Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern
| Court | Investment Security Office |
| Citation | 88 FR 54961 |
| Published date | 14 August 2023 |
| Record Number | 2023-17164 |
Federal Register, Volume 88 Issue 155 (Monday, August 14, 2023)
[Federal Register Volume 88, Number 155 (Monday, August 14, 2023)]
[Proposed Rules]
[Pages 54961-54972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17164]
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DEPARTMENT OF THE TREASURY
Office of Investment Security
31 CFR Chapter VIII
[Docket ID TREAS-DO-2023-0009]
RIN 1505-AC82
Provisions Pertaining to U.S. Investments in Certain National
Security Technologies and Products in Countries of Concern
AGENCY: Office of Investment Security, Department of the Treasury.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Executive Order of August 9, 2023, ``Addressing United
States Investments in Certain National Security Technologies and
Products in Countries of Concern'' (the Order), directs the Secretary
of the Treasury (the Secretary) to issue regulations that identify
categories of transactions involving technologies and products that may
contribute to the threat to the
[[Page 54962]]
national security of the United States identified under the Order and
require United States persons to notify the Department of the Treasury
(the Treasury Department) of each such transaction; and identify
categories of transactions involving technologies and products that
pose a particularly acute national security threat to the United States
and prohibit United States persons from engaging in such transactions.
This advance notice of proposed rulemaking (ANPRM) seeks public comment
on various topics related to the implementation of the Order.
DATES: Written comments on this ANPRM must be received by September 28,
2023.
ADDRESSES: Written comments may be submitted through one of two
methods:
Electronic Submission: Comments may be submitted
electronically through the Federal Government eRulemaking portal at
https://www.regulations.gov.
Mail: Send to U.S. Department of the Treasury, Attention:
Meena R. Sharma, Acting Director, Office of Investment Security Policy
and International Relations, 1500 Pennsylvania Avenue NW, Washington,
DC 20220.
We encourage comments to be submitted via https://www.regulations.gov. Please submit comments only and include your name
and company name (if any) and cite ``Provisions Pertaining to U.S.
Investments in Certain National Security Technologies and Products in
Countries of Concern'' in all correspondence.
Anyone submitting business confidential information should clearly
identify the business confidential portion at the time of submission,
file a statement justifying nondisclosure and referring to the specific
legal authority claimed, and provide a non-confidential version of the
submission. For comments submitted electronically containing business
confidential information, the file name of the business confidential
version should begin with the characters ``BC.'' Any page containing
business confidential information must be clearly marked ``BUSINESS
CONFIDENTIAL'' on the top of that page. The corresponding non-
confidential version of those comments must be clearly marked
``PUBLIC.'' The file name of the non-confidential version should begin
with the character ``P.'' Any submissions with file names that do not
begin with either a ``BC'' or a ``P'' will be assumed to be public and
will be posted without change, including any business or personal
information provided, such as names, addresses, email addresses, or
telephone numbers.
To facilitate an efficient review of submissions, the Treasury
Department encourages but does not require commenters to: (1) submit a
short executive summary at the beginning of all comments; (2) provide
supporting material, including empirical data, findings, and analysis
in reports or studies by established organizations or research
institutions; (3) consistent with the questions below, describe the
relative benefits and costs of the recommended approach; and (4) refer
to the numbered question(s) herein to which each comment is addressed.
The Treasury Department welcomes interested parties' submissions of
written comments discussing relevant experiences, information, and
views. Parties wishing to supplement their written comments in a
meeting may request to do so, and the Treasury Department may
accommodate such requests as resources permit. Additionally, in
consultation with the Departments of Commerce and State, the Treasury
Department expects to seek additional opportunities to engage in
discussions with certain stakeholders, including foreign partners and
allies.
FOR FURTHER INFORMATION CONTACT: Meena R. Sharma, Acting Director,
Office of Investment Security Policy and International Relations, at
U.S. Department of the Treasury, 1500 Pennsylvania Avenue NW,
Washington, DC 20220; telephone: (202) 622-3425; email:
[email protected].
SUPPLEMENTARY INFORMATION:
I. Background
On August 9, 2023, the President issued the Order pursuant to his
authority under the Constitution and the laws of the United States,
including the International Emergency Economic Powers Act (IEEPA), the
National Emergencies Act, and section 301 of Title 3, United States
Code. In the Order, the President declared a national emergency and
determined the need for action due to the policies and actions of
countries of concern which seek to, among other things, exploit U.S.
outbound investments to develop sensitive technologies and products
critical for military, intelligence, surveillance, and cyber-enabled
capabilities. In an Annex to the Order, the President identified one
country, the People's Republic of China (PRC), along with the Special
Administrative Region of Hong Kong and the Special Administrative
Region of Macau, as a country of concern. The President may modify the
Annex to the Order and update the list of countries of concern in the
future.
Advanced technologies and products that are increasingly developed
and financed by the private sector form the basis of next-generation
military, intelligence, surveillance, and cyber-enabled capabilities.
For example, certain advanced semiconductors and microelectronics,
quantum information technologies, and artificial intelligence (AI)
systems will underpin military innovations that improve the speed and
accuracy of military decision-making, planning, and logistics; enable
the compromise of encryption and other cybersecurity controls; and
advance mass surveillance capabilities. The potential military,
intelligence, surveillance, and cyber-enabled applications of these
technologies and products pose risks to U.S. national security
particularly when developed by a country of concern such as the PRC in
which the government seeks to (1) direct entities to obtain
technologies to achieve national security objectives; and (2) compel
entities to share or transfer these technologies to the government's
military, intelligence, surveillance, and security apparatuses. The PRC
government explicitly seeks to advance these technologies and to ensure
that new innovations simultaneously benefit its military and commercial
aims. The PRC government is aggressively pursuing these objectives to
confer a decisive advantage to its military, intelligence,
surveillance, and cyber-enabled services. The PRC government is also
encouraging a growing number of PRC entities to undertake military
research and development, including weapons production, which exploit
private investments in pursuit of this goal.
U.S. investments are often more valuable than capital alone because
they can also include the transfer of intangible benefits. Investors
from the United States often lend support to the companies in which
they invest, and these could include PRC entities that are developing
technology with military end uses. Intangible benefits that often
accompany U.S. investments and help companies succeed include enhanced
standing and prominence, managerial assistance, access to investment
and talent networks, market access, and enhanced access to additional
financing. Certain investments from the United States into a country of
concern can be exploited to accelerate the development of sensitive
technologies or products in ways that negatively impact the strategic
military position of the United States.
[[Page 54963]]
Such investments, therefore, risk exacerbating this threat to U.S.
national security.
Cross-border investment creates valuable economic opportunities and
promotes competitiveness, innovation, and productivity. For these
reasons, the United States has and will continue to champion open and
rules-based investment.
The United States has undertaken efforts to enhance existing policy
tools and develop new policy initiatives aimed at maintaining U.S.
leadership in technologies critical to national security, while
preventing the exploitation of our open economic ecosystem in ways that
could undermine our national security. Nevertheless, there remain
instances where the risks presented by U.S. investments enabling
countries of concern to develop critical military, intelligence,
surveillance, or cyber-enabled capabilities are not sufficiently
addressed by existing tools. Accordingly, the Order directs the
Secretary to establish a program to prohibit or require notification
concerning certain types of outbound investments by United States
persons into certain entities located in or subject to the jurisdiction
of a country of concern, and certain other entities owned by persons of
a country of concern, involved in discrete categories of advanced
technologies and products.
The Order has two primary components that serve different
objectives with respect to the relevant technologies and products. The
first component requires the Secretary to prohibit certain types of
investment by a United States person in a covered foreign person whose
business involves certain categories of advanced technologies and
products. The second component requires notification to the Secretary
regarding certain types of investments by a United States person in a
covered foreign person whose business involves other categories of
technologies and products. The focus of both components is on
investments that could enhance a country of concern's military,
intelligence, surveillance, or cyber-enabled capabilities through the
advancement of technologies and products in particularly sensitive
areas.
