Treasury Department Issues New CFIUS Regulations

On November 14, 2008, the US Treasury Department issued final regulations governing the policy and procedures of the Committee on Foreign Investment in the United States (CFIUS). The regulations will go into effect on or about December 18, 2008 (i.e., 30 days after their publication in the Federal Register).


CFIUS is an interagency body charged with reviewing acquisitions, mergers, and takeovers resulting in foreign control of US businesses for their potential effect on US national security, under authority of the Exon-Florio Amendment to the Defense Production Act of 1950 (“Exon-Florio”). Transactions that CFIUS deems to be a threat to national security can be blocked or, in the case of completed transactions, buyers may be obligated to divest. Parties to potentially sensitive transactions can seek prior clearance from CFIUS by filing a voluntary notice.

The new regulations implement changes to Exon-Florio legislated by the Foreign Investment and National Security Act of 2007 (FINSA), which was signed into law on July 26, 2007. Congress enacted FINSA to strengthen CFIUS’s review following criticism of the handling of several controversial proposed foreign acquisitions.

The New Regulations

The final regulations largely codify procedures that CFIUS already has been following for some time or that were introduced by FINSA. The final regulations are, though not entirely, mostly unchanged from the draft text circulated for public comment on April 21, 2008 (for more details on key provisions of the regulations, please click here).

Notable changes to the draft regulations include the following:

  • A foreign person’s incremental increase in ownership of an entity whose acquisition was previously cleared by CFIUS is not itself subject to another CFIUS review;
  • Appropriateness of CFIUS’s review of acquisitions involving convertible securities will be determined by considering the imminence of conversion, whether the timing of conversion is under the acquiror’s control, and whether the rights to be obtained through conversion are reasonably ascertainable at the time of review;
  • Whether lending transactions by non-US creditors are subject to CFIUS’s review will depend on the likelihood that the lender may obtain control of a US business and the imminence of default; and
  • Removal of a controversial discussion of CFIUS’s power to reopen transactions previously cleared by CFIUS. FINSA allows CFIUS to exercise this power only in extraordinary circumstances, and this revision appears to be intended to assuage the concerns of foreign investors that CFIUS planned to increase its scrutiny of transactions previously cleared by CFIUS.

Implications and Next Steps

The new regulations and FINSA-mandated changes, including Congress’s enhanced oversight role, greater accountability for CFIUS officials, the focus on “critical infrastructure,” increased pressure for longer investigations, and explicit penalties for material misstatements and breaches of mitigation agreements, all suggest a more activist CFIUS and increased scrutiny over a more diverse range of transactions. Parties involved in inbound US investments and their advisors will need to pay close attention to whether Exon-Florio may have an impact on their transactions and whether a voluntary notice may be warranted.

The Treasury Department’s Open Investment Initiative, which has included numerous presentations to and dialogues with key investor states, appears directed at reconciling a tougher CFIUS regime with the US commitment to encouraging foreign investment. Today’s financial crisis and precarious economic landscape present significantly different circumstances then obtained when FINSA was passed and the regulations initially drafted. In this environment, US economic interests would seem to favor fewer rather than more obstacles to foreign investment. Treasury officials have issued assurances to investor nations—particularly those operating sovereign wealth funds—that CFIUS will not hinder their investment in US business. Whether this objective is consistent with CFIUS’s expanded scope remained to be seen.  

In addition to the new regulations released on November 14, Treasury will soon issue guidance on the types of transactions that CFIUS has deemed sensitive in the past, as mandated by FINSA.