Fort Walton Beach Council agenda — 03-09-2010 Regular — reading text

Middle Eastern SWFs: " Its unnecessarily suspicious approach may have unwelcome consequences.... Voluntary codes of conduct are one thing, but any further regulation of SWFs by the West would be both unfair and a mistake. "' Interestingly, these anti -regulation statements were issued at the time the U. S. Congress was holding hearings on regulations and sovereign wealth funds. The non -transparent Islamic sovereign wealth funds are clearly in a posi- tion not only to make capital investments in strategic sectors of Western economies with potentially ominous implications. They can also be used to ensure widespread introduction of Shariah -compliant finance and, thereby, to legitimate —both directly and indirectly —Shariah. For all these reasons, their activities should be closely monitored and, where appropriate, regulated. 7 Nicholson, Neil. " Sovereign Rights." April 28, 2008. Online publication: Thel- awyer.com . / ww.thelawyer.com /cgi- bin /item.cgi ?id= 132437 &d= pnhpr &h= pnhpr &f =pnfpr . http: / w 57  Case Studies:* 1. Dow Jones, Shariah- Compliant Finance and Wall Street he Dow Jones & Company brand name is considered by many to T be Wall Street' s gold- standard. Promoters of Shariah -compliant finance ( SCF) have understood this and tried, in various ways, to exploit relationships with Dow Jones to facilitate their efforts to penetrate and influence American and other capital markets. This case study examines two examples, the Dow Jones Islamic Market Index ( DJII) and the Dow Jones Islamic Fund. The DJII provides a standardized universe of Shariah -compliant publicly - traded companies. Private investors and mutual funds who wish to invest only in Shariah-com pliant companies can select the DJII or any of the seventy some other Shariah-com pliant indexes licensed by Dow Jones for U. S., non -U.; . and specialty markets. One such mutual fund which had licensed the right to utilize the Dow Jones Islamic U. S. Index ( "DJII -US ") and the Dow Jones name is the Dow Jones Islamic Fund ( "the Fund").' The Dow Jones Islamic Index Dow Jones, which was recently acquired by News Corporation, was the first company to offer Shariah- com pliant indexes. ( Other industry leaders, such as Standard & Poor's, have subsequently introduced such indexes.) Dow Jones represents itself as " a leading provider of global business news and information services." It markets " Dow Jones Indexes [ as] a leading full -service index provider that develops, maintains and licenses indexes for use as benchmarks and as the basis of investment products." In its promotional and related materials, the Dow Jones Islamic Index pro- vides an insight into what its management and lawyers consider reasonable due diligence and disclosure for one of the world' s premier financial The section on " case studies" has drawn heavily from the unpublished legal memorandum " Civil Liability and Criminal Exposure for U. S. Financial Institutions and Businesses Engaged in Shariah- Compliant Finance," prepared for the Center for Security Policy by David Yerushalmi. s Dow Jones learned of the facts and analysis of these case studies when Investor's Business Daily published an editorial in late February 27, 2008 based upon a press release of the material relating to the nexus between Dow Jones, Usmani, Jihad, and terror financing set forth below. According to Michael Petronella, the president of Dow Jones Indexes, in a letter to Frank Gaffney and David Yerushalmi dated May 8, 2008 ( "the Dow Jones Indexes Letter "), Dow Jones terminated the license agreement with the Fund immediately. In March 2008, the Fund filed an amendment to its prospectus with the SEC deleting any reference to Dow Jones and changing its name to the Iman Fund ( symbol: MANX). Not surprisingly, neither the Iman Fund nor Dow Jones ( or its parent company, News Corp.) filed any disclosures with the SEC about the reasons for the termination. 58 Shariah, Law and `Financial Jihad': How Should America Respond? research companies in the context of an index marketed to the world of Shariah -compliant Muslims as authoritative. For example, the following items are described as the DJII' s " Key Attributes ": Shariah Law Compliance: The Dow Jones Islamic Market Indexes are stringently monitored to ensure their continued compliance with Shariah Law. The independent Shariah Supervisory Board supports index integrity by conducting periodic reviews. Liquidity: The Dow Jones Islamic Market Indexes include only actively traded stocks that are easily accessible to investors. The selection uni- verse for the family is the Dow Jones World Index, which covers approxi- mately 95% of underlying market capitalization and expressly excludes the very smallest and most thinly traded stocks. Comprehensive Coverage: The DJIM Index provides broad coverage across countries, regions, market cap ranges and Shariah -compliant industries. Subindexes allow the individual tracking of these various market segments. Systematic Methodology: The Dow Jones Islamic Market Indexes are created and maintained according to a systematic and published method- ology. The selection universe is constructed based on a quantitative set of rules, and stocks must pass consistently -applied industry and financial - ratio screens to be included in the index. According to the DJII Internet site, the sum and substance of these screens" are: The DJIM Index includes all securities in the Dow Jones World Index that pass the following screens for Islamic compliance: Industry Type: Excluded are companies that represent the following lines of business: