International Law Advisory - Treasury Seeks Comments to Formulate New CFIUS Regulations

On October 11, 2007, the Department of the Treasury issued a notice of inquiry, requesting public comments on several issues related to the proposed regulations that are to be issued to implement the Foreign Investment and National Security Act of 1997 (FINSA).

President Bush signed FINSA into law on July 26, 2007.  The legislation codifies the structure, role, process, and responsibilities of the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee responsible for reviewing foreign acquisitions for national security concerns.  The main provisions of the new legislation include the following:

• FINSA codifies the establishment of CFIUS, and specifies its membership to include the Secretaries of the Departments of the Treasury, State, Defense, Commerce, Energy and Homeland Security, and the Attorney General.  The Secretary of Labor and the Director of National Intelligence are ex officio, non-voting members.  The President may also appoint the head of any other executive agency to serve as a CFIUS member (under current executive orders, the US Trade Representative, Director of the Office of Management and Budget, Chairman of the Council of Economic Advisers, Director of the Office of Science and Technology Policy, Assistant to the President for National Security Affairs and the Assistant to the President for Economic Policy are also members).  The Secretary of the Treasury continues as the Chair of CFIUS and has the authority to designate any CFIUS member the “lead'” agency for a particular transaction.

• CFIUS must review a “covered transaction” -- a merger, acquisition, or takeover by or with any foreign person that could result in foreign control of any person engaged in interstate commerce in the United States -- within 30 days of accepting a notice to determine its effects on national security, based on relevant factors, including an illustrative list included in FINSA.  Parties may file voluntary notices for CFIUS review, the Committee can require a notice to be filed, and if a foreign government, governmental entity, or government-controlled company will acquire control, notice is mandatory.

• CFIUS must conduct a further investigation within 45 day days of completing the review if the Committee determines that: 

1. the transaction threatens to impair US national security and the threat has not yet been mitigated; 
2. the lead agency recommends an investigation and CFIUS concurs; 
3. the transaction would result in foreign government control; or 
4. the transaction would result in the control of any US critical infrastructure that could impair US national security and the threat has not yet been mitigated. 

An investigation is not mandatory on the latter two grounds if Treasury and the lead agency jointly determine that the transaction will not impair US national security.

• CFIUS or the lead agency may enter into, modify, monitor and enforce agreements with any party to a covered transaction to mitigate national security risk posed by the transaction.  Any mitigation agreement must be based on transaction-specific, risk-based analysis.

• The President is authorized to suspend or prohibit any covered transaction when (1) there is credible evidence that the foreign interest might take action that threatens to impair national security, and (2) other provisions of law do not appropriately protect national security.  The President must decide whether to take such action within 15 days of the completion of an investigation.

FINSA provides for unilateral review by the President or CFIUS of any covered transaction after August 23, 1988 that was not previously reviewed or that was reviewed but in which false or inaccurate information was submitted to CFIUS or a mitigation agreement has been intentionally and materially breached.   

FINSA also requires the publication of implementing regulations, including civil penalties for violations, and guidance on the types of transactions that CFIUS has reviewed and that have presented national security considerations.  Before Treasury issues proposed regulations, it is seeking public comments from businesses involved in international mergers and acquisitions.  Treasury has requested comments on the following particular topics, in addition to any general comments on the CFIUS review process and FINSA:

• Procedural issues relating to the review process, including pre-filing, filing of voluntary notice, unilateral initiation of review by CFIUS, withdrawal of notice, refiling of notice, and notice to filers of the results of a review or investigation

• Definitional issues, including the definitions of “control,” “foreign person,” “person engaged in interstate commerce in the United States,” “critical infrastructure,” and “critical technologies”

• Mitigation agreements, including determinations of the need for risk mitigation, scope of provisions, compliance monitoring, modification, and enforcement, including civil penalties and other remedies for breach

• Confidentiality issues

• Collection of information from filers, including personal identifier information and information to aid CFIUS in determining jurisdiction and whether the transaction raises national security considerations

• Emerging trends in international investment and their relevance to the CFIUS process, including legal structures for effecting acquisitions of U.S. businesses

While FINSA largely codified the existing CFIUS structure and process, it did not make many substantive changes to the process for reviewing foreign acquisitions for national security concerns.  Future CFIUS practice therefore may be shaped by its implementing regulations. 

CFIUS has gained the attention of the media and Congress since last year’s highly-publicized Dubai Ports World transaction and the ensuing political debate about review of foreign acquisitions of sensitive US businesses or facilities.  With this increased public interest, Treasury is taking the first step in a notice and comment rulemaking.  Businesses that are likely to be involved in international mergers and acquisitions may have an interest in submitting comments on the FINSA implementing regulations, especially on increasingly sensitive issues such as confidentiality and mitigation agreements.

Public comments in response to the notice of inquiry must be received by Treasury by December 7, 2007.  Treasury is also holding a public meeting on October 23, 2007 to discuss issues related to FINSA.  If you have any questions regarding the notice of inquiry, please contact Tim Walsh at 202.429.6277, Ed Krauland at 202.429.8083, or Michael Gershberg at 202.429.6208.