II. Program Overview
The Treasury Department is considering implementation of the Order
through the establishment of a program that would (1) prohibit certain
types of investment by United States persons into certain entities
located in or subject to the jurisdiction of a country of concern, and
certain other entities owned by persons of a country of concern, with
capabilities or activities related to defined technologies and
products; and (2) require submission of a notification to the Secretary
by United States persons for certain types of investment into certain
entities located in or subject to the jurisdiction of a country of
concern, and certain other entities owned by persons of a country of
concern, with capabilities or activities related to defined
technologies and products. The Treasury Department does not contemplate
that the program will entail a case-by-case review of U.S. outbound
investments. Rather, the Treasury Department expects that the
transaction parties will have the obligation to determine whether a
given transaction is prohibited, subject to notification, or
permissible without notification.
Importantly, the program is not intended to impede all U.S.
investments into a country of concern or impose sector-wide
restrictions on United States person activity. The high-level
categories of the technologies and products that are the focus of the
program, as enumerated in the Order, are: (1) semiconductors and
microelectronics, for which the Treasury Department is considering a
prohibition on transactions related to certain advanced technologies
and products, and considering a notification requirement related to
other technologies and products; (2) quantum information technologies,
for which the Treasury Department is considering a prohibition on
transactions related to certain technologies and products; and (3) AI
systems, for which the Treasury Department is considering a
notification requirement for transactions related to certain
technologies and products with specific end uses and is considering a
prohibition in certain other cases, as discussed herein.
The Treasury Department anticipates that transactions covered by
the program would include certain acquisitions of equity interests
(e.g., mergers and acquisitions, private equity, and venture capital),
greenfield, joint ventures, and certain debt financing transactions by
United States persons. Given the focus on transactions that could aid
in the development of technological advances that pose a risk to U.S.
national security, the Treasury Department expects to create a carveout
or exception for specific types of transactions, such as certain
investments into publicly-traded securities or into exchange-traded
funds.
It is not proposed that the program provide for retroactive
application of the provisions related to the prohibition of certain
transactions and the notification of others. However, the Treasury
Department may, after the effective date of the regulations, request
information about transactions by United States persons that were
completed or agreed to after the date of the issuance of the Order to
better inform the development and implementation of the program.
The Treasury Department, in consultation with the Department of
Commerce and, as appropriate, other executive departments and agencies,
will evaluate the program after an initial period of no longer than one
year following the effective date of the implementing regulations to
consider whether adjustments to the program are warranted.
III. Issues for Comment
The Treasury Department welcomes comments and views from a wide
range of stakeholders on all aspects of how the Secretary should
implement this new program under the Order. The Treasury Department is
particularly interested in obtaining information on the topics
discussed below.
Note that this ANPRM does not necessarily identify the full scope
of potential approaches the Treasury Department might ultimately
undertake in regulations to implement the Order.
A. Overview
The Order frames the key terms that will be developed through
rulemaking. Accordingly, United States persons may either be required
to notify the Treasury Department of, or be prohibited from
undertaking, a transaction with a ``covered foreign person''--that is,
a ``person of a country of concern'' (per the President's designation
of a country of concern in the Annex to the Order) that is engaged in
certain defined activities involving ``covered national security
technologies and products'' that may contribute to the threat to the
national security of the United States. These requirements would not
apply to a United States person engaged in an ``excepted transaction.''
Definitions under consideration for these and related terms are
discussed below, along with questions on which the Treasury Department
seeks comment.
B. U.S. Person
The Order authorizes the Secretary to prohibit or require
notification of instances where a ``United States person'' engages in a
covered transaction. The Order defines a ``United States person'' as
any United States citizen, lawful permanent resident, entity organized
under the
[[Page 54964]]
laws of the United States or any jurisdiction within the United States,
including any foreign branches of any such entity, and any person in
the United States.
The Treasury Department is considering adopting the Order's
definition of the term ``United States person'' without elaboration or
amendment and referring to it as a ``U.S. person.'' The Treasury
Department expects the regulations to apply to U.S. persons wherever
they are located.
The ANPRM seeks comment on this topic including:
1. In what ways, if any, should the Treasury Department
elaborate or amend the definition of ``U.S. person'' to enhance
clarity or close any loopholes? What, if any, unintended
consequences could result from the definition under consideration?
2. Are there additional factors that the Treasury Department
should consider when determining whether an individual or entity is
a ``U.S. person''? Please explain.
C. Covered Foreign Person; Person of a Country of Concern
The Order requires the Treasury Department to prohibit or require
notification of certain transactions by a U.S. person into a ``covered
foreign person.'' The Treasury Department is considering elaborating
upon the definition of a ``covered foreign person'' in the Order to
mean (1) a person of a country of concern that is engaged in, or a
person of a country of concern that a U.S. person knows or should know
will be engaged in, an identified activity with respect to a covered
national security technology or product; or (2) a person whose direct
or indirect subsidiaries or branches are referenced in item (1) and
which, individually or in the aggregate, comprise more than 50 percent
of that person's consolidated revenue, net income, capital expenditure,
or operating expenses. (For more information on the knowledge standard
under consideration, see subsection J below.)
Further, the Treasury Department is considering elaborating upon
the definition for the term ``person of a country of concern''
mentioned in the Order to mean (1) any individual that is not a U.S.
citizen or lawful permanent resident of the United States and is a
citizen or permanent resident of a country of concern; (2) an entity
with a principal place of business in, or an entity incorporated in or
otherwise organized under the laws of a country of concern; (3) the
government of a country of concern, including any political
subdivision, political party, agency, or instrumentality thereof, or
any person owned, controlled, or directed by, or acting for or on
behalf of the government of such country of concern; or (4) any entity
in which a person or persons identified in items (1) through (3) holds
individually or in the aggregate, directly or indirectly, an ownership
interest equal to or greater than 50 percent.
The Treasury Department intends that the definitions of ``covered
foreign person'' and ``person of a country of concern'' together
provide clarity and predictability within the scope of the authorities
granted by the Order while avoiding major loopholes and unintended
consequences. For example, item (2) of the definition of ``covered
foreign person'' is intended to capture parent companies whose
subsidiaries and branches engage in activities related to a covered
national security technology or product. (Meanwhile, item (1) would
capture such subsidiaries and branches themselves as covered foreign
persons.) In addition, item (4) of the definition of ``person of a
country of concern'' is intended to capture entities located outside of
a country of concern that are majority-owned by persons of a country of
concern.
The ANPRM seeks comment on this topic including:
3. Should the Treasury Department further elaborate in any way
on the definitions of ``covered foreign person'' and ``person of a
country of concern'' to enhance clarity or close any loopholes?
4. What additional information would be helpful for U.S. persons
to ascertain whether a transaction involves a ``covered foreign
person'' as defined in section III.C?
5. What, if any, unintended consequences could result from the
definitions under consideration? What is the likely impact on U.S.
persons and U.S. investment flows? What is the likely impact on
persons and investment flows from third countries or economies? If
you believe there will be impacts on U.S. persons, U.S. investment
flows, third-country persons, or third-country investment flows,
please provide specific examples or data.
6. What could be the specific impacts of item (2) of the
definition of ``covered foreign person''? What could be the
consequences of setting a specific threshold of 50 percent in the
categories of consolidated revenue, net income, capital
expenditures, and operating expenses? Are there other approaches
that should be considered with respect to U.S. person transactions
into companies whose subsidiaries and branches engage in the
identified activity with respect to a covered national security
technology or product?
7. What analysis or due diligence would a U.S. person anticipate
undertaking to ascertain whether they are investing in a covered
foreign person? What challenges could arise in this process for the
investor and what clarification in the regulations would be helpful?
How would U.S. persons anticipate handling instances where they
attempt to ascertain needed information but are unable to, or
receive information they have doubts about? What contractual or
other methods might a U.S. person employ to enhance certainty that a
transaction they are undertaking is not a covered transaction?
8. What other recommendations do you have on how to enhance
clarity or refine the definitions, given the overall objectives of
the program?
D. Covered Transactions
The Order requires the Secretary to promulgate regulations defining
``prohibited transactions'' and ``notifiable transactions.'' These are
distinct concepts and the scope of each is discussed below in
connection with specific ``covered national security technologies and
products.''
