Docket Number: TREAS-DO-2023-0009
September 28, 2023
The US-China Business Council (USCBC) welcomes the opportunity to submit comments to the Department of the Treasury (Treasury) regarding the advance notice of proposed rulemaking (ANPRM) preceding the implementation of regulations contemplated by the Executive Order (EO) of August 9, 2023, “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern.”
USCBC represents more than 270 American companies that do business with China. Our membership includes some of the largest and most iconic American brands, in addition to small- and medium-sized enterprises. Our members represent a wide range of industries and sectors, including manufacturers, professional services firms, high-tech companies, investment funds, and others.
We support the Biden administration’s dual efforts of protecting US national security and promoting a robust bilateral commercial relationship with China. We greatly appreciate the administration’s consultations with our organization and our member companies throughout the development of the EO and ANPRM.
In our comments below, USCBC strives to act as a constructive partner to the US government and help the Biden administration adhere to its “small yard, high fence” principle. Our submission first offers some general comments on the EO and ANPRM. It then provides specific feedback, informed by our member companies, on key definitions, concepts, and questions posed in the ANPRM. To the extent possible, we have tried to reference the question number to which each section or comment is addressed.
I. General Comments
USCBC would like to offer six general, high-level comments on the EO and ANPRM.
First, the final rule should be targeted to achieve specific national security objectives. Treasury should ensure the final rules work to target specific activities that raise national security concerns and, where practical, should work in tandem with existing and any future US restrictions on the basis of national security interests. The vast majority of trade with China has no nexus to US national security interests, and this trade should not be covered by the scope of the final rules.
Second, to avoid unintended consequences, the final rules must provide clear definitions and guidance to companies. Treasury should strive to harmonize definitions with similar programs, including the Export Administration Regulations (EAR). Synchronization of definitions, including with the EAR, would be consistent with Executive Order 13563 of January 18, 2011, which states that “in developing regulatory actions and identifying appropriate approaches, each agency shall attempt to promote such coordination, simplification, and harmonization.”
Third, the application of the EO should be prospective. It would be difficult for companies if the US government required submission of transaction documents or any other information regarding investments or other transactions signed before the issuance of the EO, including those that close after the issuance of the EO but before adoption of the final rules. The parties to these transactions could not have foreseen the obligation to be imposed by the final rules and requesting such information, therefore, would not contribute to "better inform[ing] the development and implementation of the program” covered by the EO and the ANPRM. If the scope of the term “covered national security technologies and products” is expanded at any point in the future, the application of the expanded scope similarly should have a prospective application.
Fourth, as the United States works to implement the EO, it must continue to push other countries to pursue similar policies. An uncoordinated or a unilateral, rather than a multilateral, approach to reviewing outbound investment is unlikely to achieve its objectives and would harm US competitiveness. For example, a unilateral action would limit the ability of US companies to operate in large markets while their foreign competitors could maintain normal operations. Specifically, the market demand in the country of concern would still exist; however, the market gap would be solely filled by foreign-based companies with the ability to provide the financing, skills, and advanced technology that is being targeted by the US government.
Fifth, both the EO and ANPRM contemplate expanding the list of technologies and products covered by the EO. We strongly urge the Biden administration to act with restraint regarding any future expansions. The technologies and products covered by the EO all have complicated supply chains and their inclusion in it’s the scope of the EO followed rigorous consultation with the business community over many years. If the scope of the order should eventually be expanded, it should follow a similarly rigorous consultation process and it should have a prospective application. Moreover, Congress has proposed alternative ideas on US outbound investment, including in the Senate’s version of the FY24 National Defense Authorization Act. To avoid unnecessary confusion, USCBC encourages the administration and Congress to work to ensure there is one clear set of rules that will apply to US businesses.
Sixth, one solution to provide companies more certainty in complying with the EO would be for the administration to create a process where interested parties could submit a fact pattern and receive guidance on the applicability of the rules based on the facts presented. A similar solution is offered by the Securities and Exchange Commission (SEC), which offers non-binding guidance on certain fact-specific filings.
