CFIUS & FINSA.

1. CFIUS & FINSA. Bret Kelly Mie Nakanishi

2. What is CFIUS? The Committee on Foreign Investment in the United States • Inter-agency committee chaired by the Secretary of Treasury • “13-member body and the president together are statutorily authorized to review and ultimately block mergers and acquisitions between foreign entities and U.S. firms if those transactions threaten U.S. national security.”

3. What is FINSA? The Foreign Investment and National Security Act FINSA was an amendment made to the Exon-Florio provision that was Signed by President Bush on July 26, 2007 and became effective on Oct 24, 2007. “Exon-Florio provisionprovides authority to the President to suspend or prohibit any foreign acquisition, merger or takeover of a U.S. corporation that is determined to threaten the national security of the United States.” “Exon-Florio provision is not to discourage FDI generally, but to provide a mechanism to review and, if the President finds necessary, to restrict FDI that threatens the national security.”

4. What does FINSA do? • “FINSA increases the power of the President of the United States and the Committee on CFIUS.” • “FINSA gives the President more latitude in defining national security and widens the rage of companies that might be subject to protection from foreign acquisition.” • “While enlarging executive branch control over foreign acquisitions, FINSA also opens the review and investigation process for foreign acquisitions to many new parties, including Congress, advocacy groups, labor unions and competing bidders for acquisition targets.”

5. CFIUS Chair CFIUS

6. History of CFIUS and FINSA • “Established in 1975, CFIUS has reviewed foreign acquisition from a cold war view of national security.” • Since the end of the Cold War, and especially since September 11, 2001, the focus of national security planning has been defense against attacks within the U.S. by terrorist organizations.” • Recent “The Dubai Ports World controversy (in 2006) led Congress and the President to cooperate in enacting FINSA. The act formally defines “ national security” to include “ homeland security”

7. Focus of CFIUS & FINSA • “CFIUS establishes procedures to review foreign acquisition of “ critical infrastructure” and “ critical technologies” defined as “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.” • In addition to defense and technology companies, any business operating in a sector that is important to the U.S. economy- including transportation companies energy and power companies, ports and airports, banks, food supplies and telecommunications providers- may be subject to national security analysis.”

8. CFIUS review process 30-day CFIUS review Reporting the results 45-day CFIUS investigation Congress CFIUS provides a report and recommendation to the President 15-day Presidential review President’s Decision whether to suspend, prohibit or allow transaction * In total, the process can not exceed 90 days If there is a threat

9. “The CFIUS review under FINSA must determine whether (1) the transaction could result in control by a foreign person of a U.S. person engaged in interstate commerce (2) there is credible evidence to support a belief that the foreign person might take action that threatens to impair U.S. national security (3) there are any other laws that provide adequate authority to protect national security.”

10. Major Problems of CFIUS • Very protectionist, scaring off capital. Discouraging capital flows into the U.S. • Former secretary Powell, “ money, capital is a coward, it will go nowhere where it is put in fear.” • Narrow interpretation of threat to national security. • CFIUS’s definition effectively covered only sectors involving classified contracts, export-controlled technologies, or foreign acquirers subject to specific intelligence concerns. This constricted view often trumps efforts by some CFIUS members, namely Homeland Security, the Defense Department, and the Justice Department, to expand the term to encompass foreign control of critical communications or transportation infrastructure, inputs to defense systems and related technology, and cutting-edge R&D."

11. Major Problems of CFIUS • Insufficient time for review • The GAO said that 30 days for clearing inbound transactions is insufficient in many cases. • Lack of Transparency • The GAO termed the CFIUS proceedings "opaque" and recommended more-comprehensive reporting to Congress and more-active oversight.

12. Major Problems of CFIUS • Reluctance to initiate investigations. • Since Exon-Florio's inception, more than 1,560 notices have been filed, 25 of which were formally investigated. • Decisions mostly made by staffers, not high level officials. • "The committee almost never met, and when it deliberated it was usually at a fairly low bureaucratic level," Richard Perle said. Perle, who has worked for the Reagan, Clinton and both Bush administrations added, "I think it's a bit of a joke."