The Treasury Department is considering using a single term,
``covered transaction,'' that would apply to the definition of both
prohibited and notifiable transactions. Specifically, the Treasury
Department is considering defining the term ``covered transaction'' to
mean a U.S. person's direct or indirect (1) acquisition of an equity
interest or contingent equity interest in a covered foreign person; (2)
provision of debt financing to a covered foreign person where such debt
financing is convertible to an equity interest; (3) greenfield
investment that could result in the establishment of a covered foreign
person; or (4) establishment of a joint venture, wherever located, that
is formed with a covered foreign person or could result in the
establishment of a covered foreign person. The Treasury Department
intends this definition to be forward-looking, and not to cover
transactions and the fulfillment of uncalled, binding capital
commitments with cancellation consequences made prior to the issuance
of the Order. The Treasury Department may, after the effective date of
the regulations, request information about transactions by U.S. persons
that were completed or agreed to after the date of the issuance of the
Order to better inform the development and implementation of the
program.
The Treasury Department is considering including ``indirect''
transactions as ``covered transactions'' in order to close loopholes
that would otherwise result, and to clarify that attempts to evade
prohibitions on certain transactions cannot find safe harbor in the use
of intermediary entities that are not ``U.S. persons'' or ``covered
foreign persons,'' as defined. Examples of such conduct could include,
but would not be limited to, a U.S. person knowingly investing in a
third-country entity that will use the investment to undertake a
transaction
[[Page 54965]]
with a covered foreign person that would be subject to the program if
engaged in by a U.S. person directly.
The Treasury Department does not intend the definition of ``covered
transaction'' under consideration to apply to the following activities,
so long as they do not involve any of the definitional elements of a
``covered transaction'' and are not undertaken as part of an effort to
evade these rules: university-to-university research collaborations;
contractual arrangements or the procurement of material inputs for any
of the covered national security technologies or products (such as raw
materials); intellectual property licensing arrangements; bank lending;
the processing, clearing, or sending of payments by a bank;
underwriting services; debt rating services; prime brokerage; global
custody; equity research or analysis; or other services secondary to a
transaction.
The definition of ``covered transaction'' under consideration would
also exclude ``excepted transactions,'' as discussed in this ANPRM.
The Order describes additional activities that are, or may be,
prohibited. In particular, any conspiracy formed to violate the
regulations and any action that evades, has the purpose of evading,
causes a violation of, or attempts to violate the Order or any
regulation issued thereunder is prohibited.
In addition, the Order provides authority to the Secretary to
prohibit U.S. persons from ``knowingly directing transactions'' that
would be prohibited transactions pursuant to the Order if engaged in by
a U.S. person.
The Order also provides authority to the Secretary to require U.S.
persons to ``take all reasonable steps to prohibit and prevent any
transaction by a foreign entity controlled by such United States person
that would be a prohibited transaction if engaged in by a United States
person.'' With respect to notifiable transactions, the Order provides
authority to the Secretary to require U.S. persons to provide
notification of ``any transaction by a foreign entity controlled by
such United States person that would be a notifiable transaction if
engaged in by a United States person.'' (For more information on the
obligations of U.S. persons with respect to controlled foreign
entities, see subsection M below.)
The ANPRM seeks comment on this topic including:
9. What modifications, if any, should be made to the definition
of ``covered transaction'' under consideration to enhance clarity or
close any loopholes?
10. What additional information would be helpful for U.S.
persons to ascertain whether a transaction is a ``covered
transaction'' as defined in section III.D?
11. What, if any, unintended consequences could result from the
definition of ``covered transaction'' under consideration? What is
the likely impact on U.S. persons and U.S. investment flows? What is
the likely impact on persons and investment flows from third
countries or economies? If you believe there will be impacts on U.S.
persons, U.S. investment flows, third-country persons, or third-
country investment flows, please provide specific examples or data.
12. How, if at all, should the inclusion of ``debt financing to
a covered foreign person where such debt financing is convertible to
an equity interest'' be further refined? What would be the
consequences of including additional debt financing transactions in
the definition of ``covered transaction''?
13. The Treasury Department is considering how to treat follow-
on transactions into a covered foreign person and a covered national
security technology or product when the original transaction relates
to an investment that occurred prior to the effective date of the
implementing regulations. What would be the consequences of covering
such follow-on transactions? If you believe certain follow-on
transactions should or should not be covered, please provide
examples and information to support that position.
14. How could the Treasury Department provide clarity on the
definition of an ``indirect'' covered transaction? What are
particular categories that should or should not be covered as
``indirect'' covered transactions, and why?
15. How could prongs (3) and (4) of the ``covered transaction''
definition under consideration be clarified in rulemaking such that
a U.S. person can ascertain whether a greenfield or joint venture
investment ``could result'' in the establishment of a covered
foreign person? What are the impacts and consequences if a knowledge
standard, actual or constructive, is used as part of these prongs?
What are the impacts and consequences if a foreseeability standard
is used as part of these prongs? (For more information on the
knowledge standard under consideration, see subsection J below.)
16. Please specify whether and how any of the following could
fall within the considered definition of ``covered transaction''
such that additional clarity would be beneficial given the policy
intent of this program is not to implicate these activities unless
undertaken as part of an effort to evade these rules:
University-to-university research collaborations;
Contractual arrangements or the procurement of material
inputs for any of the covered national security technologies or
products;
Intellectual property licensing arrangements;
Bank lending;
The processing, clearing, or sending of payments by a
bank;
Underwriting services;
Debt rating services;
Prime brokerage;
Global custody; and
Equity research or analysis.
17. Are there other secondary or intermediary services incident
to a transaction where there may be questions about whether they
fall within the definition of ``covered transaction''? What are
these situations and what are the reasons they should or should not
be within the definition of a ``covered transaction''?
E. Excepted Transactions
Certain transactions may fall within the definition of ``covered
transaction'' as set forth in section III.D but, due to the nature of
the transaction, present a lower likelihood of concern. With an
interest in minimizing unintended consequences and focusing on
transactions that present a higher risk, the Treasury Department is
considering a category of transactions that would be ``excepted
transactions'' and thus excluded from the definition of ``covered
transaction.'' The definition under consideration for ``excepted
transaction'' is:
1.a. An investment:
i. into a publicly traded security, with ``security'' defined as
set forth in section 3(a)(10) of the Securities Exchange Act of
1934; or
ii. into an index fund, mutual fund, exchange-traded fund, or a
similar instrument (including associated derivatives) offered by an
investment company as defined in the section 3(a)(1) of the
Investment Company Act of 1940 or by a private investment fund; or
iii. made as a limited partner into a venture capital fund,
private equity fund, fund of funds, or other pooled investment
funds, in each case where
A. the limited partner's contribution is solely capital into a
limited partnership structure and the limited partner cannot make
managerial decisions, is not responsible for any debts beyond its
investment, and does not have the ability (formally or informally)
to influence or participate in the fund's or a covered foreign
person's decision making or operations and
B. the investment is below a de minimis threshold to be
determined by the Secretary.
1.b. Notwithstanding a., any investment that affords the U.S.
person rights beyond those reasonably considered to be standard
minority shareholder protections will not constitute an ``excepted
transaction;'' such rights include, but are not limited to:
i. Membership or observer rights on, or the right to nominate an
individual to a position on, the board of directors or an equivalent
governing body of the covered foreign person; or
ii. Any other involvement, beyond the voting of shares, in
substantive business decisions, management, or strategy of the
covered foreign person. or
2. The acquisition of the equity or other interest owned or held
by a covered foreign person in an entity or assets located outside
of a country of concern where the U.S. person is acquiring all
interests in the entity or assets held by covered foreign persons;
or
[[Page 54966]]
3. An intracompany transfer of funds from a U.S. parent company
to a subsidiary located in a country of concern; or
4. A transaction made pursuant to a binding, uncalled capital
commitment entered into before the date of the Order.
