CFIUS Expands Monitoring and Enforcement Authorities

The U.S. Treasury Department has issued a Final Rule expanding the monitoring and enforcement authorities of the Committee on Foreign Investment in the United States (“CFIUS”), paving the way for more vigorous enforcement. The Final Rule, which largely implements a Notice of Proposed Rulemaking (“NPRM”) issued by CFIUS in April of this year, expands CFIUS’s authority to make requests for information in connection with transactions that are not notified to CFIUS and increases the maximum penalties for certain violations from $250,000 per violation to $5 million per violation. See our prior alert. Notably, the Final Rule walks back the scope of a critical timing requirement proposed in the NPRM for responding to CFIUS proposals during mitigation negotiations. Whereas the NPRM would have imposed a three business day response deadline on only the parties seeking CFIUS clearance each time CFIUS proposed mitigation terms during a negotiation, the Final Rule instead authorizes the CFIUS Staff Chairperson to impose a response deadline of no fewer than three business days in certain circumstances only.

The Final Rule will become effective 30 days after publication in the Federal Register. However, the authority to impose deadlines on mitigation responses will only apply to notices accepted for CFIUS review after the effective date. The Final Rule is unlikely to impact the majority of transactions subject to CFIUS jurisdiction and review, particularly in cases where parties comply with the regulations and terms of mitigation agreements. However, the Final Rule indicates the seriousness with which CFIUS is focusing on implementing and enforcing its monitoring, compliance, and penalty authorities.

Rule Changes

The Final Rule makes changes to three areas of the CFIUS regulations in 31 C.F.R. Parts 800 and 802.

1. Requests for Information

CFIUS has broad authority to request information from parties to transactions that were not notified to the Committee so that it can determine whether such transactions are subject to CFIUS jurisdiction. The current regulations do not specify other types of authorized information requests. The Final Rule amends the CFIUS regulations to expressly authorize requests for information related to whether transactions meet the criteria for a mandatory CFIUS filing and whether transactions may raise national security considerations. The stated purpose of this amendment is to help the Committee determine whether and when to request a formal notice, and are not intended to replace the Committee’s broader risk-based assessment that it undertakes during a formal review of a transaction.

2. Timing of Responses during Mitigation Negotiations

The current CFIUS rules do not require transaction parties negotiating mitigation with the Committee to respond to Committee proposals within a specific time frame (or require the Committee to respond to the transaction parties within a specific time frame). The NPRM proposed a default rule requiring transaction parties to respond within three business days to mitigation proposals in each instance that the Committee sent mitigation terms to parties (both initial and subsequent proposals and revisions).
In response to concerns expressed during the comment period, the Final Rule walks back the proposed three business day deadline for all responses from all parties in every mitigation negotiation, and instead grants the CFIUS Staff Chairperson the discretionary authority to impose response deadlines of no fewer than three business days in certain circumstances. These include the deadline for completing the investigation, the parties’ responsiveness to the Committee, and the risk to U.S. national security arising from the transaction.

3. Civil Monetary Penalties

Under the current rules, CFIUS may issue a civil penalty of up to $250,000 for the submission of a filing to CFIUS with a material misstatement or omission, or with a false certification. The Final Rule expands the list of circumstances under which penalties could be imposed to include material misstatements or omissions in the context of other communications with CFIUS, such as responses to CFIUS requests for information related to non-notified transactions, and responses to CFIUS requests for information related to monitoring or enforcing compliance.

The Final Rule also increases the penalty from $250,000 per violation to $5 million per violation. Penalties for failure to file a mandatory declaration and material violation of mitigation agreements are currently a maximum of $250,000, or the value of the transaction. The Final Rule revises the $250,000 penalty to $5 million, but maintains the value of the transaction as the maximum penalty. The Final Rule will, therefore, only impact transactions valued at less than $5 million.

Implications

The Final Rule’s expansion of CFIUS’s authorities related to requests for information and civil penalty increases reflect CFIUS’s ongoing focus on its monitoring and compliance functions and implementing its enforcement authorities. Traditionally, CFIUS has not exercised its authorities to impose civil penalties, but has begun to use those authorities more actively to pursue penalties for violations as part of the Committee’s efforts to protect U.S. national security. In 2023, CFIUS assessed four civil monetary penalties, double the total number issued previously.

The CFIUS Staff Chairperson’s new authority to impose a deadline to respond during mitigation negotiations is unlikely to affect most parties seeking CFIUS clearance. In 2023, only 36 of 342 total filings had mitigation agreements. That said, for parties negotiating mitigation agreements, the Final Rule could have a significant impact on their negotiating leverage.

Three business days, particularly when foreign investors are located in time zones many hours ahead of the United States, is a very short amount of time to respond. While such turnaround time may be possible in the latter stages of negotiations when revisions may be more limited, it is very unlikely to be sufficient to respond to an initial mitigation proposal. Ideally, this new authority will be used only in circumstances in which parties are not responding to mitigation in a timely manner, and not to provide CFIUS with additional negotiating leverage by pressuring parties to hastily agree to mitigation terms without the benefit of time to fully assess the impact.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta L. Nightingale, an O’Melveny partner licensed to practice law in the District of Columbia; and David J. Ribner, an O’Melveny partner licensed to practice law in the District of Columbia and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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