Last year Congress reformed the process by which the U.S. reviews foreign investments to identify security concerns (Foreign Investment and National Security Act - FINSA). Reviews are carried out by the interagency Committee on Foreign Investment in the U.S. (CFIUS) Now the Treasury is preparing a rule to bring regulations up to date.
Yesterday Barney Frank, Carolyn Maloney (a key mover behind FINSA), and Luis Gutierrez, all of the House Financial Services Committee, sent a letter the the Treasury (Frank, Maloney, Gutierrez Call on Treasury to Address Sovereign Wealth Funds in FINSA Regulations) yesterday weighing in with two ideas for the new rule:
First, we do not believe the current regulations are sufficiently clear in describing the role that the 10 percent threshold plays as a test for control for CFIUS’s purposes. We urge you to clarify in the new regulations that this threshold is only one of the indicia of control and does not represent a bright line below which CFIUS has no ability or intent to review a transaction. FINSA does not specify a percentage threshold, and while we recognize the need to offer guidance to companies so that they can plan accordingly, the regulations should not give the false impression that investments below this threshold are also below the radar in terms of the CFIUS’s ability to do its work.
Christopher Rugaber explains the significance of this (House: Foreign investing rules too gray, AP, March 13):
Currently, foreign purchases of less than 10 percent of U.S. companies are generally considered to be passive investments and therefore not subject to scrutiny by the Committee on Foreign Investment in the United States.
But Rep. Barney Frank, D-Mass., chairman of the House Financial Services, and two other committee members urged Treasury Secretary Henry Paulson in a letter Thursday to clarify whether the 10 percent threshold is a "bright line" rule....
The issue is significant because many recent, high-profile foreign investments in U.S. companies have come in just below the 10 percent mark. For example, China Investment Corp., a government-owned investment fund, purchased a 9.9 percent stake in Morgan Stanley in December.
But falling under the 10 percent tipping point doesn't guarantee the investment won't be reviewed. And Frank's letter urged Paulson to make that point clear when Treasury releases new CFIUS regulations this spring....
"The regulations should not give the false impression that investments below this threshold are also below the radar" for CFIUS review, the letter said.
That radar is getting crowded due to the proliferation of sovereign wealth funds, the letter said. Several Middle Eastern governments have set up the government-controlled pools of capital to reinvest billions of dollars of oil revenue. Asian countries such as China and South Korea, meanwhile, have set up funds to reinvest trade surpluses.
The law to reinforce CFIUS requires that acquisitions by foreign governments undergo an extensive 75-day review, compared to 30 days for private foreign companies. However, the longer review can be waived if Treasury determines the investment doesn't pose a national security threat.
The legislators also think that:
Second, FINSA creates a presumption that all foreign government transactions before CFIUS will be subject to both a review and an investigation. This requirement recognizes the unique risks associated with foreign government ownership generally. As a general matter, this presumption clearly encompasses sovereign wealth funds. At the same time, FINSA recognizes that not all of these investments raise concerns serious enough to warrant a full investigation. For example, investments from a pension fund owned by a democratic government with a long track record of investment in the United States, such as Canada or Norway, are not likely to raise the same degree of concern as some others. As a result, FINSA creates a “waiver” authority, to be exercised by the CFIUS chairman and the lead agency, allowing the transaction to proceed without a full investigation when no national security threats are identified by the 30 day review.
Rugaber:
The lawmakers also want the regulations to specify that sovereign wealth funds in democratic countries, such as Norway, are more likely to receive waivers than "some others" that aren't as open and transparent.
While Frank's letter did not mention names, sovereign funds in Abu Dhabi and China, among others, provide little information about their investment objectives or holdings.
More posts on CFIUS may be found here: CFIUS.
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