On June 3, 2021, President Joe Biden signed Executive Order 14032 (EO) banning U.S. persons from purchasing or selling certain publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities (covered securities), of any listed “Chinese military industrial complex companies” (CMICs) (the CMIC EO). The CMIC EO amended EO 13959 of November 12, 2020, and revoked in its entirety EO 13974 of January 13, 2021.1 Before this most recent amendment, EO 13959 banned U.S. persons from purchasing, selling, or possessing certain securities of “Communist Chinese military companies” (CCMCs). The CMIC EO results in several changes from the CCMC sanctions regime. On the whole, there are six main takeaways when comparing the new CMIC sanctions and the CCMC sanctions:
1. There is a two-month gap on the prohibition on purchasing or selling covered securities from Chinese companies of concern.
The prohibitions covered by this amendment go into effect on August 2, 2021, and effective June 3, 2021, the CMIC list has replaced and superseded the CCMC list. The Office of Foreign Assets Control (OFAC) has removed the CCMC list from its website.2 It therefore appears that for the next two months, there will be no prohibition on purchasing or selling covered securities of companies that are on both lists, and the restrictions on companies that were on the CCMC list but are not on the CMIC list are no longer in effect. Such a gap will not affect Chinese companies listed on other sanctions lists, such as the Specifically Designated Nationals and Blocked Persons (SDN) lists.
2. The CMIC EO does not prohibit possessing CMIC securities.
EO 13959 prohibited only purchases of CCMC covered securities. In January 2021, EO 13974 amended EO 13959 to cover purchases and sales of covered securities as well as possession of such securities after the divestment date. The CMIC EO revokes EO 13974 and does not re-incorporate the prohibition on possession. Accordingly, while the CMIC EO allows purchases and sales for purposes of divestment through June 3, 2022, for already named CMICs, and for 365 days after designation for later designated CMICs, it does not require such divestment. However, as of such dates, U.S. persons will no longer be permitted to purchase or sell covered securities, including for purposes of divestment. U.S. persons who continue to possess covered securities after the applicable divestment deadline will not be in violation of EO 13959, but they may possess securities of which they are unable to divest themselves.
3. Unlike the CCMC sanctions, the CMIC sanctions cover only entities whose names exactly match those on the CMIC list.
Under the CCMC sanctions, OFAC said a subsidiary was required to be explicitly listed to be covered by EO 13959’s prohibitions unless the subsidiary’s name was a “close match” to the listed CCMC. This “close match” requirement caused some uncertainty with respect to company name abbreviations and brand names that lacked corporate suffixes. Fortunately, OFAC’s guidance on the CMIC EO explicitly states that only entities whose names “exactly match” the names of the entities on the CMIC list are subject to the prohibitions in EO 13959, as amended. Therefore, an entity must be listed on the CMIC list to be covered. The CMIC list, available here, is very specific, with full corporate names, International Securities Identification Numbers (ISINs), and equity tickers. While searching entities by ISIN may be helpful, companies should rely on a name match when doing diligence. Given that covered entities may issue new securities with new ISINs that are not yet listed on the CMIC list, a name match is likely to control.
4. OFAC appears to more explicitly authorize many of the “facilitation-like” activities by U.S. persons than it did under CCMC sanctions.
Whereas OFAC previously declined to say whether U.S. persons may provide investment advisory services to non-U.S. persons trading in CCMCs, OFAC now explicitly authorizes such activity in its new guidance. Specifically, U.S. persons are not prohibited from providing “investment advisory, investment management, or similar services” to non-U.S. persons in connection with their purchase or sale of a covered security, provided the underlying purchase or sale would not otherwise violate EO 13959, as amended. In other words, a U.S. person acting as a fund manager is not prohibited from advising on purchases or sales of covered securities if neither the purchase nor sale of the covered security is for the ultimate benefit of a U.S. person or is a willful attempt to evade the prohibitions of the EO. It is unclear what “ultimately benefit” means under the EO, including whether OFAC may interpret it to cover situations in which an investment manager indirectly benefits from the purchase or sale of a covered security by a fund that is managed by the investment manager.
5. The definition of covered securities has been somewhat narrowed.
On the face of the CMIC EO, it appears that only “publicly traded” securities, and “publicly traded” securities that are derivative of or designed to provide investment exposure to the publicly traded securities of a covered entity, are covered. This would seem be a departure from the CCMC sanctions regime, which only required the underlying security to be publicly traded, not necessarily the derivative or security designed to provide investment exposure. However, in the definition of “publicly traded securities” under the revised EO, the administration included any securities “that trade ... through the method of trading that is commonly referred to as ‘over-the-counter.’ ” One problem with this definition is that there is not a clear and universal understanding of the meaning of the term “over-the-counter” under U.S. law. While that phrase is used in certain regulations, its meaning depends on the context in which it is used. It may also strike securities and derivatives lawyers and market participants as odd to refer to “over-the-counter” securities transactions as being “public.”
Therefore, this supposed change in the scope of the restrictions on CMIC transactions may not be as significant as it appears at first glance. However, some narrowing of the definition has occurred. Specifically, the new definition excludes “currency or any note, draft, bill of exchange, or [certain] banker’s acceptances,” which were included under the original version of EO 13959.
6. The CMIC list has been changed, in part, from the CCMC list.
The CMIC EO did more than just rename the CCMC list. The CMIC list covers parties not previously covered by the CCMC list and removes parties previously covered by the CCMC list. OFAC published a “Changes to the Non-SDN Chinese Military Industrial Complex Companies List” here. Companies will need to reconduct diligence to ensure that they do not purchase or sell covered securities after the applicable effective date.
1 Trump Executive Order Amends Ban on Investment in Publicly Traded Securities of Chinese Military Companies (January 19, 2020).
2 Frequently Asked Questions, Chinese Military Companies Sanctions (updated June 3, 2021) at 899.
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