October 4, 2019

Trump Administration Proposes Further Scrutiny of Foreign Investments in the US

New rules seek to protect the country’s critical infrastructure, technology, and sensitive personal information of citizens.

Reported by Steffan Navedo-Perez

Last week, The US Department of Treasury proposed new regulations that aim to curtail national security risks brought about by foreign investments made into the US. The proposed regulations would implement the bipartisan-supported Foreign Investment Risk Review Modernization Act of 2018 (FIRMMA), which brings additional supervisions to prepare for a wide range of situations brought about by foreign investments in the country that jeopardize national security concerns.

Specifically, FIRMMA expands national security scrutiny to foreign investments made in domestic real estate or “critical infrastructure” non-controlling investments that enable a foreign entity to be in possession of an equity interest, and subsequently access to information “in the possession of, rights in, or involvement in the decision-making of certain US businesses involved in certain critical technologies.”

FIRMMA also monitors any changes in a foreign person’s rights if such change could result in foreign control of a US business or another investment in certain US businesses, including those that involve sensitive personal data of its users that “may be exploited in a manner that threatens to harm national security.”

Lawmakers of the bill recognize that “most companies collect some type of data on individuals,” so in order to maintain the benefits of foreign investment in the United States, the legislation is tailored only to certain businesses who collect relatively sensitive information.

Such sensitive information is defined as personal intelligence of government employees, the collecting of or intent to collect (as part of a business plan) the data of more than 1 million users, and “all genetic information” of its users.

“The United States welcomes and encourages investment in our country and our workforce,” said Treasury Secretary Steven T. Mnuchin. “Today’s proposed regulations will provide clarity and certainty to investors regarding CFIUS’s enhanced authorities to address national security risks that arise from certain foreign investments, and continue modernizing the CFIUS process.”

A final version of the rule will take effect no later than Feb. 13, 2020.

It’s the latest step in the administration’s hardline stance over national security concerns. The Trump administration previously banned Chinese phone maker Huawei’s use of Google’s Android mobile operating system, among other similar actions.

It’s not entirely, wide-ranging, however. The bill states that some foreign investments are encouraged because they are actually in the interest of protecting national security. In light of this, as well as increasingly complex ownership structures, the bill sets forth a “narrow definition of excepted investors.”

“The criteria specified require that a foreign person have a substantial connection to one or more particular foreign states in order to be deemed an excepted investor,” the rules read.

The rules are relatively flexible and contingent on a few factors. The full text is available here.

Some financial institutions have disparaged the administration’s attempts to curtail national security threats and political moves against certain foreign states. In August, Morgan Stanley asserted that another tariff hike on China would stimulate a recession.

The California State Teachers’ Retirement System’s Chief Investment Officer Christopher Ailman said that the president’s tweets are a ‘key market risk’ to monitor.