Executive Order Increases Regulatory Risks for Foreign Investment in the U.S. Economy – Terrorism, Homeland Security and Defense

On September 15, 2022, President Biden signed an Executive Order (EO) identifying economic sectors that merit special consideration for consideration by the Committee on Foreign Investment in the United States (CFIUS or the Committee). While the OE is not changing CFIUS’ jurisdiction to review foreign investment in US companies, this is the first time a US president has identified particular factors the committee should use to assess whether a transaction poses a threat. for the national security of the United States. The EO will likely have the effect of increasing the number of foreign investments reviewed by CFIUS. It specifically directs CFIUS to undertake national security risk assessments considering the impact a transaction may have on supply chain security, U.S. technology leadership, cybersecurity, access to sensitive personal data and the impact of additional investments over time.

The OE reinforces a practical reality that has become increasingly clear in recent years: foreign investment in large swaths of the US economy may attract the attention of CFIUS. The CFIUS is expected to focus in particular on investments by foreign entities in technologies perceived as important to U.S. strategic leadership, such as semiconductors and microelectronics, quantum computing, batteries, autonomous vehicles, robotics and artificial intelligence. And the OE makes it clear that companies that may not consider themselves important to the strategic national security of the United States may nevertheless attract the attention of CFIUS, including companies in the biotechnology and biomanufacturing sectors. , advanced clean energy, climate adaptation, critical materials and agriculture.

This EO lands amid a bipartisan focus on national security concerns that can be triggered by foreign direct investment. In August, CFIUS reported to Congress that the Committee was reviewing a record number of transactions for national security risk, and that the Biden administration and Congress were considering either an executive order or legislation to screen outbound U.S. investments in semiconductors and similar technologies through a “reverse”. CFIUS process”.

The administration “will continue to review whether additional steps are needed to better position CFIUS to protect U.S. investors from predatory foreign investment,” National Security Advisor Jake Sullivan said after the EO was released.

OT Summary: Sharpening CFIUS Focus

The EO directs the CFIUS to consider five sets of factors when conducting its reviews:

1. Supply chains. The CFIUS must examine the effect of a transaction on “the resilience and security of the supply chain, both inside and outside the defense industrial base”. The defense industrial base refers to the companies that the United States Department of Defense relies on to supply military equipment. The EO highlights a wide range of civilian industrial supply chains that CFIUS should consider, including “microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy ( such as battery storage and hydrogen), climate adaptation technologies, critical materials (such as lithium and rare earths)” and elements of the agricultural sector. could make the U.S. vulnerable to supply chain disruptions CFIUS should also consider several factors involved in the supply chain itself, including its diversification through alternative suppliers, including allies and partners; whether the U.S. government itself relies on the supply chain; and the concentration of ownership or c control of the supply chain by a foreign party.

The EO warns of the risks of foreign investments that transfer control of critical supply chains to a foreign party, including a foreign party that has “relevant third-party connections” “that could cause that the transaction poses a threat to national security.” The emphasis on “third-party connections,” a phrase that is not further defined but is repeated throughout the OE, suggests that the Committee will be on the lookout for links between the foreign investor and other foreign parties. While the EO does not name any nations of particular concern, the administration is extremely concerned about competitors like China and Russia, and CFIUS will likely scour transactions for links to entities in those countries.

2. Technological leadership. The OE asks the committee to consider the effect of a transaction on US technology leadership. It lists specific areas of concern, including critical minerals, “microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy and climate adaptation technologies.” The CFIUS must examine the relevant ties between the foreign buyer and its investors or other third parties “that could cause the transaction to threaten the national security of the United States”.

3. Investment Trends. The CFIUS must consider additional investment trends in a technology sector that, in aggregate, “may cede, part by part, national development or control in that sector or technology” to a foreign person. “[A] a series of transactions over time can increase systemic vulnerability, potentially causing a particular covered transaction to pose a national security risk,” a senior administration official explained in a press call, suggesting that the CFIUS should look beyond the specific factors of the transaction before it when weighing national security risks against general industry trends.

4. Cyber ​​Security Risks. The EO directs CFIUS to consider the cybersecurity capabilities of the foreign investor and the cybersecurity practices of the domestic target. In particular, the Committee should consider whether a transaction could provide a foreign party with “the ability and intent to conduct cyber intrusions or other malicious cyber-enabled activities.” These activities include those that attempt to affect the outcome of elections, the operation of US critical infrastructure, and the integrity of US communications. CFIUS must also consider the cybersecurity posture and practices of all parties to the transaction that could allow a foreign party to conduct such cyber activities. The EO notes that Congress, in the Foreign Investment Risk Review Modernization Act of 2018, which expanded CFIUS’s mandate and passed with near unanimous support, identified “aggravation or creation of new cybersecurity vulnerabilities” as a relevant consideration for CFIUS.

5. Sensitive Data. OE directs CFIUS to consider sensitive data in several ways. First, the CFIUS must consider whether a covered transaction involves a U.S. company that has to access sensitive data of US Persons, “including health, digital identity or other biological data of US Persons and any data which may be identifiable or anonymized, which may be used to distinguish or trace the identity of ‘an individual in a way that threatens national security.’ Second, apparently for the sake of counterintelligence, CFIUS must determine whether the target company has access to data on “subpopulations” that a foreign entity could use to target individuals or groups “in some way.” that threatens national security”. Third, the CFIUS must consider whether a transaction involves the
to transfer sensitive data of U.S. individuals to a foreign entity “that may take action that threatens to harm the national security of the United States,” including whether the foreign entity has ties to investors who may exploit the information , including by commercial means.

The EO directs the Committee to review its practices on an ongoing basis and to “continue to make necessary and appropriate updates to ensure that the Committee’s review of National Security Risks remains robust alongside the changes being made.” to the national security landscape”. CFIUS must provide periodic reports to the White House, including any policy recommendations.

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