alcohol, tobacco, pork -related products, financial services, defense /weapons and entertainment. Financial Ratios: Excluded are companies whose: Total debt divided by trailing 12 -month average market capitalization is 33% or more. 59  Case Studies: Dow Jones, Shariah -Compliant Finance and Wall Street Cash plus interest -bearing securities divided by trailing 12 -month average market capitalization is 33% or more. Accounts receivables divided by 12 -month average market capitalization is 33% or more. In all of its public disclosures and representations, Dow Jones informs the public that the DJII Shariah Supervisory Board " was established to counsel Dow Jones Indexes on matters relating to the Shariahh [ sic] compliance of the indexes' eligible components." One question that comes to mind is why the DJII needs any Shariah authority on retainer if the " filters" are quantitative rules" applied presumably by a software program? Assuming Muslim investors might not trust the DJII to maintain the " filters" and some supervision is required to keep everyone honest, why does the DJII keep six world -renowned Shariah authorities on retainer? The answE r suggested by the questions themselves is that there is still some component of Shariah supervision of the DJII that is not simply quantitative." If this is indeed the case, this fact is disclosed nowhere by the DJII or by any publicly reporting fund that licenses the DJII and is required to disclose the filters the fund has licensed. It is, of course, possible that the answer is a simpler one. Perhaps, the DJII, seeking to be the " gold standard" in the industry, maintains an illustri- ous board to gild its reputation among Shariah- adherent investors. This theory is reinforced by the fact that, the Index' s Shariah supervisory board members —a veritable Who' s Who in the world of Shariah authorities — are listed prominently on all of the DJII promotional literature: Shaykh Muhammad Taqi Usmani— Pakistan Shaykh Abdul Sattar Abu Ghuddah —Syria Shaykh Nizam Yaquby— Bahrain Shaykh Dr. Mohamed A. Elgari —Saudi Arabia Shaykh YUSUf Talal DeLorenzo— United States Shaykh Dr. Mohd Daud Baker —Malaysia Prior to its acquisition by News Corporation, Dow Jones had long been a publicly -traded company. News Corporation, the company which recently acquired Dow Jones, is a publicly-traded company. After a careful review of all of the Dow Jones filings with the SEC and the filings by News Corporation relating to its acquisition of Dow Jones, there is absolutely no mention of any reputational, financial, or national security risks associated with operating a Shariah -compliant index. 60 Shariah, Law and ` Financial Jihad': How Should America Respond? Neither is there any mention of the purposes of Shariah ( i. e., world hege- mony) and its methods ( including violent jihad). Further, while Usmani was listed as a member of the DJII Shariah advisory board, no mention was made of the fact that this central figure on the DJII Shariah advisory board has publicly and in English called for violent Jihad against non -Muslims in the United States —even during peaceful times when Muslims are provided with the First Amendment right to freely exercise their religion and to convert non -Muslims through lawful means. The questions regarding all of the disclosure and due diligence issues raised herein now confront not simply the Dow Jones' lawyers —who appear to view Shariah as a beneficent black box —but the News Corporation lawyers. Without going into an intricate analysis of all of the Dow Jones representa- tions and disclosures relating to Shariah and SCF, one area is of interest because it confirms the earlier analysis of the intimate and integrated rela- tionship between SCF, Shariah, and the law of jihad. The DJII describes its screens" as being of two kinds. One screen is for the forbidden " vice" industries, such that companies engaged in any of the forbidden industries will be excluded from the universe of potential indexed companies. The second -level screen eliminates companies from within the permissible industries whose financials indicate they carry too much debt or maintain too much liquidity, which would suggest they are paying or receiving, respectively, too much interest. ( As indicated earlier, a minimum amount of interest may be tolerated provided the Shariah -compliant mutual fund or the individual Shariah -compliant investor " purifies" the portion attributed to for- bidden profits, such as from interest, and donates that portion to a Shariah- compliant charity.) In its various public representations, Dow Jones states that the following industries are forbidden and excluded from the DJII: " alcohol, tobacco, pork -related products, financial services, defense /weapons and entertain- ment." Elsewhere on its website, however, Dow Jones explains that neither tobacco nor defense /weapons are strictly forbidden: ' Although no universal consensus exists among contemporary Shariah scholars on the prohibition of tobacco companies and the defense industry, most Shariah boards have advised against investment in companies involved in these activities." The question for the U. S. publicly- traded company is: Does it have a duty to disclose why it is that Shariah would prohibit the defense industry? Does the Shariah prohibition apply to Muslims investing in a Muslim defense industry? To be sure, there is no legal issue relative to an index or a mutual fund which chooses not to invest in military or defense industries —whether 61  Case Studies: Dow Jones, Shariah -Compliant Finance and Wall Street out of a conviction that such industries are sources of evil or out of