II. Specific Feedback on Key Definitions, Concepts, and Questions
a. Definition of “US Person” (Questions 1-2)
The EO defines a “United States person” to mean “any United States citizen, lawful permanent resident, entity organized under the 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 ANPRM states that Treasury is considering adopting this definition “without elaboration or amendment.” Treasury further notes that it expects the regulations to apply to “US persons wherever they are located.”
It is important that the final definition of a US person is as clear as possible and aligns with definitions found elsewhere in relevant US law. Clarity and consistency will make compliance easier for businesses as they navigate this new regime. In fulfillment of this objective, USCBC recommends for Treasury to:
- Align the definition of US person with the definition used in similar regimes, including the EAR;
- Clarify how dual citizens are treated; and
- Ensure the final rules include examples to clarify the application of this definition to “US persons wherever they are located.” We would encourage foreign subsidiaries of a US parent company not to be included in the definition of a US person.
b. Definitions of “Covered Foreign Person” and “Person of a Country of Concern” (Questions 3-8)
The EO defines “covered foreign person” to mean a person of a country of concern who or that is engaged in activities, as identified in the regulations issued under this order, involving one or more covered national security technologies and products.” The ANPRM notes that Treasury is considering elaborating on the definition to mean:
- A person of a country of concern that is engaged in, or a person of a country of concern that a US person knows or should know will be engaged in, an identified activity with respect to a covered national security technology or product; or
- 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.
The EO defines “person of a country of concern” to mean:
(i) Any individual that is not a United States person and is a citizen or permanent resident of a country of concern;
(ii) Any entity organized under the laws of a country of concern or with a principal place of business in a country of concern;
(iii) The government of each 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
(iv) Any entity owned by a person identified in subsections (e)(i) through (e)(iii) of this section.
The ANPRM notes that Treasury is considering elaborating on the definition to mean:
- Any individual that is not a US citizen or lawful permanent resident of the United States and is a citizen or permanent resident of a country of concern;
- 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;
- 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
- 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.
USCBC supports Treasury in defining the terms “covered foreign person” and “person of a country of concern.” However, the definitions, as drafted, are too vague. We encourage further clarifications to ensure companies can comply with the requirements. For example, the final rules should work in tandem with existing and any future US restrictions on the basis of national security. Treasury should provide more clarity and outline more precise criteria by which an entity would be determined to fall under either definition. Specifically, we believe Treasury should:
- Clarify what specific elements will be used to determine if an entity is a person of a country of concern, and what elements are needed to reverse such a determination; and
- Ensure that US persons are not improperly determined to be a “covered foreign person.” For example, if a US person owns an entity in a “country of concern” that is engaged in “covered national security technologies and products,” would that US-owned foreign entity be considered a “covered foreign person” or a “person of a country of concern?”
Furthermore, it is our understanding that “person of a country of concern” is intended to cover entities outside of a “country of concern” that are majority owned by a “person of a country of concern.” We suggest Treasury consider additional limiting principles for application to entities organized outside of a “country of concern” but majority owned by a “person of a country of concern” (e.g., limiting this application outside of a “country of concern” to specified end-users).
c. Knowledge Standard (Questions 49-51)
The ANPRM notes that Treasury is considering regulations that condition a person's obligations on that person's knowledge of relevant circumstances. It notes that 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 ANPRM further notes that this would mean that to be covered by the final regulations, “a US 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.” The knowledge standard would also apply “to end uses as applicable to some of the definitions of covered national security technologies and products.”
USCBC supports Treasury in defining a knowledge standard. However, based on the language included in the ANPRM, we anticipate some challenges for a US person in conducting analysis or due diligence to ascertain whether they are investing in a covered foreign person. We outline some anticipated problems and potential solutions related to the due diligence process below.
