Proposed FIRRMA Regulations Need Clearer Definitions, May Deter Foreign Investors, Stakeholders Say

Companies and trade groups warned the Treasury Department that the proposed regulations for the Foreign Investment Risk Review Modernization Act may repel foreign investors and customers, fails to clearly define “critical technologies” and could place trusted trading partners at disadvantages, according to comments due Oct. 17.

While Toyota Motor North America commended the Treasury Department’s plan to improve and modernize foreign investment screening, several steps can be taken to ensure FIRRMA does not ward off trusted customers and hurt companies operating in the U.S., the car maker said in comments. Toyota said the draft regulations need a more precise definition of “critical technologies” beyond “emerging” and “foundational” technologies, adding that FIRRMA’s pilot program includes a “broad sweeping approach” to define critical technologies, many of which “may not be critical from a national security perspective.”

Toyota said it has been “challenging” for companies to determine which technologies should be classified as critical. “We strongly encourage a precise definition and targeted approach to these areas under both FIRRMA and [the Export Control Reform Act (ECRA)] to provide clarity to businesses and facilitate the successful implementation of both laws,” Toyota said.

The car maker applauded the proposal to create a list of “excepted foreign states” for the regulations, asking Japan to be listed as an “excepted foreign state” and for Toyota to be listed as an “excepted foreign investor.” Toyota made the suggestion “with the understanding that ‘excepted’ entities will not be entirely exempt from the expanded jurisdiction under FIRRMA ... and, indeed, Toyota acknowledges the criticality that each entity considering investment in the United States must conduct its own due diligence.”

The U.S. Chamber of Commerce said the Committee on Foreign Investment in the U.S. should better clarify “covered control transactions,” saying the examples that were provided in the proposal “present relatively easy and straightforward cases. The examples fall short of providing the necessary clarity to guide U.S. businesses considering cross-border intellectual property licensing transactions.”

When Congress enacted FIRRMA and ECRA, the Chamber said that “typical licensing transactions” -- including those involving critical technologies -- would be governed by U.S. export controls and were “not covered investments or covered control transactions” under CFIUS.

“This clear delineation between the role of CFIUS and export controls was a central understanding in the Chamber’s decision to support FIRRMA,” the Chamber said. “The Proposed Rule should make clear that covered controlled transactions do not include the establishment of joint ventures that Congress specifically chose to exclude from the scope of CFIUS jurisdiction in FIRRMA.”

BAE Systems, a British defense and aerospace company, said the regulations could place “certain trusted industry partners … at a serious disadvantage.” The company said CFIUS should limit the scope of mandatory filings for critical technology transactions to “avoid unnecessarily burdening itself.” BAE Systems said the proposed regulations do not address the broad filing requirement currently in place under FIRRMA’s pilot program, which requires foreign people or entities to file a declaration with CFIUS for any investment in a U.S. business that produces or deals in critical technologies. The company recommended that CFIUS eliminate the mandatory filing requirement in the final regulations to “set a uniform filing standard for all TID U.S. businesses” -- businesses that are involved in critical technologies, infrastructure or that maintain sensitive data on U.S. citizens.

“Doing so would harmonize the filing standard for TID U.S. businesses, but would also help avoid unnecessarily burdening CFIUS with the review of transactions involving trusted members of the U.S. defense industrial base that are very unlikely to adversely impact U.S. national security,” BAE Systems said.

The proposed regulations could isolate the U.S. from foreign investment, The Cybersecurity Association of China said. The FIRRMA regulations “provide an interface between foreign investment review” and the U.S.’s export control regime, which could “break up normal technical cooperation and exchanges between the United States and the rest of the world,” the association said. The regulations could hurt U.S.’s place as the “sole front-runner in technology sphere” by slowing the “upgrading of U.S. industries and technologies” and cutting the U.S. off from the “compatibility of technologies globally.”

The association also said the regulations’ “country specific exceptions” are a violation of World Trade Organization rules, saying they violate non-discrimination laws. The association said the proposed regulations would grant “special treatment” to U.S. allies in export control and investment fields. “We believe that these measures not only defy the obligation of the U.S. to treat enterprises of other countries fairly under the WTO framework, but also will cost the world what it has achieved in globalization since the World War II,” the association said.