House Financial Services Members Criticize Portions of Proposed FIRRMA Regulations

Four Republican members of the House Financial Services Committee praised the Treasury Department’s proposed regulations for the Foreign Investment Risk Review Modernization Act but also criticized several key areas, according to comments released Oct. 29. The comments were signed by Reps. Patrick McHenry, R-N.C., Andy Barr, R-Ky., French Hill, R-Ark., and Steve Stivers, R-Ohio.

While the lawmakers said the regulations accurately reflected conversations between Treasury and the committee, saying Treasury showed “sensitivity to congressional intent,” they also raised several concerns. The members asked for clarification on the regulations’ definition of “supply” of critical infrastructure, urged the Committee on Foreign Investment in the U.S. to include allies in FIRRMA’s “excepted foreign state” list, suggested CFIUS revise the threshold under the “excepted foreign investor list” and asked CFIUS to introduce a waiver for certain mandatory declarations.

The members asked for clarity on the definition of supply, which the regulations define as the provision of “third party physical or cybersecurity.” Under the Defense Production Act of 1950, the supply of critical infrastructure refers to the “provision of critical infrastructure itself,” the lawmakers said, not the supply of critical infrastructure “with” goods and services. “Otherwise, Congress would have indicated that supplying critical infrastructure with (goods, services, etc.) was intended, and then would have specified the goods and services envisaged,” the comments said. The members said the supply of third-party physical or cybersecurity “may not obviously align with these provisions” and “hope to work with you to fully understand the rationale.”

The lawmakers also touched on FIRRMA’s intention to create a list of foreign states that are excepted from the regulations. Because Treasury has not yet issued the list, the proposed regulations “establish categories that are not coherent without a list of excepted foreign states,” the comments said. “This is therefore a limitation that does not limit; it is both inconsistent with FIRRMA and calls into question a number of significant provisions.”

The lawmakers urged Treasury to “specify” the excepted foreign states by the time the final rulemaking is issued, saying the list should not have been delayed. The members said CFIUS already has “extensive” experience targeting countries for national security risks, disputing the regulations’ assertion that the expected foreign states list is a “new concept.” That rationale “does not justify a delay,” the comments said. They also stressed that “many U.S. allies, including NATO and non-Nato partners, should remain unaffected by FIRRMA’s expansions” so CFIUS can concentrate efforts on China, Russia and others.

CFIUS should also revise an ownership threshold under the regulations for excepted foreign investors “to make it more consistent with concepts such as minimum excepted ownership, substantial interest” or the existing rules on “holdings of 10 percent in connection with passive investment,” the comments said. The lawmakers said the “hurdles” to qualify as an excepted foreign investor are “inconsistent” with congressional intent.

The lawmakers said they are “disappointed” that CFIUS did not propose to use its “waiver authority” for certain mandatory declarations even though members on the Financial Services Committee told Treasury that a “number of candidates … may merit such waivers.” The committee is aware of a “number of certified transactions ... by allied governments that may not pose the risk of other government-controlled entities” and said it hopes the final rules “reflect appropriate consideration for a wide range of U.S. allies.”

The lawmakers said they were “pleased to learn” that Treasury has “sought to hire” more staff to help with the regulations, adding that the “completed reviews of notifications and declarations post-FIRRMA suggest that CFIUS takes seriously the importance of certifying transactions efficiently.”

The comments also include a Sept. 12, 2018, letter from Financial Services Committee members about the committee’s priorities and concerns for FIRRMA. FIRRMA had been passed by Congress one month earlier. The comment period for FIRRMA’s proposed regulations ended Oct. 17. The final regulations are expected to take effect not later than Feb. 13 (see 1909180018).