First, we are concerned about Treasury’s “knowledge standard” definition and its potential to raise some compliance issues for impacted companies. While we generally support the harmonization of definitions across related regulatory regimes, we are concerned that this proposed “knowledge standard” would penalize companies who have conducted good faith due diligence based on all relevant information available to them. As currently drafted, the ANPRM is calling for a “should have known” standard for knowledge when, in practice, new facts may become available later that were simply not available at the time due diligence was conducted. USCBC recommends that clear accommodations be made to prevent regulatory enforcement actions in these scenarios – for example, ensuring that the knowledge standard applies at the time that the relevant parties enter into a purchase agreement.
Second, the final rule should clarify that, unless a prospective investor knows, or can readily conclude that the investment target is a covered foreign person, a US person (prospective investor) can rely on due diligence responses, as well as representations and warranties from the prospective investee that the prospective investee is not a covered foreign person. For example, this could be done by the prospective investor being supplied with certified formation documents demonstrating the covered foreign person was not formed under the laws of a country of concern, or by the prospective investor checking publicly available registry sites where incorporation documents are required to be filed. Alternatively, an investor could ask pertinent questions and seek representations and negative covenants from a target regarding such target’s status as a covered foreign person or not, but it is difficult, if not impossible, for a prospective investor to ensure the accuracy of certain facts critical to a determination of whether a party is a “covered foreign person.” In any venture capital investment, the investor would need to rely on company due diligence replies, representations and warranties, and negative covenants beyond its own review and diligence so as to assure itself the investee is or is not a covered foreign person.
Based on these concerns, we would encourage Treasury to consider establishing some form of safe harbor or an exemption from liability under the program based on the investor’s due diligence and the representations it obtains or, at a minimum, an explicit statement that such due diligence and representations would be substantial mitigating factors in any enforcement action that Treasury might take in connection with compliance with the program’s final regulations. We would also note that ambiguity regarding the knowledge standard will have a chilling effect on investments with much wider effect than the intended scope of the EO. Most investors and investees, for example, will avoid pursuing a deal without certainty because the prospect of penalties and even divestiture are unpalatable. Furthermore, the leading start-ups in China have many financing options and can look to other non-US investors for their funding. It is already quite competitive for a US investor to be accepted to participate in a promising Chinese start-up, and these regulations will decrease the competitiveness of US investors. One solution would be for the appropriate US agency to open a consultation hotline (or a similar web-based consultation mechanism), as the Securities and Exchange Commission (SEC) does with respect to certain filings that are fact specific. While the results of SEC process are non-binding, they are in most cases helpful in providing direction to would-be filers.
Additionally, we would note that US companies are already undertaking significant due diligence reviews to ensure covered transactions meet internal standards. This often includes: (1) business, finance, and technology-related diligence (typically in-house) to determine the viability of an investment; (2) legal diligence, in most cases, via a combination of internal legal and external law firm efforts; and (3) on geopolitical, military-related, and other sensitive considerations, background diligence on founders, co-investors, and the prospective investee using a third-party US investigative firm. The knowledge standard, as currently drafted, would require additional due diligence, which will result in increased time and costs, including an increased use of third-party service providers such as consultants, accountants, and investigative firms.
Further clarity on the knowledge standard and the creation of a safe harbor or exemption from liability under the program would help address these competitiveness and cost concerns.
d. Definition of “Covered Transaction” (Questions 9-16)
The ANPRM notes that, with regard to defining “prohibited transactions” and “notifiable transactions,” Treasury is considering using a single term, “covered transaction,” that would apply to the definition of both. It notes further that Treasury is considering defining the term “covered transaction” to mean:
A US person's direct or indirect
- Acquisition of an equity interest or contingent equity interest in a covered foreign person;
- Provision of debt financing to a covered foreign person where such debt financing is convertible to an equity interest;
- Greenfield investment that could result in the establishment of a covered foreign person; or
- 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.
Additionally, the ANPRM notes that Treasury does not intend the definition of “covered transaction” to apply to the following activities, unless undertaken as part of an effort to evade the regulations:
- 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;
- Processing, clearing, or sending of payments by a bank;
- Underwriting services;
- Debt rating services;
- Prime brokerage;
- Global custody; and
- Equity research or analysis.
