Feb. 7 (Bloomberg) -- Investment funds owned by foreign countries, which are buying more stakes in U.S. companies, may try to use government information to commit insider trading, a Securities and Exchange Commission official said.

The Washington-based SEC is also concerned foreign governments may resist U.S. attempts to examine suspicious trades by sovereign wealth funds, potentially letting illegal activity go unchecked, Linda Thomsen, the agency's enforcement chief, told the U.S.-China Economic and Security Review Commission today.

The funds ``have power derived from being governmental entities, which may give them access to government officials and information that is not available to other investors,'' she said.

Sovereign wealth funds have been created by such countries as China and the United Arab Emirates to invest trillions of dollars. Losses on mortgage-backed securities in the past year have spurred some of the world's biggest financial-services companies, including Citigroup Inc. and Merrill Lynch & Co., to seek money from state-controlled investment authorities.

The funds' investments have sparked U.S. concern that they may influence some of the nation's leading companies. Most of the investments don't give the funds any extra say in the management of the banks, such as board seats.

`Ultimate' Tool

In December, SEC Chairman Christopher Cox said sovereign wealth funds' access to ``vast amounts of covert information'' from their governments would be the ``ultimate insider-trading tool.'' In October, he questioned whether foreign states overseeing funds would cooperate with SEC inquiries.

The need for foreign assistance was underscored during the SEC's investigation of former Dow Jones & Co. director David Li, a Hong Kong legislator and chairman of Bank of East Asia Ltd., for allegedly tipping off associates to a pending takeover of the company last year, Thomsen said. The Hong Kong Securities and Futures Commission assisted the SEC's probe, and Li, 68, agreed Feb. 5 to pay an $8.1 million fine to settle the claims without admitting or denying the allegations.

``This kind of cooperation is essential for our effectiveness and the need for the cooperation is increasing,'' Thomsen said.

The agency's sovereign wealth-fund concerns are ``hypothetical,'' Thomsen told reporters after the hearing. In some situations, foreign governments have offered ``less than optimal cooperation'' in SEC investigations, she said, declining to cite specific instances.

Congress created the U.S.-China panel in 2000 to monitor national security implications of the countries' economic relationship. The commission advises lawmakers on legislation and writes an annual report. The commission's head, Larry Worztel, is vice president for foreign policy at the Heritage Foundation in Washington and the former director of the Asian Studies Center.

To contact the reporter on this story: David Scheer in Washington at dscheer@bloomberg.net.

Last Updated: February 7, 2008 13:53 EST