The Custom-House

Rules for FDI Security Reviews

Foreign direct investment (FDI) can have a lot to offer an economy.  But, the world's nations are becoming increasingly concerned about the impact of FDI on national security.  As governments have placed more emphasis on screening investments, they've increased the costs of investments - and reduced the attractiveness - to foreign investors.

David Marchick and Matthew Slaughter look at trends in foreign investment reviews in their new Council of Foreign Relations report, Global FDI Policy. Correcting a Protectionist Drift (June 2008).  Marchick was the author, with the late Edward Graham, of US National Security and Foreign Direct Investment (Peterson Institute, 2006).

Marchick and Slaughter point to three reasons for heightened security concerns:

"Expanding" Scope of CFIUS

The comment period on the Treasury's proposed regulations to govern security reviews of foreign investment in the U.S. ended on Monday, June 9.  The comments may be found here: Regulations Pertaining to the Mergers, Acquisitions, and Takeovers by Foreign Persons.

Shortly before the period closed, Richard Willoughby and Tim Martin of the law firm Torys LLP published a short note on the content of the proposed rule: United States: The Expanding CFIUS Mandate For Review Of Foreign Investment In The United States (June 6).

As the title indicates, Willoughby and Martin are interested in the expanding scope of CFIUS. Foreign control triggers CFIUS interest, and the range of arrangements that may create control is larger under last year's legislation and the regulations; a new emphasis on critical infrastructure and critical technologies may extend the range of CFIUS authority to new sectors of the economy.

Expanding scope also crops up in a description of the proposed rule by Philip Thompson of Duane Morris LLP: United States: Treasury Department Issues Proposed Regulations Governing Review of Foreign Investment in the United States (May 22):

• The proposed regulations have expanded the procedures to make explicit the opportunity for interaction between CFIUS and the parties to a transaction before a notice is formally filed. Information provided to CFIUS as part of a pre-notice consultation becomes part of the formal notice and is accorded the existing confidentiality protections of section 721(c).
• The proposed regulations have expanded the scope of information required to be submitted to CFIUS to include additional data that CFIUS has routinely requested of parties in connection with a voluntary notice. This includes, for example, additional information regarding ultimate and intermediate parents of the foreign person making the acquisition; identification of any special government rights over the foreign person making the acquisition; and personal identification information for certain key personnel.

CFIUS Investigation of CSX-TCI Relationship Unlikely?

Stephanie Kirchgaessner reports that the U.S. Treasury is "...unlikely to pursue a request by senators to investigate [through the auspices of CFIUS - Ben] an attempt by the Children’s Investment Fund, a British hedge fund, to replace some members of the board of the rail operator CSX." (UK fund set to escape Cfius probe, Financial Times, June 11).

CSX Plays the CFIUS Card

The railroad company CSX is trying to head off the election of directors sponsored by one of its investors, a British hedge fund: CSX, hedge funds square off in forum  (CNNMoney, June 9).

CFIUS Proposed Rule Comment Period Coming to an End Soon

The comment period for the Treasury CFIUS regulations closes in another week (June 9).   Here's the proposed rule: Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons Federal Register, April 23). 

What's In the CFIUS Proposed Rule?

On April 23rd the Treasury published its proposed rule to modify the regulations governing U.S. national security reviews of foreign investments (Proposed rule).  The Treasury is accepting public comments through June 9.

Barara Linnney of Blank Rome LLP describes the content of the new rules: United States: No “Bright Lines” Drawn By New Foreign Investment Regulations (Mondaq, April 24).

Simeon Kriesberg, David McIntosh, and Kristy Balsanek of Mayer Brown LLP, describe the content and provide a little more analysis: United States: Proposed Rules Signal A More Expansive And Intensive Examination Of Foreign Investments In The United States (Mondaq, May 12, 2008).  It doesn't break new ground: "For the most part, the proposed rules simply codify the mode of operation that CFIUS has developed before and since the enactment of the Foreign Investment and National Security Act of 2007 (FINSA)."

Control is the most important concept in the rule:

FINSA and "National Economic Security"

James Jackson has prepared a six page primer on U.S. national security vetting of foreign investments (Foreign Investment, CFIUS, and Homeland Security: An Overview, Congressional Research Service, April 17, 2008). 

Jackson develops an argument that last year's Congressional action to revise the process, the Foreign Investment and National Security Act (FINSA), is meant to address threats to something called "national economic security."  He does so by ignoring the language of FINSA, and introducing language from a separate statute.

June 14: Since I wrote this, I've found that, while FINSA doesn't include a definition of "national security," or "national economic security" it does include a "clarification" among its definitions stating "The term `national security' shall be construed so as to include those issues relating to `homeland security', including its application to critical infrastructure."  I'm not sure what this means, but I'm not as certain as I once was that the language of FINSA precludes something its proponents call "national economic security."  See the text added to the end of this post.

"Economic security" is a problematic concept.  Summarizing a discussion in Graham and Marchick (US National Security and Foreign Direct Investment), a national economic security test might create a general foreign investment review process that would inhibit foreign investments in the U.S.and provide other countries with an excuse to subject U.S.investments to similar review.  It would be hard to enforce because it's extremely hard to define what “economic security” means.  It would provide endless opportunities for companies to suppress competition by making spurious claims that a foreign investment in a competitor violates some "economic security" test.  It would encourage politicization of the review process.

A quick word search of the final text of the bill (FINSA) shows that it does not use the term "'economic security."  FINSA does include references to "critical infrastructure," and Jackson suggests that a concern with economic security can be introduced into this bill by using the definition of critical infrastructure from another piece of legislation (to anticipate the argument at the end of the post - FINSA uses a different definition of critical infrastruture than the legislation Jackson cites):

CFIUS Public Hearing

The Treasury Department held a public hearing May 2 on its proposed rule to implement changes required by legislation modifying the process the U.S. uses to vet foreign direct investments for national security concerns.  Ron Orol reports for TheDeal.com: Lawyers Question Proposed Rules Governing Foreign Investment in U.S. (May 5).

Some suggested that firms, to minimize their risk in the face of ambiguity in the rule, would be more likely to file notifications with the Committee on Foreign Investment in the U.S. in marginal cases, increasing the administrative burden of the process:

The CFIUS Proposed Rule is Available

The Treasury has released its proposed rule with the revisions to the CFIUS regulations.  The proposed rule is here: Proposed Rule. 

Here's an early news report: U.S. Treasury releases proposed foreign investment regulations UPDATE (Thomson Financial News, via Forbes, April 21).

CFIUS Under FINSA

G. Christopher Griner, Farhad Jalinous, and Christopher Brewster of Kaye Scholer describe the changes in the way U.S. security reviews of foreign investments are done following passage of last year's Foreign Investment and National Security Act (FINSA) and this year's executive order on the process: Soapbox: Mitigating circumstances (The Deal.com, April 16, 2008):