USCBC supports Treasury’s approach in applying a single term for “covered transaction” that clearly identifies prohibited and notifiable transactions. USCBC supports Treasury’s intention to not include certain activities under the definition of “covered transaction,” including the decision to exclude the procurement of material inputs, intellectual property licensing, and presumably, intellectual property sale activities. We encourage further clarifications to the currently considered term of “covered transactions” to ensure certain transactions do not indirectly implicate US businesses under "covered transactions” or have other unintended consequences. As such, USCBC makes the following recommendations:
- Transactions entered into prior to the issuance of the EO should not be considered “covered transactions” and should be exempted. As already stated by the ANPRM, the definition of a “covered transaction” should not cover binding commitments made before the issuance of this EO, especially in the cases of joint ventures and intracompany transactions. The inclusion of prior transactions would be outside the scope of the EO and would hurt the ability of US businesses to conduct current and future business operations with trusted foreign partners.
- A threshold for a “covered transaction” should be established. Given the intended scope of the EO, we encourage Treasury to establish a threshold for what constitutes a covered transaction so as not to implicate common business transactions that only aim to assist US business operations. For example, US enterprises frequently take minority, non-controlling positions in companies to gain insight into a local market and better understand emerging trends. A threshold for a “covered transaction” should be above the point where the US enterprise can gain valuable insight to support its affairs but has little influence over the direction of the investment.
- The definition of a “covered transaction” must be exceptionally clear to avoid unintended consequences. Clarity in defining "covered transactions" is crucial to prevent unintended consequences. As proposed, the definition of a “covered transaction” appears to cover a US person entering into a joint venture with a covered foreign person, even if that joint venture itself is unrelated to covered national security technologies and products. For example, a US person enters a joint venture with a Chinese company to develop non-covered widgets. Whether the Chinese company is determined to be a “covered foreign person” could hinge on whether a separate division of the Chinese company is developing an AI system to control robotic systems. Covering these types of joint ventures would go beyond the national security risks the regulations are intended to target. Moreover, it would discourage US companies from pursuing joint ventures that could benefit the US enterprise and economy as a whole. We also encourage Treasury to define “joint venture,” given the various ways in which the term is used.
- Differences in debt financing should be accounted for. It is important to clarify the forms of debt financing that would be covered under the final rule. With this in mind, the final rule surrounding debt financing should be rather narrow to not include debt financing that is outside of the intended scope. Treasury should consider the challenges and disparities created by including convertible debt as a covered transaction; specifically, debt financing that is convertible into equity generally originates from bank debt to fund the activity. Limiting the definition to convertible debt would create different treatment for similar activities and provide favorable treatment to commercial and other private lenders at the expense of equity investors and other large corporations that do business in China.
- A clear definition of “follow-on transactions” would assist companies in determining what activities would be covered. USCBC recommends that follow-on transactions--regardless of whether the initial financing transaction closed before issuance of the EO, after issuance of the EO but before finalization of the regulations, or after finalization of the regulations--should not require notification if a US person is only purchasing up to its pro rata share of the offering. This does not appear to be the intention of the EO unless the company has materially changed its business in a way that would result in the follow-on transaction being prohibited under the regulations. To assist with this, Treasury should include multiple examples of follow-on transactions between a US person and a covered foreign person which would trigger the requirements for prohibition or notification. For example, would “follow-up” transactions include an additional equity investment and/or transfers of resources such as equipment or materials?