13. Major Problems of FINSA • Closing Delays • CFIUS will feel political pressure to extend more national security reviews beyond the 30-day clearance period to the supplemental 45-day investigation phase. • Wider Net • Transactions subject to national security review now include investments in "critical US infrastructure," which is broadly defined. As one sign of this wider focus, FINSA added the US Energy Department and Labor Department to CFIUS.

14. Major Problems of FINSA • Hinder Competitive Bidding Process • Free market distortions and the drag on foreign investment will be strongest in bidding situations where foreign firms compete with US firms, foreign government-owned enterprises compete with private bidders or bidders from US-allied countries bid against companies from countries viewed as higher security risks. Offering the highest bid now will be no guarantee of winning a deal. In fact, financial analysts may apply a price premium if they perceive a political risk or the potential for significant transactional delays with a particular bidder. • Policy Implications • In combination, the proposals could have a chilling effect on attracting important foreign investment into the United States. America is both the world's largest recipient of foreign direct investment and the world's largest investor. A perception that the country is less open to foreign investment could undercut current U.S. efforts to open financial markets overseas, and cause a backlash through harsh reciprocal treatment for American investors abroad.

15. Global Implications The enactment of FINSA will have a global impact, not only on FDI in the U.S. • German Chancellor Angela Merkel has already stated that the European Union should consider adopting protective controls on certain types of foreign investments in Europe. China and other countries also are considering additional restrictions on foreign investment in the interest of national security.

16. Political Interference • A prime example of political interference is the Dubai Ports World attempted takeover of a few American ports. • Commerce Secretary Carlos Gutierrez, told the AP in an interview: "They are not in charge of security. We are not turning over the security of our ports. When people make statements like that you get an instant emotional reaction."

17. Political Interference • Became a problem under CFIUS, now it is heavily involved with FINSA. • FINSA raises the bureaucratic profile of the national security review process by creating a new Assistant Treasury Secretary responsible for CFIUS reviews, requiring the Director of National Intelligence to perform an intelligence review of each transaction and mandating that high-level CFIUS officials sign off on key decisions. CFIUS now has explicit statutory authority to impose changes to deals via "mitigation agreements" before granting approvals. For example, in exchange for clearance, it could demand that parties to a deal undergo a restructuring, allow law enforcement access or spin off or wall off sensitive operating units.

18. Political Interference • FINSA also significantly enhances Congress's role in the potentially explosive issue of foreign investment. CFIUS now must notify Congress about each transaction it considers, and answer to a breathtaking number of Congressional committees and officials. This transaction-by-transaction political involvement could lead to problems, particularly if US constituents have an interest in opposing a competing foreign investor or have an ax to grind against a foreign investor's home country.

19. Policy Proposal • The main issue with the new CFIUS is its allowance for political interference. It is still to early to tell if this is going to be a problem in the process or not. If it is, then somehow the committee needs to be insulated from outside political pressures. • Clearly define what is meant by “critical U.S. infrastructure.”

20. http://www.ustreas.gov/offices/international-affairs/exon-florio/http://www.ustreas.gov/offices/international-affairs/exon-florio/ http://www.forbes.com/opinions/2007/10/22/investment-national-security-oped-cx_hlc_1023finsa.html http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1190106174477 http://www.clm.com/publication.cfm/ID/140 Bracewell & Giuliani LLP, United States; the foreign investment and national security act of 2007; improved transparency and slower deal making 30OCT 2007 by George M. Foote and Joshua Zive "Remarks at Sovereign Credit Rating Conference", United States Department of State, April 23, 2002. "Bush, Congress In Dark About Port Deal", CBS News, February 22, 2006. http://www.whitecase.com/publications/detail.aspx?publication=785 http://www.whitecase.com/talking_08032007/