Highlights from Treasury’s Second Annual CFIUS Conference
- On September 14, 2023, the U.S. Department of Treasury (“Treasury”) hosted its Second Annual CFIUS Conference (the “Conference”) regarding the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”).
- Headlined by Treasury Secretary Janet Yellen and Assistant Secretary for Investment Security Paul Rosen, the Conference’s program included discussions surrounding CFIUS’ priorities, transaction due diligence considerations, and the Committee’s compliance and enforcement agenda.
- Below we highlight several key takeaways from the Conference for transaction parties to consider when navigating the CFIUS review process.
1. CFIUS is increasingly interested in clean energy and biotechnology.
Based on recent remarks from officials at the Conference and the Biden Administration’s September 2022 Executive Order (which we discuss at length here), dealmakers should be alert to transactions involving the U.S. energy and biotechnology sectors.
The Biden Administration’s clean energy policy appears to be an increasingly important consideration in CFIUS’ case reviews. A number of officials at the Conference commented on the importance of preserving U.S. leadership in the energy infrastructure space. Notably, the U.S. Department of Energy continues to grow its CFIUS-related team to account for growth in the energy sector. We expect to see increasing interest from CFIUS in transactions involving clean energy products that could be used to combat climate change, including batteries, aerial vehicles, hydrogen, and other energy alternatives.
Biotechnology also remains of interest to CFIUS. Officials at the Conference explained that CFIUS evaluates potential use cases that are non-commercial and advised dealmakers to do the same.
There is an ever-expanding list of sectors that may be seen to raise national security concerns. Transaction parties would be wise to develop a sophisticated CFIUS strategy at the start of the transaction planning process to avoid surprises and facilitate closing on their preferred timeline.
2. CFIUS is pressure testing private equity fund structures.
Private equity investors have long made use of exceptions under the CFIUS regulations that allow for passive non-U.S. limited partners to invest alongside U.S. general partners without triggering CFIUS jurisdiction. Officials at the Conference made clear that CFIUS is pressure testing these structures to ensure that non-U.S. limited partners truly are passive – for example, by requiring disclosure of side letters with non-U.S. limited partners. While certain transaction structures may offer non-U.S. investors passivity from a tax (or other) perspective, this does not mean that passivity exists from CFIUS’ perspective. CFIUS recently clarified in its Frequently Asked Questions (FAQs) that it may request follow-up information in respect of all foreign investors involved in a transaction, regardless of any arrangements made to limit disclosure (which we discuss here). Going forward, greater CFIUS scrutiny of non-U.S. investors should be expected.
3. The Committee is bolstering its non-notified transaction team to identify transactions posing national security risks.
CFIUS reviews thousands of deals each year and actively identifies so-called non-notified transactions for further review. Assistant Secretary Rosen made clear in his remarks that the Committee is increasing its focus and resources in this area, stating: “non-notified work is one of CFIUS’ most important functions”. The statement echoes the findings of the 2022 CFIUS Annual Report (which we cover here) which showcases the non-notified transaction team’s uptick in activity. With the help of the Federal Bureau of Investigation, CFIUS’ identification and subsequent reviews of non-notified transactions are on an upward trajectory. Transaction parties should be diligent with assessing CFIUS risk from the outset of a transaction to avoid potential surprises.
4. Companies subject to mitigation agreements must develop robust compliance programs. CFIUS intends to conduct more site visits and impose more penalties to underscore the importance of compliance.
The Committee is more likely to impose mitigation measures now more than ever in its history. Per the 2022 CFIUS Annual Report, there was a 67% increase in the number of transactions subject to mitigation measures as compared to 2021. In line with this trend, Assistant Secretary Rosen’s remarks revealed that the Committee is monitoring more than 230 active mitigation agreements, and given the pattern thus far, we can expect to see the imposition of more mitigation agreements going forward.
In connection with the increased use of mitigation agreements, officials at the Conference emphasized that U.S. businesses subject to mitigation agreements must develop and implement effective compliance programs and must focus on doing so rapidly. Officials expressed that they have identified many potential compliance exceptions during the implementation phase (usually the first few months following the date a mitigation agreement becomes effective) and advised the compliance community not to kick the can down the road.
CFIUS has multiple tools in its enforcement toolkit to ensure compliance with mitigation agreements, including site visits and monetary penalties. With respect to site visits, officials emphasized that mitigated companies should prepare backward- and forward-looking materials for such visits and should expect interviews to be conducted “at all levels, including line-level staff, perform[ance of] spot checks on records, and engage[ment] in other measures to actively monitor compliance”, per Assistant Secretary Rosen’s remarks.
In addition to site visits, CFIUS officials appear to be imposing potential monetary penalties with increasing frequency. The Committee made clear with recent enforcement guidelines (which we discuss here) and statements at the Conference that there is an active enforcement climate. Assistant Secretary Rosen spent the bulk of his remarks discussing enforcement and penalties, emphasizing that the Committee has been “doubling down on efforts to improve our protocols and train our staff on enforcement” and that CFIUS is on track to issue this year the most civil monetary penalties in the Committee’s history.
It appears CFIUS has imposed two civil penalties this year to date, but Treasury has not yet published any details. Perhaps Treasury is waiting until additional penalties have been imposed and then will announce them all at one time.
5. CFIUS plans to issue new rules.
In recent months, CFIUS has been active with issuing new FAQs that introduce potential changes to the CFIUS review process. During the Conference, Assistant Secretary Rosen announced that CFIUS is also actively reviewing the CFIUS regulations and dealmakers should expect to see new notices of proposed rulemaking in a number of areas, including with respect to the Committee’s penalty and enforcement authorities, to “sharpen and enhance the Committee’s tools in the non-notified space”, and to allow for more efficiency and effectiveness in case reviews.
As detailed above, we should expect to see more information regarding the penalties CFIUS has administered this year as well as new notices for proposed rulemaking. We will continue to monitor this space and report on these significant developments as well as any others.
Dechert represents a wide range of clients with respect to CFIUS, including major operators and investors in the high tech, telecommunications, energy, defense, and infrastructure industries. We regularly advise foreign and domestic entities (“buyers”, “sellers”, and other interested third parties) through the CFIUS review process, helping them determine whether or not to bring a transaction before the Committee (and whether or not CFIUS review is required), assemble the required information and materials for a filing, and negotiate (as necessary) national security agreements with CFIUS in a manner that minimizes both delay and the imposition of conditions that might threaten the transaction.[i]
[i] The Conference was held under the Chatham House Rule, which allows use of any information provided but without attribution. As a result, we have not attributed comments to any particular speaker with the exception of Assistant Secretary Rosen, whose remarks were published here: https://home.treasury.gov/news/press-releases/jy1732.