Over the past two weeks, the Office of Foreign Assets Control (“OFAC”) published a series of FAQs related to Executive Order 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies” (the “CCMC EO” or the “EO”). That EO aimed to prevent US investors from financing the development of the People’s Republic of China’s military, intelligence, and security capabilities by prohibiting purchases of securities of certain “Communist Chinese military companies.” Our prior blog posts on the EO and on the Defense Department’s announcement of additional companies that would be subject to the EO are available here and here.
The following points in OFAC’s FAQs concerning the scope of the CCMC EO are noteworthy:
Treatment of Subsidiaries and EO Definitions
- FAQ 857 clarifies that the EO applies to any subsidiary of the identified “Communist Chinese military companies,” provided that such subsidiaries are publicly listed as such by the US Treasury Department. OFAC has published a list of companies subject to the EO here (the “Communist Chinese Military Companies List”). Accordingly, until a subsidiary of a currently-listed Communist Chinese military company is itself publicly listed, the prohibitions of the EO do not apply with respect to securities issued by such subsidiary. However, the FAQ indicates that the Treasury Department intends to publicly list any entity that issues publicly traded securities and that is (i) 50 percent or more owned by a “Communist Chinese military company,” or (ii) determined to be controlled by one or more “Communist Chinese military companies.” It is therefore, at least, the current intention of the Treasury Department to list majority-owned subsidiaries of and entities controlled by currently-listed Communist Chinese military companies.
- FAQ 858 clarifies that the EO applies with respect to publicly traded securities (or any securities that are derivative of, or are designed to provide investment exposure to such securities) of an entity with a name that exactly or closely matches the name of a listed entity. FAQ 864 indicates that this name-matching guidance also applies to subsidiaries, regardless of whether the subsidiary’s name is expressly listed or not. OFAC has not provided additional guidance on the apparent conflict between the FAQ 864 guidance and the guidance indicating that non-listed subsidiaries are not covered under the EO, as set out at FAQ 867 and discussed above. However, OFAC issued General License 1 to the EO authorizing transactions and activities involving securities of any entity with a name that exactly or closely matches the name of a listed entity through 9:30 a.m. EST on January 28, 2021.
- FAQ 859 provides that the term “publicly traded securities” will be interpreted to include securities denominated in any currency that trade on a securities exchange or through the method of trading that is commonly referred to as “over-the-counter,” in any jurisdiction.
- FAQ 860 provides that the phrase “any securities that are derivative of, or are designed to provide investment exposure to” will be interpreted to include, but is not limited to, derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (ADRs), global depositary receipts (GDRs), exchange-traded funds (ETFs), index funds, and mutual funds. The effect of this guidance is to bring within the scope of the EO a broad trade of financial instruments and is consistent with OFAC’s position in other contexts.
Permissible and Impermissible Transactions
- FAQ 861 clarifies that US persons are prohibited from investing in US or non-US funds, such as exchange-traded funds (“ETFs”) or other mutual funds that hold publicly traded securities of a listed Communist Chinese military company, regardless of such securities’ share of the underlying index fund, ETF, or derivative thereof. This guidance is significant as it relates to non-US funds with US person investors, even where securities of listed Communist Chinese military companies constitute a less than predominant portion of the fund’s overall asset pool.
- FAQ 862 provides that US persons, including US funds and related market intermediaries and participants, are not required to divest their holdings in publicly traded securities (and securities that are derivative of, or are designed to provide investment exposure to, such securities) of the “Communist Chinese military companies” identified in the Annex to the EO by January 11, 2021. However, as further discussed in FAQ 865, if a US person chooses to divest of such securities, such divestment must be completed by November 11, 2021. By the plain language of the EO, US persons continuing to hold such securities after that date will be required to maintain the position absent further guidance or a modification of the EO.
- FAQ 863 provides that US persons can engage in activities related to clearing, execution, settlement, custody, transfer agency, back-end services, and other such support services, provided that such services are not provided to US persons in connection with transactions prohibited by the EO. In effect, FAQ 863 authorizes US persons to provide certain types of support to non-US persons in connection with transactions that are otherwise restricted under the EO where engaged in directly by US persons. While FAQ 863 provides guidance on a limited set of facilitation activities, additional guidance on a broad range of other facilitation activities has yet to be published.
- FAQ 864 clarifies that China Telecom Corporation Limited, China Mobile Limited, and China Unicom (Hong Kong) Limited are subject to the EO because, consistent with the name-matching guidance set out in FAQ 858, they closely match the names of entities included in the Communist Chinese Military Companies List. The FAQ also clarifies that compliance with the EO will be measured by trade date, rather than settlement date.
- FAQ 865 provides that market intermediaries and other participants may engage in ancillary or intermediary activities that are necessary to effect divestiture during the relevant wind-down periods, or that are otherwise not prohibited under the EO. The FAQ also states that “[t]ransactions by US persons (including investors and intermediaries) involving investment funds that are seeking to divest during the relevant wind-down periods to ensure compliance with the EO are permitted.” We understand that this section of the FAQ provides authority for US persons to invest in a fund that holds restricted securities (or instruments that are derivative of such securities) provided that the fund intends to divest of such securities during the relevant one-year wind-down period. Under this interpretation, a fund that holds such securities is therefore not “off limits” to investment by US persons as long as the fund intends to divest. FAQ 865 also reiterated the guidance set out at FAQ 862 that US persons are not required to divest of restricted securities, but stated that “[d]ivestment must be completed by November 11, 2021.” We understand that this last statement is meant to indicate that if a US person chooses to divest, such divestment must be completed by November 11, 2021 (or otherwise by the completion of the relevant wind-down period for securities issued by entities listed in the future).