- The definition of an indirect transaction must be clarified. The ANPRM notes that Treasury 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 ’US persons’ or ’covered foreign persons’ as defined.” Treasury should include clarification of what types of transactions fall within this category other than the one example in the ANPRM. Currently, the scope of what would constitute an “indirect” covered transaction is unclear and potentially overly broad. Defining the scope of “indirect transactions” would assist in scenarios where an enterprise invests in a company that later decides to engage in a “covered transaction.” For example, a US enterprise initially invests in a Chinese company that falls outside the scope of the EO. Subsequently, the Chinese company, independently and based on its own decisions, becomes a "covered foreign person." In such a case, would the VC or PE fund be obligated to divest its investment or report it to the government? Would the responsibility for awareness and reporting lie with the US entity? USCBC recommends that Treasury rely on specific provisions to target evasion, rather than including “indirect” in the definition of a covered transaction. Alternatively, we recommend that Treasury make explicit in the regulations that indirect investments are only covered where the US person is making an investment with knowledge it will be used to undertake a covered transaction.
- Additional clarity is needed for divestments. The EO provides that the Secretary can “nullify, void, or otherwise compel the divestment of any prohibited transaction entered into after the effective date,” but the exact applicability of a “covered transaction” to divestments is not clear. For example, a gradual divestment strategy could result in a corporate structure with a US person having minority ownership in a new joint venture with a “person of a country of concern,” which could be covered. If a US person were in such a joint venture, would each drawdown from the joint venture require notification and possibly approval from Treasury? If divestment would be a “covered transaction,” it would incentivize companies to maintain their status quo business operations in China. The ANPRM does not seem to contemplate transactions made during gradual exit processes. We encourage Treasury to consider excluding such divestment entirely, including notification requirements, since such actions would normally not entail the provisioning of additional capital and technology into a country of concern.
- Additional clarity should be given to certain transactions.
- USCBC urges Treasury to include examples of “contractual arrangements” that the ANPRM states the new regime will not cover.
- USCBC recommends that Treasury make clear that routine intracompany activities are not considered “covered transactions” and that it provides guidance on what activities are out of the final rule’s scope. For example, Treasury should specify exemptions for activities such as technology used for customer service and scientific analysis.
- USCBC suggests that Treasury clarify that a procurement, including transportation or carriage of material inputs for any of the covered national security technologies or products, is not a covered transaction. The simple conveyance of those goods should not trigger a requirement to participate in the notification process.
- USCBC requests that Treasury provide clarity on whether certain other transactions by US persons, such as a wire transfer, might be considered “knowingly directing” transactions. For example, would a US financial institution facilitating a “covered transaction” in which it is not otherwise involved in constitute “knowingly directing” a transaction?
- USCBC requests that Treasury provide clarity on whether ordinary course contributions of equipment (e.g., for research collaborations for use by a collaboration partner), would be “covered transactions.”
e. Definition of “Excepted Transactions” (Questions 18-25)
The ANPRM notes that Treasury is considering a category of transactions that would be “excepted transactions,” and thus excluded from the definition of covered transaction. The definition under consideration 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 US 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 US person is acquiring all interests in the entity or assets held by covered foreign persons; or
3. An intracompany transfer of funds from a US 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.
USCBC makes the following recommendations:
- The definition of “excepted transactions” should be made clear in the final rule. USCBC welcomes Treasury’s approach to create exceptions for certain transactions that present a lower likelihood of concern. It is important in the final rule that Treasury continue to define “covered transaction” to exclude publicly traded securities (including derivatives), certain limited partners’ investments, intracompany transfer of funds, and binding transactions made before the issuance of the EO. A failure to do so would mean that certain transactions outside the intended scope of the EO would be covered and would decrease a US person’s ability to conduct normal business operations. Treasury should strive to ensure that transactions covered by other programs (e.g., US export control rules) are not also covered by the program established by the Executive Order.
- The final rule should provide clarity for general and limited partners’ “excepted transactions.” The final rule should be clear regarding the regulation of general partners (GP) versus limited partners (LP). For example, USCBC would like more clarity on the de minimis threshold for passive LP investments under the proposed excepted transactions. In this vein, the final rule should address the corporate venture capital structure and set a separate de minimis threshold for investments in countries of concern. That threshold, whether a number, a percentage of the total amount invested each year, or some other metric, should be relatively high so as to not inadvertently freeze corporate venture capital funds that are outside the scope of the EO and do not run afoul of the final rule.