The objective of item 1. of the definition of ``excepted
transaction'' under consideration is to carve out certain transactions
that are unlikely to involve the transfer of both capital and
additional benefits to a covered foreign person. With respect to item
1.a.iii, the Treasury Department is considering whether the exception
should only apply to investors or investments into funds beneath a
defined threshold, based on one or more benchmarks such as the size of
the limited partner's investment in the fund or the size of the limited
partner itself. The rationale for this approach is that transactions
above a threshold are more likely to involve the conveyance of
intangible benefits such as those often associated with larger
institutional investors, including standing and prominence, managerial
assistance, and enhanced access to additional financing.
The objective of item 2. under consideration is to carve out
buyouts of country of concern ownership, which eliminates the
opportunity and incentive for a U.S. person to lend support to a
covered foreign person. The objective of item 3. is to avoid unintended
interference with the ongoing operation of a U.S. subsidiary in a
country of concern when that U.S. subsidiary meets the definition of a
covered foreign person, although the Treasury Department anticipates
that the definition of a ``covered transaction'' under consideration
would not apply to most routine intracompany actions such as the sale
or purchase of inventory or fixed assets, the provision of paid
services, the licensing of technology, or the provision of loans,
guarantees, or other obligations. (The subsidiary, as a covered foreign
person, would still be covered by the relevant provisions as it relates
to other U.S. persons, and the U.S. parent would have other obligations
as related to an entity that it controls--see subsection M for more
information.) The objective of item 4. is to avoid penalizing U.S.
persons who have entered into binding agreements prior to the date of
the Order.
The ANPRM seeks comment on this topic including:
18. What modifications, if any, should be made to the definition
of ``excepted transaction'' under consideration to enhance clarity
or close any loopholes?
19. What information would a U.S. person need to obtain to
ascertain whether a transaction is an ``excepted transaction'' as
defined in section III.E?
20. What, if any, unintended consequences could result from the
definition under consideration? What is the definition's likely
impact on U.S. persons and U.S. investment flows? What is the likely
impact on persons and investment flows from third countries or
economies? If you believe there will be impacts on U.S. persons,
U.S. investment flows, third-country persons, or third-country
investment flows, please provide specific examples or data.
21. What other types of investments, if any, should be
considered ``excepted transactions'' and why? Are there any
transactions included in the definition under consideration that
should not be considered ``excepted transactions,'' and if so, why?
22. The Treasury Department is considering the appropriate scope
of item 1.a.iii of ``excepted transaction,'' which carves out from
program coverage certain transactions by U.S. persons made as a
limited partner where the investment is below a de minimis
threshold. The goal of the qualifier in item 1.a.iii.B is to exclude
from the ``excepted transaction'' carveout those transactions in
excess of a set threshold, which would be set at a high level, where
there is a greater likelihood of additional benefits being conveyed,
and the U.S. limited partner knows or should have known that the
venture capital fund, private equity fund, fund of funds, or other
pooled investment fund into which the U.S. person is investing as a
limited partner, itself invests in one or more covered foreign
persons. The Treasury Department is considering defining such a
threshold with respect to one or more factors such as the size of
the U.S. limited partner's transaction, and/or the total assets
under management of the U.S. limited partner. The concern is the
enhanced standing and prominence that may be associated with the
size of the transaction or the investor, and increased likelihood of
the conveyance of intangible benefits to the covered foreign person.
What are the considerations as to the impact of this potential
limitation on U.S. investors, and in particular, categories of U.S.
investors that may invest in this manner as limited partners? If the
Treasury Department includes a threshold based on the size of the
U.S. limited partner's investment in the fund, what should this
threshold be, and why? If the Treasury Department includes a
threshold based on assets under management, what should this
threshold be, and why? What are the costs and benefits to either of
these approaches? What other approaches should the Treasury
Department consider in creating a threshold, above which the
``excepted transaction'' exception would not apply--for example,
what would be the considerations if the threshold size was with
respect to the limited partner's investment as a percentage of the
fund's total capital?
23. When investing as a limited partner into a financing vehicle
that involves the pooling of funds from multiple investors with the
intent to engage in multiple transactions--such as a venture capital
or private equity fund--what, if any, covenants, contracts, or other
limitations could a U.S. investor attach to their capital
contribution to ensure the U.S. investor's capital is not invested
in a covered transaction, even if the fund continues to invest in
covered transactions? What burdens would this create for U.S.
investors? If such limitations existed or were required, how might
investment firms change how they raise capital from U.S. investors,
if at all?
24. With respect to item 3. of ``excepted transaction,''
regarding intracompany transfers of funds from a U.S. parent company
to a subsidiary located in a country of concern, the Treasury
Department is interested in understanding how frequently such
intracompany transfers would meet the definition of a ``covered
transaction.'' What would be the impact if the exception were
applicable only to relevant subsidiaries that were established as a
subsidiary of the U.S. parent before the date of the Order versus
also including subsidiaries established at any time in the future?
Note that an exception for intracompany transfers from the parent
company would not change the status of the subsidiary as a covered
foreign person for purposes of receiving investments from other U.S.
persons.
25. Additionally with respect to item 3., the Treasury
Department is considering defining the parent-subsidiary
relationship as one in which a U.S. person's ownership interest is
equal to or greater than 50 percent. What are the costs and benefits
to this approach?
F. Covered National Security Technologies and Products: Overview
As discussed in section III.D, the Treasury Department is
considering defining the term ``covered transaction'' based on an
investment by a U.S. person in or resulting in a covered foreign
person. The Order directs the Treasury Department to focus on
transactions that include certain covered national security
technologies or products. Accordingly, the Treasury Department is
considering defining the term ``covered foreign person'' using a
further reference to an identified activity with respect to a
designated covered national security technology or product. Thus, the
Treasury Department is interested in developing clearly defined and
well understood definitions with respect to each designated covered
national security technology and product as well as the identified
activity linking the foreign person to the technology or product.
The Order defines the term ``covered national security technologies
and products'' to mean sensitive technologies and products in the
semiconductors and microelectronics, quantum information technologies,
and artificial intelligence sectors that are critical for the military,
intelligence, surveillance, or cyber-enabled capabilities of a country
of concern, as determined by the Secretary in
[[Page 54967]]
consultation with the Secretary of Commerce and, as appropriate, the
heads of other relevant agencies. Where applicable, ``covered national
security technologies and products'' may be limited by reference to
certain end uses of those technologies or products.
The Treasury Department is considering regulations that would
define specific covered national security technologies and products for
purposes of notifiable transactions and prohibited transactions based
on a description of the technology or product and the relevant
activities, capabilities, or end uses of such technology or product, as
applicable. U.S. persons undertaking a transaction with a covered
foreign person engaged in activities with respect to the technology or
product based on the definition would be subject to the program.
The notification requirement will increase the U.S. Government's
visibility into U.S. person transactions involving the defined
technologies and products that may contribute to the threat to the
national security of the United States. The notifications will be
helpful in highlighting trends with respect to related capital flows as
well as inform future policy development. The definitions under
consideration were crafted with these objectives in mind.
The prohibitions under consideration would be narrowly tailored
restrictions on specific, identified areas to prevent U.S. persons from
investing in the development of technologies and products that pose a
particularly acute national security threat.
G. Covered National Security Technology or Product: Semiconductors and
Microelectronics
Consistent with the Order, the Treasury Department is considering a
prohibition on U.S. persons undertaking certain transactions involving
covered foreign persons engaged in activities involving sub-sets of
advanced semiconductor and microelectronic technologies and products.
Additionally, the Treasury Department is considering requiring
notification by U.S. persons for certain other transactions involving
covered foreign persons engaged in other semiconductor and
microelectronic technologies and products.
The U.S. Government is concerned with the development of
semiconductor and microelectronic technology, equipment, and
capabilities that will enable the production and certain uses of
integrated circuits that will underpin military innovations that
improve the speed and accuracy of military decision-making, planning,
and logistics, among other things. The prohibition under consideration
is focused on three concerns: (i) specific technology, equipment, and
capabilities that enable the design and production of advanced
integrated circuits or enhance their performance; (ii) advanced
integrated circuit design, fabrication, and packaging capabilities; and
(iii) the installation or sale to third-party customers of certain
supercomputers, which are enabled by advanced integrated circuits. The
Treasury Department is also considering a notification requirement for
design, fabrication, and packaging of other integrated circuits. The
notification requirement is intended to increase the U.S. Government's
visibility into the volume and nature of investments and inform future
policy decisions.
