[co-author: Alasdair Kan]
Key Points
- On November 12, 2020, President Trump issued a new EO prohibiting U.S. persons from engaging in transactions in publicly traded securities of certain CCMCs, or any securities that are derivative of, or are designed to provide investment exposure to, such securities, effective January 11, 2021, at 9:30 a.m. EST.
- On December 28, 2020, OFAC published guidance clarifying the breadth of these prohibitions, including (i) a broad interpretation of the covered financial instruments to include, for instance, derivatives (futures, options, swaps), warrants, ADRs, GDRs, ETFs, index funds and mutual funds, to the extent such instruments fall within the definition of “security” under the EO; (ii) confirmation that the prohibition applies to investments in both U.S. and foreign funds that hold publicly traded securities of CCMCs, regardless of the level of such securities’ share of the underlying fund, ETF or derivative, and regardless of where the securities are traded or in which currency the securities are denominated; and (iii) a statement that the Treasury Department intends to list additional entities that are majority-owned or controlled by listed CCMCs.
- The EO provides a limited exemption allowing U.S. persons to divest their holdings in listed CCMCs within one year from the CCMC’s designation.
- For companies designated as CCMCs after November 12, 2020, restrictions imposed by the EO will go into effect 60 days after the designation, with an exemption allowing for divestments made within 365 days of the designation.
Background: China’s Military-Civil Fusion Strategy
As part of a broader series of actions taken over the past year in response to China’s Military-Civil Fusion initiative, President Trump issued a new Executive Order (EO 13959 or the EO) on November 12, 2020, titled “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.” According to the EO, China’s Military-Civil Fusion strategy aims to “increase the size of [China’s] military-industrial complex by compelling civilian Chinese companies to support its military and intelligence activities.”
In conjunction with this action the U.S. State Department stated, “the [Chinese Communist Party] is implementing this strategy, not just through its own research and development efforts, but also by acquiring and diverting the world’s cutting-edge technologies – including through theft – in order to achieve military dominance.” A senior State Department official said earlier this year that China’s Military-Civil Fusion strategy is “one of the United States’ most pressing national security threats.”
The issuance of EO 13959 also follows calls by a bipartisan group of members of U.S. Congress in September 2019 for the U.S. executive branch to “reexamine all the statutory…
Read More: New Executive Order Restricts U.S. Persons from Trading in Publicly Traded