- Intracompany funds to subsidiaries established before the date the EO was issued and to subsidiaries established at any time in the future should be “excepted transactions.” Applying this exception only to existing subsidiaries would limit the ability of a US person to expand an existing business in China. Such an application would potentially depress the value of the existing business and incentivize the sale of that business to a Chinese entity or other non-US person not subject to such limitations on expansion. Similarly, companies frequently engage in legal entity restructuring for a variety of legal or tax reasons, even if the underlying activities taking place in the country do not change.
- A transaction that awards a board observer should not revoke the “excepted transaction” protections. USCBC recommends that this language not be included in the final rule. Permitting US persons to have a board observer seat enables US persons to better track foreign company activities and gain insights into new technologies, without creating a control relationship or providing any decision-making authority.
- “Intangible benefits” should only be covered under the EO in conjunction with a “covered transaction.” Trying to otherwise restrict the provision of “intangible benefits” would expand the scope of the order beyond the administration's stated intent.
- As with intracompany transactions, ongoing support, and investments in US subsidiaries in a country of concern should be an excepted transaction.
- As with the proposal to exempt university-to-university transactions, public-private partnerships with universities for the purpose of using technology to promote scientific analysis should be exempted.
- An additional de minimis threshold for investments by a venture capital fund, private equity fund, or other funds in a covered foreign person that are below certain thresholds should be considered excepted transactions.
f. Definition of “Knowingly Directing Transactions” (Questions 62-66)
USCBC supports Treasury in its approach to determine whether a transaction was knowingly directed. We encourage Treasury to consider creating a safe harbor or otherwise exempting from liability certain scenarios, as well as clarify scenarios for knowingly directed transactions. USCBC recommends the following:
- We are concerned about the use of “should have known” as a standard for knowingly directed transactions. In the context of “knowingly directing transactions,” this phrasing is ambiguous and creates the potential for unnecessary litigation. We would encourage Treasury to consider not including a “should have known” standard in this context.
- The ANPRM text does not explicitly state whether the regime would apply to transactions knowingly directed by a US citizen who serves as CEO or senior executive of a non-US company. We recommend that the final rules explicitly exclude such transactions that are knowingly directed by a US person serving as CEO or senior executive at a non-US company. Covering this scenario would create an extraterritorial application of the US regime. In the alternative, if the final rule explicitly includes such transactions, then the rule should clarify how such a CEO or senior executive could recuse him or herself from the particular investment and thereby avoid coverage of the transaction. Such a clarification would be like the recusal option in the fund context in Scenario 6 of the knowingly directed transaction section of the ANPRM.
g. Definition of “Covered National Security Technologies and Products”
The EO 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 consultation with the Secretary of Commerce and, as appropriate, the heads of other relevant agencies.
The ANPRM further states that Treasury 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.
USCBC supports Treasury’s efforts to apply a narrow definition to covered technologies within the ANPRM and supports the White House’s goal of scoping this program with a “small yard, high fence” principle. To further minimize the potential for disruption to investment in non-sensitive technologies, it is crucial that mechanisms for the notification and prohibition of covered transactions only apply to technologies that are clearly and demonstratively tied to national security end uses.
Given the unprecedented nature of such controls on investment and the need to apply an appropriate scope to covered technologies, we ask that Treasury commit to the following:
- Align the definition and scope of regulations with the EAR.
- Maintain and or add “designed to be exclusively used” when describing covered technologies.
- Provide greater clarity for certain covered AI systems.
USCBC also offers the following recommendations:
The definitions for “semiconductors and microelectronics” should be aligned with the EAR (Questions 26-32). Treasury should harmonize proposed investment notification and review rules with technical definitions used in the EAR wherever possible. EAR definitions for the physical export of semiconductors, microelectronics, toolmaking equipment, and electronic design automation software are well understood by industry practitioners, and changes to this effect would aid compliance efforts by industry. A failure to do so will increase costs and complexity.