Specifically, the Treasury Department is considering a prohibition
on U.S. persons undertaking a transaction with a covered foreign person
engaged in activities involving:
Technologies that Enable Advanced Integrated Circuits
Software for Electronic Design Automation: The development
or production of electronic design automation software designed to be
exclusively used for integrated circuit design.
Integrated Circuit Manufacturing Equipment: The
development or production of front-end semiconductor fabrication
equipment designed to be exclusively used for the volume fabrication of
integrated circuits.
Advanced Integrated Circuit Design and Production
Advanced Integrated Circuit Design: The design of
integrated circuits that exceed the thresholds in Export Control
Classification Number (ECCN) 3A090 in supplement No. 1 to 15 CFR part
774 of the Export Administration Regulations (EAR), or integrated
circuits designed for operation at or below 4.5 Kelvin.
Advanced Integrated Circuit Fabrication: The fabrication
of integrated circuits that meet any of the following criteria: (i)
logic integrated circuits using a non-planar transistor architecture or
with a technology node of 16/14 nanometers or less, including but not
limited to fully depleted silicon-on-insulator (FDSOI) integrated
circuits; (ii) NOT-AND (NAND) memory integrated circuits with 128
layers or more; (iii) dynamic random-access memory (DRAM) integrated
circuits using a technology node of 18 nanometer half-pitch or less;
(iv) integrated circuits manufactured from a gallium-based compound
semiconductor; (v) integrated circuits using graphene transistors or
carbon nanotubes; or (vi) integrated circuits designed for operation at
or below 4.5 Kelvin.
[cir] ``Fabrication of integrated circuits'' is defined as the
process of forming devices such as transistors, poly capacitors, non-
metal resistors, and diodes, on a wafer of semiconductor material.
Advanced Integrated Circuit Packaging: The packaging of
integrated circuits that support the three-dimensional integration of
integrated circuits, using silicon vias or through mold vias.
[cir] ``Packaging of integrated circuits'' is defined as the
assembly of various components, such as the integrated circuit die,
lead frames, interconnects, and substrate materials, to form a complete
package that safeguards the semiconductor device and provides
electrical connections between different parts of the die.
Supercomputers
Supercomputers: The installation or sale to third-party
customers of a supercomputer, which are enabled by advanced integrated
circuits, that can provide a theoretical compute capacity of 100 or
more double-precision (64-bit) petaflops or 200 or more single-
precision (32-bit) petaflops of processing power within a 41,600 cubic
foot or smaller envelope.
In addition, the Treasury Department is considering a requirement
for U.S. persons to notify the Treasury Department if undertaking a
transaction with a covered foreign person engaged in activities
involving any of the below:
Integrated Circuit Design: The design of integrated
circuits for which transactions involving U.S. persons are not
otherwise prohibited in section III.G.
Integrated Circuit Fabrication: The fabrication of
integrated circuits for which transactions involving U.S. persons are
not otherwise prohibited in section III.G.
Integrated Circuit Packaging: The packaging of integrated
circuits for which transactions involving U.S. persons are not
otherwise prohibited in section III.G.
The ANPRM seeks comment on this topic including:
26. Where possible, please provide empirical data about trends
in U.S. investment into country of concern entities engaged in the
activities described in section III.G. Based on this data, are there
emerging trends with respect to U.S. outbound investments in
semiconductors and microelectronics in countries of concern that
would not be captured by the definitions in section III.G? If so,
what are they?
[[Page 54968]]
27. Please identify any areas within this category where
investments by U.S. persons in countries of concern may provide a
strategic benefit to the United States, such that continuing such
investment would benefit, and not impair, U.S. national security.
Please also identify any key factors that affect the size of these
benefits (e.g., do these benefits differ in size depending on the
application of the technology or product at issue?). Please be
specific and where possible, provide supporting material, including
empirical data, findings, and analysis in reports or studies by
established organizations or research institutions and indicate
material that is business confidential per the instructions at the
beginning of this ANPRM.
28. What modifications, if any, should be made to the
definitions under consideration to enhance clarity or close any
loopholes? Please provide supporting rationale(s) and data, as
applicable, for any such proposed modification.
29. With respect to the definition of ``Electronic Design
Automation Software,'' would incorporation of a definition,
including one found in the EAR, be beneficial? If so, how?
Practically speaking, how would a focus on software for the design
of particular integrated circuits--e.g., fin field-effect
transistors (FinFET) or gate-all-around field effect transistors
(GAAFET)--be beneficial? If so, how could such a focus be
incorporated into the definition?
30. Should the Treasury Department consider additional existing
definitions from other U.S. Government regulations or programs?
Should the Treasury Department consider any industry definitions
that may be relevant? If so, please note any additional specific
definitions, with citations, that the Treasury Department should
consider in this category.
31. How might the Treasury Department further clarify when
transactions into entities engaged in activities involving
semiconductors and microelectronics in countries of concern would be
prohibited, and when they would be allowed but require notification?
32. In what ways could the definition of ``Supercomputer'' be
clarified? Are there any alternative ways to focus this definition
on a threshold of computing power without using the volume metric,
such that it would distinguish supercomputers from data centers,
including how to distinguish between low latency high-performance
computers and large datacenters with disparate computing clusters?
Are there any other activities relevant to such supercomputers other
than the installation or sale of systems that should be captured?
H. Covered National Security Technology or Product: Quantum Information
Technologies
The Order states that the regulations will define ``covered
national security technologies and products'' to include sensitive
technologies and products in the quantum information technologies
category.
The U.S. Government is concerned with the development and
production of quantum information technologies and products that enable
capabilities that could compromise encryption and other cybersecurity
controls and jeopardize military communications, among other things. To
address these concerns, the Treasury Department is considering a
prohibition that would focus on specific and advanced quantum
information technologies and products, or with respect to end uses. In
the case of quantum sensors, the end-use provisions seek to distinguish
from use cases in civilian fields such as medicine and geology, and in
the case of quantum networking systems, they seek to avoid capturing
quantum systems with no relevance to secure communications or systems
related to classical encryption. The Treasury Department is currently
not considering a separate notification requirement for quantum
information technologies.
The Treasury Department is considering a prohibition on U.S.
persons undertaking a transaction with a covered foreign person engaged
in activities involving:
Quantum Computers and Components: The production of a
quantum computer, dilution refrigerator, or two-stage pulse tube
cryocooler.
[cir] ``Quantum computer'' is defined as a computer that performs
computations that harness the collective properties of quantum states,
such as superposition, interference, or entanglement.
Quantum Sensors: The development of a quantum sensing
platform designed to be exclusively used for military end uses,
government intelligence, or mass-surveillance end uses.
Quantum Networking and Quantum Communication Systems: The
development of a quantum network or quantum communication system
designed to be exclusively used for secure communications, such as
quantum key distribution.
The ANPRM seeks comment on this topic including:
33. Where possible, please provide empirical data about trends
in U.S. investment into country of concern entities engaged in
quantum information technologies as described in section III.H.
Please identify any technologies notable for the high volume or
frequency of outbound investment activity or for the low volume or
frequency of outbound investment activity. Based on this data, are
there U.S. outbound investment trends in quantum information
technologies in countries of concern that would not be captured by
the definitions in section III.H? If so, what are they?
34. Please identify any areas within this category where
investments by U.S. persons in countries of concern may provide a
strategic benefit to the United States, such that continuing such
investment would benefit, and not impair, U.S. national security.
Please also identify any key factors that affect the size of these
benefits (e.g., do these benefits differ in size depending on the
application of the technology or product at issue?). Please be
specific and where possible, provide supporting material, including
empirical data, findings, and analysis in reports or studies by
established organizations or research institutions, and indicate
material that is business confidential per the instructions at the
beginning of this ANPRM.
35. With respect to the definition of ``Quantum Computers and
Components,'' would any further specificity be beneficial and, if
so, what, and why? Are there existing definitions from other U.S.
Government regulations or programs that are not reflected in section
III.H and should be considered? Please provide specificity.
