Treasury’s Outbound Notification Rules May Present Hidden Risks for Investors, Lawyers Say

It’s unclear exactly how the Treasury Department will use information it receives as part of the notification requirements in its upcoming outbound investment regulations, lawyers said, warning that those notifications could present reputational and business risks for certain American investors in China, especially if members of Congress see them.

Phil Ludvigson, a lawyer with King & Spalding and Treasury’s former acting deputy assistant secretary for investment security, noted that the House Select Committee on China has been focused on trying to stop U.S. investments from being used to aid the Chinese government and military (see 2404180049 and 2407260056) and could ask to see those notifications.

The committee and other lawmakers are “looking to see what those trends are,” Ludvigson said, “and they're more than happy to name and shame.”

The Biden administration is expected to issue a final version of its outbound investment rules by the end of the year, potentially introducing new prohibitions and notification requirements on U.S. investments in China, Hong Kong and Macau (see 2406210034 and 2408050038). During an event this week hosted by the Capitol Forum, lawyers warned companies not to overlook the notification rules, which could require firms to report to Treasury the details of certain investments in China's artificial intelligence and microelectronics sectors.

“I think the concern is exactly what happens with that information," Ludvigson said.

If Congress asks Treasury to provide it with those notifications, Ludvigson said lawmakers could decide to publish information about a business if they believe the notification shows it invested in China in ways that defy U.S. interests. He suggested that Congress could even push the Pentagon to add a company to “certain lists.”

The Pentagon maintains the 1260H List, which identifies companies that Treasury determines have ties to China's military. That list doesn’t impose any financial or trade sanctions, but it does impose certain contracting restrictions.

“If you do a lot of business in the U.S. or do a lot of business with the government or in certain sectors, that could have a very bad effect for you, reputationally and on future business,” Ludvigson said. While Treasury is primarily expected to use the notification rules to collect data about American investments “to make the program better,” he said, "there's also this hazard of where the information goes and what happens to it after.”

Ludvigson also said Treasury might be pressured to increase enforcement if at some point the U.S. finds out about an unfavorable American investment in China that was reported to the agency but not explicitly prohibited by the outbound investment regime. In that scenario, “you're going to see a much more robust kind of enforcement side of things coming after that,” Ludvigson said.

Andrew Astuno, a lawyer with Fluet and a former Treasury policy adviser who specialized in CFIUS reviews, noted that the “exact procedures and the exact rules” for the notification regime are still “yet to be fully articulated.” He asked whether the government plans to review and possibly unwind, or impose mitigation measures, on certain notified investments.

“That has yet to be articulated in the regulations,” he said, “adding to the overall calculus of uncertainty.”

Antonia Tzinova, a CFIUS lawyer with Holland & Knight, also said it’s unclear how long Treasury has to “act” on a notification after a company submits it to the agency. “Is it within 30 days they have to notify you they’ve got a concern? Five years down the road?” she said. “And what happens to your investments in the meantime?”

Investors are hoping these and other questions are answered when Treasury releases its final rule, Ludvigson said. “I think that's one of the frustrations,” he said. “You want to get ahead of the curve if you're investing in any area, particularly China. And I think you would like to take a look and see what's coming down the road and plan for that.

“I think, given that some of the aspects of the rule right now are still unknown," he said, "it's very difficult to plan for what the rule might ultimately prohibit or require in terms of notification.”