An alternative definition of “supercomputers” should be considered (Question 32). USCBC generally urges Treasury to harmonize definitions with the EAR and believes doing so is critical to ensure understanding and compliance with the final rules. That said, we also believe that the cubic or square footage definition of “supercomputer” in the EAR is not an effective technical parameter to use because it can be circumvented by simply adding additional racks in the supercomputer cluster with fewer nodes.
The definition of “software for electronic design automation” (EDA) needs further clarity (Question 29). Treasury should consider two aspects when defining EDA. First, Treasury should ensure that the definition of EDA remains limited to software that is used for integrated circuit design. There are also EDA tools for printed circuit boards and packaging which are different from tools used to design integrated circuits and those tools should remain outside of the definition of covered national security technology.
Second, the definition of covered EDA software should be restructured to only include investments in source code that is necessary for the development or production of EDA software for integrated circuits. Source code, as opposed to corresponding object code, is an enabling technology that would permit for the development of a covered-EDA ecosystem in a country of concern. Limiting covered investments to source code would ensure that new rules on outbound investment do not inadvertently harm legitimate exports of EDA software to a country of concern.
As with the proposed rules on semiconductors, AI systems, and quantum computing, we suggest that the definition of EDA in the ANPRM be multilateral and consistent with the EAR. To streamline compliance, we suggest that Treasury’s definition of EDA be aligned with the EAR’s Export Control Classification Number (ECCN) 3D006.
The definition of “advanced integrated circuit packaging” needs further clarification. (Questions 26-32). The ANPRM defines “advanced integrated circuit packaging” to mean “the packaging of integrated circuits that support the three-dimensional integration of integrated circuits, using silicon vias or through mold vias.” It defines the term “packaging of integrated circuits” to mean “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.” A more descriptive definition could be, “the packaging of integrated circuits that create three-dimensional heterogeneously integrated circuits, using high-aspect ratio silicon vias or through mold vias.” Packaging is not "supporting integration," but rather, creating heterogenous integrated circuits, meaning multiple various types of integrated circuits packaged together. Also, adding high-aspect ratio silicon vias distinguishes these as "advanced" packaging, as any (non-advanced) package would have a silicon via, but the advanced are high aspect.
Covered quantum information technologies should be aligned with existing regulations (Questions 33-39). As with our recommendations on semiconductors and AI systems, we suggest that Treasury align its controls on investments in quantum information technology to technology and targets that are or would be laid out in the EAR. We also encourage Treasury to limit covered investments in quantum information technologies specifically to technology that is “designed to be exclusively used,” in quantum, as it is considering with AI systems. Doing so would limit the risk that technologies outside of the intended scope of the EO are not inadvertently covered.
The definition of “AI systems” should be clearly tied to military end uses and the EAR (Questions 40-48). The definition of AI systems within covered national security technology and products should be kept as narrow as possible given the vast number of AI applications. To maintain a narrow definition, Treasury should keep the language as “designed to be exclusively used” when coupled with clear and specific end-use descriptions. Regarding the AI systems enumerated in the ANPRM, Treasury should consider adding the qualifier “with dual use application.” For example, an AI system with “digital forensic tools” as an end use, without the addition of “dual use applications,” could be covered by the definition even if they were only capable of being used for civilian, nonmilitary purposes.
To further minimize the final rule’s future impact on civilian, non-military AI applications, Treasury should provide clear, specific end uses of concern for four activities listed in the ANPRM:
- Cybersecurity applications;
- Digital forensics tools;
- Penetration testing tools; and
- Control of robotic systems.
For example, a clear distinction should be made between end uses that are defensive in nature (i.e., used to protect your own computer networks) and offensive in nature (i.e., used to disrupt someone else’s computer network).
Similarly, regarding robotic systems and AI use cases, there are countless activities that utilize both technologies that do not constitute national security risks. The term “robotic systems” is vague and should be clearly defined in of terms technical scope and end use. Technical scope should be clarified to avoid unintentionally including diverse interpretations of the term “robotic systems,” such as medical robotics that are manually controlled.