36. In defining ``Quantum Sensors,'' the policy objective is to
avoid covering quantum sensors designed for commercial uses such as
medical and geological applications. As such, the definition under
consideration references certain end uses that have national
security implications. What are the costs and benefits or unintended
consequences with this approach? What alternative frameworks or
definitions, if any, should the Treasury Department consider, and
why?
37. With respect to ``Quantum Sensors'' and ``Quantum Networking
and Quantum Communication Systems,'' what could be the impact of the
language ``designed to be exclusively used''? How would the
alternative formulation ``designed to be primarily used'' change the
scope? Is there another approach that should be considered?
38. Additionally, with respect to ``Quantum Networking and
Quantum Communications Systems,'' the definition is intended to
cover quantum cryptography. Are there other clarifications or
enhancements that should be made to this definition? What might
inadvertently be captured that was not intended as noted in section
III.H?
39. Are there other areas of quantum information technologies
that should be considered as an addition or alternative to the
definitions in section III.H?
Please be specific and where possible, provide supporting
material, including empirical data, findings, and analysis in
reports or studies by established organizations or research
institutions.
I. Covered National Security Technology and Product: AI Systems
The Order states that the regulations will define ``covered
national security technologies and products'' to include sensitive
technologies and products in the AI systems category.
The U.S. Government is concerned with the development of AI systems
that enable the military modernization of countries of concern--
including weapons, intelligence, and surveillance capabilities--and
that have applications in areas such as cybersecurity and
[[Page 54969]]
robotics. The policy objective is to cover U.S. investment into
entities that develop AI systems that have applications that pose
significant national security risks without broadly capturing entities
that develop AI systems intended only for consumer applications or
other civilian end uses that do not have national security
consequences. To address these concerns, the Treasury Department is
considering a notification requirement and a potential prohibition.
Whether for purposes of a notification or prohibition, the Treasury
Department is considering defining ``AI system'' as an engineered or
machine-based system that can, for a given set of objectives, generate
outputs such as predictions, recommendations, or decisions influencing
real or virtual environments. AI systems are designed to operate with
varying levels of autonomy. Covered foreign persons engaging in the
development of software that incorporates an AI system with certain
applications or end uses would be within scope.
If the Treasury Department were to pursue a prohibition in this
category, a potential approach is to focus on U.S. investments into
covered foreign persons engaged in the development of software that
incorporates an AI system and is designed to be exclusively used for
military, government intelligence, or mass-surveillance end uses.
Alternatively, ``primarily used'' could take the place of ``exclusively
used.''
The Treasury Department is considering a requirement for U.S.
persons to notify the Treasury Department if undertaking a transaction
with a covered foreign person engaged in the development of software
that incorporates an artificial intelligence system and is designed to
be exclusively used for: cybersecurity applications, digital forensics
tools, and penetration testing tools; the control of robotic systems;
surreptitious listening devices that can intercept live conversations
without the consent of the parties involved; non-cooperative location
tracking (including international mobile subscriber identity (IMSI)
Catchers and automatic license plate readers); or facial recognition.
Alternatively, ``primarily used'' could take the place of ``exclusively
used.''
AI is a fast-changing technology area with novel aspects. The
Treasury Department welcomes comments on this category, including
specific suggestions for additional approaches or definitions that
should be considered in light of the national security concerns stated
in section III.I.
The ANPRM seeks comment on this topic including:
40. Where possible, please provide empirical data about trends
in U.S. investment into country of concern entities engaged in AI
systems as described in section III.I. Please identify any
technologies notable for the high volume or frequency of outbound
investment activity or for the low volume or frequency of outbound
investment activity. Based on this data, are there U.S. outbound
investment trends in software that incorporates an AI system in
countries of concern that would not be captured by the definitions
in section III.I? If so, what are they?
41. Please identify any areas within this category where
investments by U.S. persons in countries of concern may provide a
strategic benefit to the United States, such that continuing such
investment would benefit, and not impair, U.S. national security.
Please also identify any key factors that affect the size of these
benefits (e.g., do these benefits differ in size depending on the
application of the technology or product at issue?). Please be
specific and where possible, provide supporting material, including
empirical data, findings, and analysis in reports or studies by
established organizations or research institutions and indicate
material that is business confidential per the instructions at the
beginning of this ANPRM.
42. As stated in section III.I, the Treasury Department is
considering a single definition of an ``AI system'' whether for
purposes of a notification or prohibition. Are there any changes or
clarifications that should be made to the definition of ``AI
system''? What are the consequences and impacts of such a
definition? Please provide supporting rationale(s) and data, as
applicable, for any such proposed modification.
43. Given the nature of AI, the Treasury Department is
considering the scope of transactions subject to notification and a
prohibition by reference to certain end uses of the technologies or
products that have national security implications. What are the
general policy and practical considerations with an approach related
to AI systems designed to be used for specific end uses? What
alternative frameworks, if any, should the Treasury Department
consider, and why?
44. With respect to AI systems designed to be used for specific
end uses, what are the impacts or consequences of including the
following end uses:
Military;
Government intelligence;
Mass-surveillance;
Cybersecurity applications;
Digital forensics tools;
Penetration testing tools;
Control of robotic systems;
Surreptitious listening devices that can intercept live
conversations without the consent of the parties involved;
Non-cooperative location tracking (including IMSI
catchers and automatic license plate readers); or
Facial recognition?
Should any of these items be clarified? Are there other end uses
that should be considered?
45. To make sure the development of the software that
incorporates an AI system is sufficiently tied to the end use, two
primary alternatives are under consideration: ``designed to be
exclusively used'' and ``designed to be primarily used.'' What are
the considerations regarding each approach? Is there another
approach that should be considered?
46. The Treasury Department is interested in ways to structure
this element of the program that may increase efficiency for U.S.
persons in evaluating covered transactions. One approach may be to
focus on transactions involving entities engaged in the development
of software incorporating AI systems that are also identified on an
existing list under a different U.S. Government program that has
similar national security underpinnings. What are the considerations
as to whether such an approach would be beneficial or not and why?
What list or lists, if any, should the Treasury Department consider?
47. What analysis or considerations would a U.S. person
anticipate undertaking to ascertain whether investments in this
category are covered? In what manner would the investor approach
this via due diligence with the target? What challenges could arise
in this process for the investor and what clarification in the
regulations would be helpful? How would U.S. persons anticipate
handling instances where they attempt to ascertain the information
but are unable to, or receive information they have doubts about?
48. What, if any, additional considerations not discussed in
section III.I should the Treasury Department be aware of in
considering a prohibition and notification framework as it relates
to AI systems? What if any alternate frameworks should the Treasury
Department consider, and why?
J. Knowledge Standard
The Treasury Department is considering regulations that condition a
person's obligations on that person's knowledge of relevant
circumstances--e.g., where the U.S. person has actual or constructive
knowledge that the covered foreign person is engaged in, or will
foreseeably be engaged in, certain activity regarding the technology or
product. One approach under consideration is to adopt a definition
similar to that found in the EAR at 15 CFR 772.1, where ``knowledge''
means knowledge of a circumstance (including variations such as
``know,'' ``reason to know,'' or ``reason to believe'') including not
only positive knowledge that the circumstance exists or is
substantially certain to occur, but also an awareness of a high
probability of its existence or future occurrence. Such awareness is
inferred from evidence of a person's conscious disregard of facts known
to that person and is also inferred from a person's willful avoidance
of facts.
The Treasury Department is considering adopting this knowledge
[[Page 54970]]
standard across this program as described herein. This would mean that
to be covered by the regulations, a U.S. person would need to know, or
reasonably should know based on publicly available information and
other information available through a reasonable and appropriate amount
of due diligence, that it is undertaking a transaction involving a
covered foreign person and that the transaction is a covered
transaction. This knowledge standard would also apply to end uses as
applicable to some of the definitions of covered national security
technologies and products.
The ANPRM seeks comment on this topic including:
49. How could this standard be clarified for the purposes of
this program? What, if any, alternatives should be considered?
50. Is this due diligence already being done by U.S. persons in
connection with transactions that would be covered transactions--
e.g., for other regulatory purposes, prudential purposes, or
otherwise? If so, please explain. What, if any, third-party services
are used to perform due diligence as it relates to transactions
involving the country of concern or more generally?
