwise, we risk another Dubai Ports deal situation,” referring to that state-backed company’s plan in 2006 to purchase management companies running six U.S. seaports. The transaction was approved by CFIUS, but was scuttled after triggering massive political opposition from both parties.

Mr. Bayh wants to see more disclosure coming from the funds’ managers. Ideally, such a reporting setup would be based on the practices of Norway’s sovereign wealth fund, which has been hailed by some as a paragon of transparency. The Norwegian fund typically takes passive investments in companies.

Sen. Sherrod Brown (D-Ohio), who also testified today, said the United States has an arsenal of “carrots and sticks” that it could use to force China’s sovereign wealth fund to make its investments more transparent.

The SEC has been examining sovereign wealth funds, as well. The commission has been focusing on insider trading and disclosure issues, however. SEC enforcement division director Linda Thomsen said insider trading cases are “becoming increasingly international,” and a foreign government could have incentives not to provide data to the SEC to protect its sovereign wealth fund from prosecution.

“We have seen less than optimal cooperation when foreign governments have an interest in the issue or person we are investigating,” Ms. Thomsen said during today’s hearing.

###