RPT-UPDATE 2-U.S. SEC wary of government-controlled funds

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By Rachelle Younglai

WASHINGTON, Feb 7 (Reuters) - Large investment funds controlled by foreign governments may be prone to misusing their official ties to get non-public information and policing this could be difficult, the U.S. Securities and Exchange Commission's top enforcer said on Thursday.

It is also possible governments may not cooperate in securities cases involving their funds, Linda Chatman Thomsen told a panel created by Congress to weigh national-security implications of growing U.S. economic ties with China.

"We are concerned that if the government from which we seek assistance is also controlling the entity under investigation, the nature and extent of the cooperation could be compromised," Thomsen said.

But Thomsen said the recently established China Investment Corp, one such sovereign wealth fund with assets estimated at $200 billion, is taking a "measured approach" and acting as a passive investor. China launched its fund in September and has so far pumped $3 billion into U.S. private equity firm Blackstone Group (BX.N: Quote, Profile, Research) and taken a stake in Morgan Stanley (MS.N: Quote, Profile, Research) for $5 billion.

Overall the sovereign wealth funds, which are owned primarily by governments in the Middle East and Asia, are estimated to hold $2.5 trillion in assets and forecast to grow to $12 trillion over the next eight years.

"These funds raise a number of securities law enforcement issues," Thomsen said.

The normally low-profile funds have been thrown into the spotlight after they came riding to Wall Street's rescue by pumping billions of dollars into major Western banks damaged by the subprime mortgage crisis.