51. What are the practicalities of complying with this standard?
What, if any, changes to the way that U.S. persons undertake due
diligence in a country of concern would be required because of this
standard? What might be the cost to U.S. persons of undertaking such
due diligence? Please be specific.
K. Notification Requirements; Form, Content, and Timing
The Order states that the regulations shall identify categories of
notifiable transactions that may contribute to the threat to the
national security of the United States identified under the Order and
require U.S. persons to notify the Treasury Department of each such
transaction.
The Treasury Department is considering requiring U.S. persons to
furnish information in the form of a notification for applicable
covered transactions in semiconductors and microelectronics and AI
systems that includes, but is not limited to: (i) The identity of the
person(s) engaged in the transaction and nationality (for individuals)
or place of incorporation or other legal organization (for entities);
(ii) basic business information about the parties to the transaction,
including name, location(s), business identifiers, key personnel, and
beneficial ownership; (iii) the relevant or expected date of the
transaction; (iv) the nature of the transaction, including how it will
be effectuated, the value, and a brief statement of business rationale;
(v) a description of the basis for determining that the transaction is
a covered transaction--including identifying the covered national
security technologies and products of the covered foreign person; (vi)
additional transaction information including transaction documents, any
agreements or options to undertake future transactions, partnership
agreements, integration agreements, or other side agreements relating
to the transaction with the covered foreign person and a description of
rights or other involvement afforded to the U.S. person(s); (vii)
additional detailed information about the covered foreign person, which
could include products, services, research and development, business
plans, and commercial and government relationships with a country of
concern; (viii) a description of due diligence conducted regarding the
investment; (ix) information about previous transactions made by the
U.S. person into the covered foreign person that is the subject of the
notification, as well as planned or contemplated future investments
into such covered foreign person; and (x) additional details and
information about the U.S. person, such as its primary business
activities and plans for growth.
With regard to the time frame in which U.S. persons must file
notifications, the Treasury Department is considering requiring that
notifications be filed no later than 30 days following the closing of a
covered transaction.
Information would be collected via a portal hosted on the Treasury
Department's website to allow U.S. persons to electronically file
notifications. The Treasury Department is considering the appropriate
confidentiality requirements and restrictions around the disclosure of
any information or documentary material submitted or filed with the
Treasury Department pursuant to the implementing regulations. The
Treasury Department is considering an approach whereby any information
or documentary material submitted or filed would not be made public
unless required by law, except that the following could be disclosed:
(i) Information relevant to any administrative or judicial action or
proceeding, including the issuance of any penalties; (ii) information
to Congress or to any duly authorized committee or subcommittee of
Congress; (iii) information important to the national security analysis
or actions of the Treasury Department to any domestic government
entity, or to any foreign governmental entity of a United States ally
or partner, under the exclusive direction and authorization of the
Secretary, only to the extent necessary for national security purposes,
and subject to appropriate confidentiality and classification
requirements; (iv) information relevant to any enforcement action under
the Order and implementing regulations; and (v) information that the
parties have consented to be disclosed to third parties.
The ANPRM seeks comment on this topic including:
52. How could the categories of information requested be
clarified? Where might there be anticipated challenges or
difficulties in furnishing the requested information? Please be
specific and explain why.
53. What additional information, if any, should the Treasury
Department collect in support of the objectives of this program and
informing future policy development?
54. If there are multiple U.S. persons involved in a
transaction, would there be benefit to a process that allows a
combined notification or should each U.S. person be required to make
a separate notification?
55. What are the considerations with respect to a certification
requirement as to the accuracy of the information based on the
knowledge of the U.S. person?
56. The Treasury Department is considering encouraging joint
filings by the relevant U.S. person and covered foreign person. How
might joint filings enhance the fidelity of the information
provided? What practicalities should be considered?
57. Should the Treasury Department require prior notification of
a covered transaction (i.e., pre-closing) or permit post-closing
notification within a specified period, such as 30 days? What are
the anticipated consequences and impacts of these alternatives?
Should the notification period be shorter or longer, and why?
58. How could the specific information requirements affect
transaction activity, if at all? Please be specific.
59. How should the Treasury Department address the scenario
where a transaction for which notification was provided was actually
a prohibited transaction? How should the Treasury Department
consider options such as ordering divestment and/or the issuance of
civil monetary penalties?
60. How should the Treasury Department address the scenario
where a U.S. person is unable to gain the knowledge necessary to
meaningfully respond to the information requirements? What might a
U.S. person do in such a circumstance?
61. Would U.S. persons ordinarily rely on legal counsel to
assemble and submit the required information for notification? What
factors might inform parties' decision as to whether to engage legal
counsel?
L. Knowingly Directing Transactions
The Order states that ``the Secretary [of the Treasury] may
prohibit United States persons from knowingly directing transactions if
such transactions would be prohibited transactions pursuant to
[[Page 54971]]
this order if engaged in by a United States person.'' Pursuant to this
authority, the Treasury Department is considering defining
``knowingly'' for purposes of this provision in the Order to mean that
the U.S. person had actual knowledge, or should have known, about the
conduct, the circumstance, or the result. And the Treasury Department
is considering defining ``directing'' to mean that a U.S. person
orders, decides, approves, or otherwise causes to be performed a
transaction that would be prohibited under these regulations if engaged
in by a U.S. person. The Treasury Department is considering excluding
from this definition certain identified conduct that is attenuated from
the risks to U.S. national security identified in the Order, including
the provision of a secondary, wraparound, or intermediary service or
services such as third-party investment advisory services,
underwriting, debt rating, prime brokerage, global custody, or the
processing, clearing, or sending of payments by a bank, or legal,
investigatory, or insurance services.
This approach is narrower than the authority afforded to the
Treasury Department under the Order. The Treasury Department intends to
use the authority to tailor the regulations to prevent loopholes and
target the identified national security threat by prohibiting U.S.
person activity such as:
Scenario 1: A U.S. person General Partner manages a
foreign fund that undertakes a transaction that would be prohibited if
performed by a U.S. person.
Scenario 2: A U.S. person is an officer, senior manager,
or equivalent senior-level employee at a foreign fund that undertakes a
transaction at that U.S. person's direction when the transaction would
be prohibited if performed by a U.S. person.
Scenario 3: Several U.S. person venture partners launch a
non-U.S. fund focused on undertaking transactions that would be
prohibited if performed by a U.S. person.
By contrast, the Treasury Department currently does not intend
``knowingly directing'' transactions to cover scenarios such as those
described below, and is considering explicitly excluding them from this
prohibition:
Scenario 4: A U.S. bank processes a payment from a U.S.
person into a covered foreign person as part of that U.S. person's
engagement in a prohibited transaction. (Note, while the U.S. bank's
activity would not be prohibited, the U.S. person's would be.)
Scenario 5: A U.S. person employed at a foreign fund signs
paperwork approving the foreign fund's procurement of real estate for
its operations. The same fund invests into a person of a country of
concern that would be a prohibited transaction if performed by a U.S.
person.
Scenario 6: A U.S. person serves on the management
committee at a foreign fund, which makes an investment into a person of
a country of concern that would be a prohibited transaction if
performed by a U.S. person. While the management committee reviews and
approves all investments made by the fund, the U.S. person has recused
themself from the particular investment.
The ANPRM seeks comment on this topic including:
62. What modifications, if any, should be made to the proposed
definition of ``knowingly directing'' to enhance clarity or close
any loopholes?
63. What, if any, unintended consequences could result from the
proposed definition? What is the proposed definition's likely impact
on U.S. persons and U.S. investment flows? If you believe there will
be impacts on U.S. persons and U.S. investment flows, please provide
specific examples or data.
64. What, if any, alternate approaches should the Treasury
Department consider in order to prevent the conduct enumerated in
scenarios 1, 2, and 3 in section III.L?
65. If you believe any additional secondary or intermediate
services not discussed in section III.L should be explicitly
excluded from consideration, please explain why a given service
should be excluded.