Definitions focused on an “end use” and not an “end user” approach should also be applied. For example, globally, there are military hospitals that play a leading role in providing training for medical technologies used in non-military end uses. An end-use based approach would avoid unintentionally including AI systems used in civilian medical applications, such as medical robotics and drug discovery in the scope of the final rule. Any language that details end uses would also require further clarification, as restrictions on software may otherwise inhibit the development of civilian-use software assisted technologies.
If Treasury does not adopt the above USCBC recommendation, an alternative approach that simplifies the process for companies would be to limit the scope of end-uses and end-users to lists set out in the EAR such as the entity list and commerce control list, as we also suggested with semiconductors. This approach would ensure that the regulations are targeted at entities most likely to be engaged in activities that pose national security risks and would allow US companies to evaluate potential investments efficiently and effectively.
h. Notification Requirements (Questions 52-61)
The ANPRM outlines the information that Treasury is considering requiring US persons to furnish as part of a “notifiable transaction.” USCBC has provided below some feedback and questions on various pieces of information under consideration:
- ANPRM: (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).
- USCBC: It is important to clarify that the filing person is only required to report as to itself and the investment target (not as to all persons involved in the transaction, such as co-investors in a preferred stock financing round, who should be responsible for their own reporting). Further, US persons who are owners of the US investor should not need to report.
- ANPRM: (ii) Basic business information about the parties to the transaction, including name, location(s), business identifiers, key personnel, and beneficial ownership.
- USCBC: Treasury should clarify the terms “business identifier” and “key personnel.” USCBC would note that “beneficial ownership” of the covered foreign person may not be obtainable by the US person. In some cases, not even the covered foreign person will know who its “beneficial owners” are.
- ANPRM: (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 US person(s).
- USCBC: Complying with this provision would be overly burdensome on US persons. If there are certain transaction provisions or arrangements that the government is interested in, those should be delineated and clearly described. USCBC would note that many of the terms in the list of requested documents are confidential, and a requirement to provide such documents would inhibit investment in private entities.
- ANPRM: (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.
- USCBC: A covered foreign person may be reluctant to share detailed information on R&D, business plans, and government relationships, considering their proprietary and commercial nature. A US person would need to rely on the covered foreign person’s representations without an independent means to validate this information. We recommend that the information provided should be more focused on publicly accessible or non-confidential information about the products, services, and business activities of the covered foreign entity.
- ANPRM: (viii) A description of due diligence conducted regarding the investment.
- USCBC: This requirement is vague. Treasury should provide details or examples of the type of information it seeks.
- ANPRM: (x) Additional details and information about the US person, such as its primary business activities and plans for growth.
- USCBC: USCBC is concerned that information about a US person’s “plans for growth” is speculative and subject to change. Treasury should provide clarity on the purpose of this proposed request.
Overall, USCBC received feedback from our members that the information being considered for “notifiable transactions” is overly burdensome and could have the practical effect of a de facto prohibition of such transactions for US persons. As Treasury determines the requirements associated with a “notifiable transaction,” and to avoid the creation of a de facto prohibition for such transactions, it should consider (1) the added compliance costs such requirements would place on US persons, and (2) the viability of the US person being able to collect and provide the requested information, including the laws and regulations of the countries of concern.
The EO grants the Secretary of Treasury the authority to “nullify, void, or otherwise compel the divestment of any prohibited transaction entered into after the effective date” of the implementing regulations. USCBC recommends that the final rule establishes means by which the parties to the transaction can mitigate the national security risks associated with the transaction in order to avoid divestment.
USCBC appreciates the opportunity to comment on this ANPRM and hopes to continue to work with the administration to craft policies that are effective, implementable, and promote America’s national security and long-term global competitiveness. Providing more clarity and continuing regular consultations with US commercial stakeholders in the months and years ahead will help the Biden administration’s goal of curbing certain investments from helping countries of concern develop sensitive technologies and products critical for military, intelligence, surveillance, and cyber-enabled capabilities. Coordinating efforts with US allies and partners will ensure that US competitiveness is not unnecessarily harmed.