CFIUS Reform: Be Careful Who You Deal With

By David Adams – May 2018 

Before the Memorial Day recess, Congress took two big steps towards reforming the Committee on Foreign Investment in the United States (CFIUS). The Senate Banking, Housing and Urban Affairs Committee approved S 2098 by a vote of 23-0 and the House Financial Services Committee approved HR 5841 by a vote of 53-0. The unanimous approval by both committees is a clear indication of the depth of support in Congress for reforming how foreign investments are reviewed and the likelihood that these changes, in some form, will become law.

What is Congress Doing?

For several years Congress has been concerned with the rise of investment in the United States from particular countries and aimed at sensitive technologies. In addition to the nature and origin of such investment, the pace has also increased dramatically. The Government Accountability Office (GAO) has reported that the number of transactions reviewed by CFIUS grew by 55 percent between 2011 and 2016. In an effort to ensure that CFIUS remains focused on its core mission – reviewing investments that may pose a risk to national security – and acknowledging that the national security landscape has shifted, Congress is modernizing the processes and authorities by which CFIUS reviews such transactions.

What kind of transactions are covered?

Congress is attempting to focus the work of CFIUS by defining which countries raise concerns and the types of transactions that should be considered sensitive; the two chambers define the countries that CFIUS should focus on differently. In the House, countries include those with existing export control limitations; countries designated as state sponsors of terror; or, any nation where the United States maintains and arms embargo. The Senate leaves the list largely to the discretion of CFIUS but authorizes the Committee to decide whether a proposed transaction can be excluded from review by determining if the country in question, “effectively safeguards national security interests it shares with the United States;” if the country is a member of NATO or a major non-NATO ally; or, any other criteria the Committee thinks is appropriate.

The definition of covered transactions in both bills track closely in substance if not in format. Both bills cover any, “merger, acquisition or takeover proposed or pending since August 23, 1988,” as well as real estate transactions involving a port or property near a military installation, or any other type of real estate transaction the Committee may identify. In addition, investments in critical technology companies or critical infrastructure, changes in investment rights that will likely result in foreign control, or any transaction that is designed to evade CFIUS review are covered in both bills.

An interesting facet of both bills is the vast amount of rule-making that is left to the agencies involved. In certain instances, that makes sense; Congress does not have the expertise to identify all the emerging technologies that should be identified as critical. This is a striking contrast in an era where both Congress and the Executive Branch have spent so much time overturning federal regulations and otherwise attempting to limit agency overreach.

What’s next?

Both bills now head to the floor in their respective chambers. In the House, there are still some concerns expressed by the Armed Services and Intelligence Committees that need to be ironed out but the expectation is that the House will pass its version of the bill by the August recess. In the Senate, the Armed Services committee has attached the Banking Committee’s text to the National Defense Authorization Act (NDAA) which the Senate will consider this summer.

Companies should be thinking about the breadth of rule-making that would be established with either bill and, given the global nature of business, any client with potential overseas investors should be preparing to get in front of regulators to help shape the rules that will govern foreign investment going forward.

David Adams brings to Cogent clients an invaluable combination of legislative and foreign policy expertise. David has served as Assistant Secretary of State for Legislative Affairs to Secretary of State Hillary Clinton and was instrumental in facilitating the Iran Threat Reduction and the civil nuclear cooperation agreements with Russia and Australia. Previously, as Deputy Assistant Secretary for House Affairs, he was also key to the development of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, as well as approval of major arms sales to Saudi Arabia and Iraq and a civil nuclear cooperation agreement with the United Arab Emirates. For David’s complete bio, click here.