Treasury Proposes Revision of CFIUS Declaration Requirements Involving Critical Technologies
The Treasury Department issued a proposed rule to modify mandatory declaration requirements for certain transactions involving critical technologies. Under the rule, transactions would require a declaration if the critical technology would normally be subject to a U.S. export license. This would be a change from certain declaration requirements for the Committee on Foreign Investment in the U.S. outlined under a 2018 pilot program, which based those decisions on whether the transactions met criteria established by the North American Industry Classification System.
By basing declaration requirements on whether the transactions’ critical technology would require a U.S. export authorization, Treasury said it hopes to leverage the “national security foundations of the established export control regimes.” Treasury added that “CFIUS will continue its role in the process to identify emerging and foundational technologies.”
The rule would also introduce two new definitions to revise the declaration requirement but does not change the definition for “critical technologies” (see 2002110042). The two new definitions are “U.S. regulatory authorization” and “voting interest for purposes of critical technology mandatory declarations,” the notice said. Along with new definitions, the rule would also make “clarifying amendments” to the definition of “substantial interest,” Treasury said, which “establishes how to determine the percentage interest held indirectly by one entity in another for purposes of that term.” Comments for the rule are due June 22.
Treasury hinted at the change in January's final regulations for the Foreign Investment Risk Review Modernization Act, when it said it planned to revise the requirements for certain declarations outlined in the 2018 pilot program interim rule (see 2001140060). If the new filing requirements are adopted, Treasury said, the pilot program interim rule will continue to apply to transactions “for which specified actions occurred” on or after Nov. 10, 2018, and before Feb. 13, 2020. In addition, the existing declaration requirements for critical technologies based on NAICS codes will apply to transactions “for which specified actions occurred” from Feb. 13 until the effective date of the final version of this proposed rule.
The rule proposes a definition for “U.S. regulatory authorization,” which specifies the types of licenses or authorizations that would determine the criteria for filing a mandatory declaration with CFIUS. The definition would include licenses and approvals required by the Directorate of Defense Trade Controls for certain items covered under the International Traffic in Arms Regulations and the U.S. Munitions List and by the Commerce Department for certain items covered by the Export Administration Regulations and the Commerce Control List. The definition would also include licenses required by the Energy Department and the Nuclear Regulatory Commission.
The rule’s proposed definition for “voting interest for purposes of critical technology mandatory declarations” would specify “which persons” in ownership chains should be “analyzed for export licenses and authorization purposes” for determining whether a transaction should trigger a mandatory declaration. The definition “establishes a threshold of a 25 percent voting interest, direct or indirect,” for foreign persons that should be analyzed. For entities whose “activities are primarily directed, controlled, or coordinated by or on behalf of a general partner, managing member, or equivalent,” the definition would set a threshold of 25% interest “in an entity’s general partner, managing member, or equivalent.” For determining “the percentage of interest held indirectly by one person in another, the rule establishes that any interest of a parent entity in a subsidiary entity will be deemed to be a 100 percent interest,” the rule said.
Treasury stressed that mandatory declarations will still be required even in cases in which the transactions’ critical technology is subject to a license exception. “U.S. regulatory authorization is considered to be required even though a license exception or exemption may be available under the EAR or ITAR,” the notice said. The rule also specifies how to “analyze a foreign investor’s nationality” and how to identify which foreign people involved in the transactions should be considered the end user.
The proposed rule would keep certain exceptions for mandatory declarations of transactions involving critical technologies, Treasury said, but also revises others. Among the changes is the addition of two more license exceptions under the EAR for “technology and software-unrestricted (TSU) and certain elements of strategic trade authorization (STA),” the notice said.
(Federal Register 05/21/20)