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President Biden Expands Prohibitions on U.S. Securities Investments in "Chinese Military-Industrial Complex Companies"

James.Treanor@cwt.com's picture
Commentary by James Treanor

President Joseph R. Biden signed an Executive Order ("EO") to expand the scope of prohibitions contained in EO 13959 ("Addressing the Threat from Securities Investments That Finance Communist Chinese Military Companies"). The new EO replaces Sections 1 through 5 of EO 13959 and revokes EO 13974 (which had previously amended EO 13959) in its entirety.

The new EO prohibits U.S. persons from engaging in securities transactions with Chinese companies that the Secretary of the Treasury, in consultation with the Secretary of State (and, where appropriate, the Secretary of Defense), has determined, among other things, (i) operate in China's defense and related materiel or surveillance technology sector, or (ii) own or control, or are owned or controlled by, such companies. OFAC stated that it will refer to companies sanctioned under the EO as "Chinese Military-Industrial Complex Companies" ("CMICs"), and they are listed on OFAC's new Non-Specially Designated National CMIC List (the "NS-CMIC List").

There are currently 59 Chinese companies designated under the new EO, and for such designated companies, prohibitions go into effect on August 2, 2021. For any companies added to the NS-CMIC List in the future, the prohibitions will go into effect 60 days following the designation of that company. As was the case with EO 13959, divestment transactions, including purchases made solely for the purpose of divestment, are permitted for 365 days following the designation of a company to the NS-CMIC List.

Additionally, OFAC issued a related set of new FAQs, including:

  • FAQ 898, which explains the effect of the new EO on covered companies and the new parameters for the Treasury Secretary to designate additional companies under the EO;

  • FAQ 899, which clarifies that OFAC's NS-CMIC List replaces and supersedes in its entirety the Non-SDN Communist Chinese Military Companies List (or "NS-CCMC List");

  • FAQ 900, which clarifies that, in the surveillance technology sector, OFAC will target companies whose operations include (i) the surveillance of persons that occurs outside of the People's Republic of China or (ii) Chinese surveillance technology that facilitates repression or serious human rights abuse with regard to religious or ethnic minorities;

  • FAQ 901, which clarifies that U.S. persons, including financial institutions, registered broker-dealers, securities exchanges and other market participants, may rely on information "available to them in the ordinary course of business" when assessing the permissibility of purchases or sales under the new EO;

  • FAQ 902, which clarifies that a U.S. person is not prohibited from providing investment advisory or investment management services to a non-U.S. person in connection with the non-U.S. person's purchase or sale of a covered security of a CMIC, provided that the underlying purchase or sale would not otherwise violate the new EO;

  • FAQ 903, which clarifies that U.S. persons employed by non-U.S. entities are not prohibited from activities related to a covered security on behalf of their non-U.S. employers, "provided that such activity is in the ordinary course of their employment";

  • FAQ 904, which clarifies that U.S. market-makers are permitted to facilitate divestment from the publicly traded securities of CMICs; and

  • FAQ 905, which clarifies that the new EO does not broadly prohibit all dealings with covered companies, but only prohibits "certain purchases or sales of publicly traded securities of entities listed on the NS-CMIC List."

Commentary

With a raft of FAQs issued alongside the new CMIC EO, OFAC is intent on avoiding a repeat of the market confusion that accompanied the implementation of EO 13959. For example, in FAQ 902, OFAC explains that U.S. persons are not generally prohibited from providing investment advisory, investment management, or similar services to non-U.S. persons in connection with their purchase or sale of a covered security. FAQ 903 clarifies that U.S. persons who work for non-U.S. entities may, with certain restrictions, facilitate or otherwise be involved in transactions related to covered securities on behalf of their employers. However, while the parameters of the CMIC EO may be better defined than its predecessor, its scope is undoubtedly broader. Already, 59 Chinese companies have been targeted, and more firms linked to China's defense and surveillance sectors could soon follow.

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