Trump Executive Order Amends Ban on Investment in Publicly Traded Securities of Chinese Military Companies

In its original form, EO 13959 prohibited transactions, defined as purchases for value, in covered securities. The order also permitted divestment in such holdings by a U.S. person on or before November 11, 2021, as long as the divestment was to a non-U.S. person. The EO initially affected the publicly traded securities of 31 companies identified as CCMCs on lists previously issued by the Department of Defense pursuant to Section 1237 of the National Defense Authorization Act for Fiscal Year 1999. The EO also allowed the government to later designate additional parties as CCMCs and authorized the Office of Foreign Assets Control (OFAC) to designate covered subsidiaries of CCMCs. Where additional entities are determined to be CCMCs after the issuance of EO 13959, the prohibitions under the EO take effect 60 days after such determination, and U.S. persons are permitted to divest such holdings for up to a year following the determination.

On January 13, 2021, President Trump signed an order amending EO 13959. As revised, EO 13959 no longer simply permits U.S. persons to divest of such securities before November 11, 2021 (or 365 days after designation as a CCMC for later designated parties), but rather requires such divestment. Moreover, where transactions prohibited under EO 13959 previously included only the purchase of CCMC securities, the order as amended now prohibits both the purchase and sale of such securities.

Since the initial issuance of EO 13959 in November 2020, there has been a lack of clarity concerning the scope of the order, making it difficult for U.S. investors and fund managers to ensure compliance. This uncertainty resulted in the issuance of successive agency guidance in the form of FAQs and two general licenses. As of today, the order can be read to cover as follows:

Prohibited Entities

As described above, the order initially affected the CCMCs on lists previously issued by the Department of Defense. The order also contemplates the ability of the U.S. government to name additional CCMCs for a delayed effective date, which it has done. Further, the order authorizes OFAC to list subsidiaries of listed CCMCs for coverage under the order.

FAQs issued by OFAC have since clarified that the prohibitions would apply to investments in subsidiaries of listed CCMCs only after said subsidiaries were publicly listed as CCMCs by the U.S. government. However, OFAC further clarified that prohibitions would automatically apply to investments in any entity “with a name that exactly or closely matches the name” of a listed CCMC. Transactions in the securities of any CCMC subsidiary (whether expressly listed or not) are thus prohibited without the benefit of the 60-day implementation period if the subsidiary’s name exactly or closely matches the name of a CCMC listed by the Departments of the Treasury or Defense.

OFAC created a Non-SDN Communist Chinese Military Companies (NS-CCMC) List, which it published on December 28, 2020, and updated on January 6, 2021. The NS-CCMC includes names of companies similar to listed CCMCs as well as some equity ticker symbols associated with those issuers. OFAC explained that the NC-CCMC List is not exhaustive. Thus, U.S. persons need to perform their own diligence to determine potentially prohibited securities.

OFAC’s guidance created uncertainty surrounding which entities have names closely matching the name of a CCMC and thus which investments are prohibited under the order. On January 8, 2021, apparently acknowledging the problem, OFAC issued General License No. 1, temporarily authorizing transactions in covered securities involving entities whose names closely match listed CCMC entities that would otherwise be prohibited under EO 13959 but were not yet included in the NS-CCMC List. Transactions involving covered securities of these entities that were otherwise prohibited by the order beginning on the original January 11, 2021, effective date are currently authorized through 9:30 am EST on January 28, 2021.

On January 14, 2021, the U.S. Department of Defense published a list of an additional nine Chinese companies pursuant to section 1237 of the 1999 NDAA that are covered by the EO. These nine companies were immediately considered to be CCMCs.

Prohibited Investment

EO 13959 prohibits transactions involving “publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities” of any CCMC. The order defines “securities” to include those instruments included in “the definition of ‘security’ in section 3(a)(10) of the Securities Exchange Act of 1934” as well as “currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding 9 months.” “Publicly traded securities” include securities denominated in any currency that trade on a securities exchange or through the method of trading that is commonly referred to as “over-the-counter” in any jurisdiction.

OFAC has also clarified in guidance that it considers “derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (ADRs), global depositary receipts (GDRs), exchange-traded funds (ETFs), index funds, and mutual funds,” among others, to be in scope and “derivative of” or “designed to provide investment exposure to” the covered publicly traded securities, provided they meet the definition of securities under the EO. Based on OFAC’s broad interpretation of prohibited securities, the EO may also prohibit transactions involving certain annuities and other products issued by life insurance companies that expose the contract holder to CCMC securities, whether allocated to an underlying separate account pursuant to which the product was issued or included in a referenced index.

Further, prohibited investments include the securities issued by an investment fund that itself holds shares of CCMCs because that fund would be “provid[ing] investment exposure” to the CCMC securities. For example, any exchange-traded fund (ETF) with any amount of exposure to one or more CCMCs is within scope of the EO, regardless of whether the ETF gets that exposure via instruments that are themselves securities, because the ETF itself issues securities. The securities issued by the ETF would, therefore, be “securities that are ... designed to provide investment exposure in” the covered securities.
Given the wide-reaching effect of EO 13959, as amended, on January 14, 2021, OFAC issued General License No. 2 authorizing, for entities the names of which are listed on the NS-CCMC List on or after January 14, 2021, and for one year after an entity’s name is added to the NS-CCMC List, all transactions and activities by securities exchanges operated by U.S. persons involving covered securities of the entity that otherwise would be prohibited under the amended EO.

Persons and Activities Subject to the Order

EO 13959 applies to any U.S. citizen or permanent resident alien anywhere in the world as well as any entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches) or any person physically present in the United States. With respect to trading in non-U.S. offices, the application of the order may depend on the individual facts of the company or fund.

OFAC has clarified through FAQs that U.S. persons are permitted to provide certain support services related to CCMC securities as long as such services are not provided to U.S. persons in connection with prohibited transactions. Such services include clearing, execution, settlement, custody, transfer agency, back-end services. Market intermediaries and other participants may also engage in ancillary or intermediary activities necessary to effect divestiture during the relevant wind-down periods or that are otherwise not prohibited under EO 13959.

The EO does not restrict U.S. persons from engaging in activities with CCMCs other than with respect to transactions in covered securities, as described above. That said, certain of the listed CCMCs are subject to restrictions in addition to those under EO 13959, including those resulting from designation on the Department of Commerce’s Entity List.

There are still outstanding questions relating to the interpretation of EO 13959, as amended, and we expect OFAC to issue additional guidance. At this time, we do not expect the incoming Biden administration to completely rescind this EO. However, the Biden administration may decide to limit or more narrowly tailor the EO’s application.