66. Are there other advisory or other similar services provided
in the context of foreign investment into a country of concern in
the technology and product areas described in this ANPRM that may
pose a threat to U.S. national security and should therefore be
considered?
M. Controlled Foreign Entities--Obligations of U.S. Persons
The Order states that the Secretary may require U.S. persons to:
(1) ``provide notification to the Department of the Treasury of any
transaction by a foreign entity controlled by such United States person
that would be a notifiable transaction if engaged in by a United States
person''; and (2) ``take all reasonable steps to prohibit and prevent
any transaction by a foreign entity controlled by such United States
person that would be a prohibited transaction if engaged in by a United
States person.''
These two components serve different objectives, but they are
implemented using a similar mechanism that places responsibility with
the U.S. parent, and they share certain definitions and concepts.
Pursuant to this authority, the Treasury Department is considering
rules that would place certain obligations on U.S. persons related to
foreign entities that they control. The Treasury Department is
considering defining a ``controlled foreign entity'' as a foreign
entity in which a U.S. person owns, directly or indirectly, a 50
percent or greater interest.
Further, the Treasury Department is considering whether and how to
define ``all reasonable steps.'' These could include factors such as
(i) relevant binding agreements between a U.S. person and the relevant
controlled foreign entity or entities; (ii) relevant internal policies,
procedures, or guidelines that are periodically reviewed internally;
(iii) implementation of periodic training and internal reporting
requirements; (iv) implementation of effective internal controls; (v) a
testing and auditing function; and (vi) the exercise of governance or
shareholder rights, where applicable.
The ANPRM seeks comment on this topic including:
67. What are the considerations as to whether a foreign entity
is a ``controlled foreign entity'' of a U.S. person, as the Treasury
Department is considering defining it? What if any changes should be
made to the definition of ``controlled foreign entity'' to make its
scope and application clearer? Why? What, if any, changes should be
made to broaden or narrow it? Why?
68. What, if any, changes should be made to the factors
informing ``all reasonable steps'' in order to make its scope and
application clearer? Why? What would be the consequences and impacts
of adopting these factors?
N. National Interest Exemption
The Order authorizes the Secretary to ``exempt from applicable
prohibitions or notification requirements any transaction or
transactions determined by the Secretary, in consultation with the
heads of relevant agencies, as appropriate, to be in the national
interest of the United States.''
While the Treasury Department is not considering a case-by-case
determination on an individual transaction basis as to whether the
transaction is prohibited, must be notified, or is not subject to the
program, the Treasury Department likely would need to review the facts
and circumstances of the individual transaction subject to
consideration for a national interest exemption.
The Treasury Department is considering exempting from prohibition
certain transactions in exceptional circumstances where the Secretary
determines, in consultation with the heads of relevant departments and
agencies, as appropriate, and in her sole discretion, that a particular
transaction that would otherwise be a prohibited transaction should be
permitted because
[[Page 54972]]
it either (i) provides an extraordinary benefit to U.S. national
security; or (ii) provides an extraordinary benefit to the U.S.
national interest in a way that overwhelmingly outweighs relevant U.S.
national security concerns.
The Secretary may request detailed documentation from the relevant
U.S. person(s) involved in such proposed transaction(s) in order to
consider whether to grant an exemption. The Treasury Department is not
considering granting retroactive waivers or exemptions (i.e., waivers
or exemptions after a prohibited transaction has been completed).
The ANPRM seeks comment on this topic including:
69. What would be the consequences and impacts of allowing for
exemptions for certain transactions that ordinarily would be
prohibited? What, if any, additional or alternate criteria should be
enumerated for an exemption?
70. What should the Treasury Department require from the U.S.
person to substantiate the need for an exemption from the
prohibition?
O. Compliance; Record-Keeping
The Treasury Department wishes to achieve widespread compliance,
and to gather the information necessary to administer and enforce the
program, without unduly burdening U.S. persons or discouraging
transactions the program is not intended to address. The Treasury
Department therefore seeks comment on the compliance and record-keeping
controls that may be put in place under the program.
The ANPRM seeks comment on this topic including:
71. What new compliance and recordkeeping controls will U.S.
persons anticipate needing to comply with the program as described
in this ANPRM? To what extent would existing controls for compliance
with other U.S. Government laws and regulations be useful for
compliance with this program?
72. What additional information will U.S. persons need to
collect for compliance purposes as a result of this program?
P. Penalties
The Order requires the Secretary to investigate, in consultation
with the heads of relevant agencies, as appropriate, violations of the
Order or the regulations and pursue available civil penalties for such
violations. The Order also explicitly prohibits ``any conspiracy formed
to violate'' the Order or implementing regulations as well as ``any
action that evades, has the purpose of evading, causes a violation of,
or attempts to violate'' the Order or implementing regulations. It
authorizes the Secretary to ``refer potential criminal violations of
this order or the regulations issued under this order to the Attorney
General.''
Further, under the Order, consistent with IEEPA, the Secretary can
``nullify, void, or otherwise compel the divestment of any prohibited
transaction entered into after the effective date'' of the implementing
regulations. The Treasury Department would not use this authority to
unwind a transaction that was not prohibited at the time it was
completed.
The Treasury Department is considering penalizing the following
with a civil penalty up to the maximum allowed under IEEPA: (i)
material misstatements made in or material omissions from information
or documentary material submitted or filed with the Treasury
Department; (ii) the undertaking of a prohibited transaction; or (iii)
the failure to timely notify a transaction for which notification is
required.
The ANPRM seeks comment on this topic including:
73. How, if at all, should penalties and other enforcement
mechanisms (such as ordering the divestment of a prohibited
transaction) be tailored to the size, type, or sophistication of the
U.S. person or to the nature of the violation?
74. What factors should the Treasury Department analyze when
determining whether to impose a civil penalty, as well as the
amount?
75. What transaction data sources should the Treasury Department
use to monitor compliance with this program?
76. What process should the Treasury Department institute in the
event of a required divestment order?
Q. Overarching and Additional Inquiries
The Treasury Department welcomes comments and views from a wide
range of stakeholders on all aspects of how the Secretary should
implement the Order. A non-exclusive list of overarching and additional
questions for comment is below:
77. The Order identifies semiconductors and microelectronics,
quantum information technologies, and AI systems as technologies and
products covered by this program because of their critical role in
enhancing the military, intelligence, surveillance, or cyber-enabled
capabilities of countries of concern in ways that threaten the
national security of the United States. Are there questions about
why and how these categories fit into the objectives of the program?
Are there specific technologies and products that should be
considered and not already discussed in this ANPRM?
78. In light of the Order, what structural features should this
program include that are not already previewed in this ANPRM, and
why?
79. What would be the major risks or obstacles to the effective
operation of the program, as proposed? Where possible, please
provide supporting material, including empirical data, findings, and
analysis in reports or studies by established organizations or
research institutions, to illustrate these risks.
80. How significant are the anticipated costs and burdens of the
regulations the Treasury Department is proposing? What types of U.S.
businesses or firms (e.g., small businesses) would be particularly
burdened by the program? How can such burdens be alleviated,
consistent with the stated objectives of the program?
81. The Treasury Department is interested in exploring public
insights and supporting literature associated with outbound
investment, to complement our own research to date. Have researchers
(including in the fields of political science, international
relations, national security law, economics, corporate finance, and
other related fields) studied the national security costs and
benefits of U.S. investment in countries of concern? Please provide
any insights (and supporting literature) that characterize these
costs and benefits and/or provides conclusions about net effects.
82. How might firms approach compliance related to regulations
issued under this Order? What types of requirements would lead to
higher compliance costs for firms? What alternatives would result in
lower compliance costs? Are there any baseline costs that firms
would face regardless of choices the Treasury Department makes
during rulemaking? Where possible, please quantify these costs
(rough estimates or ranges are helpful as well).
83. The Treasury Department is interested in understanding the
risks of evasion and avoidance; how might U.S. persons or investment
targets evade or avoid these regulations, and how should the
Treasury Department account for these possible behaviors in the
design of the program?
Paul M. Rosen,
Assistant Secretary for Investment Security.
[FR Doc. 2023-17164 Filed 8-9-23; 4:15 pm]
BILLING CODE 4810-AK-P
