CFIUS Proposed Rules Target Critical Technology, Sensitive Personal Data and Real Estate

On September 17, 2019, the jurisdiction of CFIUS to conduct national security reviews of foreign investment in the United States was expanded.By John R Ingrassia, Owen Masters, Matthew McBride, The National Law Review
October 4, 2019

On September 17, 2019, the Department of the Treasury issued long-awaited proposed rules implementing many of the provisions of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which substantially expanded the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”) to conduct national security reviews of foreign investment in the United States.

The proposed rules were issued in two parts: 31 CFR Part 800 – Provisions Pertaining to Certain Investments in the United States by Foreign Persons and 31 CFR Part 802 – Provisions Pertaining to Certain Transactions in the United States by Foreign Persons Involving Real Estate. CFIUS already had the authority review any control transaction by a foreign person in respect to U.S. businesses to determine the potential impact on the national security of the United States. Under the Part 800 Rule, CFIUS’s jurisdiction has been expanded to also cover certain non-controlling investments in U.S. business that (i) are involved with “critical technologies”, (ii) own, operate, manufacture or supply or provide services to “critical infrastructure” or (iii) that collect or maintain “sensitive personal data”, in each case, if such investments afford foreign persons certain rights (as described below). Under the Part 802 Rule, CFIUS will also have the jurisdiction to review certain “covered real estate transactions” if the relevant real estate is in close proximity to U.S. military installations or sensitive U.S. government facilities, or within or part of an airport or a maritime port.

On the one hand, the proposed rules greatly expand CFIUS’s jurisdiction to review a wide range of foreign investments in U.S businesses and real estate. On the other hand, the proposed rules show some restraint on the part of CFIUS by limiting the instances where mandatory CFIUS filings are required.

The comment period for the proposed rules is open until October 17, 2019, and, in accordance with FIRRMA, the rules are required to be finalized no later than February 13, 2020. Below are key takeaways from the proposed rules.

1. The Pilot Program (including mandatory filings) remain in place

The proposed rules do not alter the interim “Pilot Program” rules (31 CFR Part 801) issued on October 11, 2018. Until further notice, or until the Pilot Program expires in February 2020 if not extended, investments subject to the Pilot Program will continue to be subject to potential mandatory CFIUS filings.

Under the Pilot Program, a mandatory filing regime was created for certain foreign investments in U.S. businesses that produce, design, test, manufacture, fabricate, or develop certain “critical technologies” if such transaction: (i) could result in a foreign person controlling such business, (ii) affords a foreign person with access to “material non-public technical information” regarding such business (information necessary to design, fabricate, develop, test produce or manufacture critical technologies), (iii) affords a foreign person with membership or observer rights on the board of such business or (iv) affords a foreign person the right to involvement in the substantive decision-making of such business with respect to the relevant critical technology. Critical technologies include: (a) defense services and articles controlled by the International Traffic in Arms Regulations, (b) items controlled by the Export Administration Regulations for reasons related to national security, chemical and biological weapons proliferation, nuclear nonproliferation, missile technology, regional stability, or surreptitious listening, (c) specially designed nuclear components, parts and technology and (d) select agents and toxins, in each case, used in or developed for any of the twenty-seven sensitive industries enumerated under the Pilot Program rule (please see our October 31, 2018 alert for the complete list of industries), and also include certain “emerging and foundation technologies” controlled under the Export Control Reform Act. The rules defining “emerging and foundational technologies” are expected by year end, and are likely to include categories such as biotechnology, artificial intelligence, additive manufacturing (including 3-D printing), navigation and timing (including self-driving car technology), microprocessor technology, robotics and quantum computing. When the final list of “emerging and foundation technologies” is released, it will be immediately relevant, as they will automatically be incorporated into the definition of critical technologies.

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