US targets securities investments associated with Communist Chinese military companies

US President Trump issued Executive Order 13959 (EO 13959 or the Order) on November 12, 2020, targeting securities investments that finance Communist Chinese military companies (CCMCs). Beginning January 11, 2021, the Order prohibits any transactions in (i) publicly traded securities of any CCMCs; (ii) derivatives of such securities; or (iii) securities designed to provide investment exposure to targeted securities. The Order does, however, permit purchases and sales of covered securities on or before November 11, 2021, solely for the purpose of divestment. The precise scope of the Order is uncertain at this time and guidance from the US Department of the Treasury's Office of Foreign Assets Control (OFAC) is expected.

The Order

EO 13959, issued pursuant to the International Emergency Economic Powers Act (50 USC 1701 et seq.) and other authorities, imposes restrictions on securities investments that are linked to CCMCs. According to the Order, the new restrictions arise as a result of the People's Republic of China's (PRC) national strategy of Military-Civil Fusion, which compels civilian Chinese companies to support military and intelligence activities. These civilian companies, according to the Order, "raise capital by selling securities to US investors that trade on public exchanges [in the US] and abroad, lobbying US index providers and funds to include these securities in market offerings, and engaging in other acts to ensure access to US capital." According to the Order, by purchasing CCMCs' securities traded on public exchanges both in the US and abroad, the US investors are financing the development and modernization of PRC's military.

To address these stated concerns, the President ordered the following activities, by any US person, be prohibited:

• beginning 9:30 am EST on January 11, 2021, any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any person designated as a CCMC as of November 12, 2020; and


• for any future determinations, beginning 9:30 am EST on the date that is 60 days after a person is determined to be a CCMC (see section below), any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of that person.

US persons who are required to comply with the Order include: any US citizen, permanent resident alien, entity organized under the laws of the US or any jurisdiction within the US (including foreign branches), or any person in the US.

The Order also has potential implications for non-US persons, including non-US financial institutions, that engage in covered securities transactions to the extent that such transactions involve a US nexus, such as the processing of payments by US financial institutions, which often occurs when transactions are denominated in US dollars. US persons (including US financial institutions) generally cannot facilitate transactions by non-US persons that would be prohibited for US persons to engage in. Nor can non-US persons cause, conspire with, or aid and abet US persons in engaging in covered securities transactions.

For purposes of the Order, ''transaction'' means the purchase for value of any publicly traded security. In light of this definition, the prohibitions in EO 13959 do not seem to apply to continued holding or selling of securities in CCMCs after the relevant dates, although this is subject to any further guidance issued by the Treasury Department.

The term "security" or "securities" include the definition of "security" referenced in section 3(a)(10) of the Securities Exchange Act of 1934, as amended,¹ except that currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited, is also considered a "security" for purposes of the Order.

"Communist Chinese military company" defined

Under EO 13959, CCMC means:

• any person identified by the Secretary of Defense as a CCMC as of November 12, 2020, and listed in the Annex to EO 13959;


• any person listed by the Secretary of Defense in consultation with the Secretary of the Treasury as a CCMC after November 12, 2020; or


• any person listed by the Secretary of the Treasury as being:
  
  • owned or controlled by the People's Liberation Army and engaged in providing commercial services, manufacturing, producing or exporting, or
  
  
  • a subsidiary of a person already determined to be a CCMC,

until the Secretary of Defense or the Secretary of the Treasury, as the case may be, removes such person from the relevant list.

EO 13959 does not define the term "CCMC" itself, but instead refers to section 1237 of the National Defense Authorization Act for Fiscal Year 1999, as amended. Under section 1237, the Secretary of Defense must prepare a list of persons, operating directly or indirectly in the US or any of its territories and possessions, that are CCMCs.

The language used in the CCMC definition provides the Secretary of Defense broad discretion with regard to section 1237 designations, by referring to any person that is either:

• identified in the Defense Intelligence Agency publication numbered VP-1920-271-90 (September 1990), or PC-1921-57-95 (October 1995), each as updated; or


• engaged in providing commercial services, manufacturing, producing, or exporting and is (i) owned or controlled by, or affiliated with: (a) the People's Liberation Army, or (b) a ministry of the PRC government, or (ii) that is owned or controlled by an entity affiliated with the PRC defense industrial base.

''People's Liberation Army'' includes the land, naval, and air military services, the police, and the intelligence services of the PRC government, and any member of any such service or police.

Key dates and wind-down periods

• January 11, 2021, at 9:30 am EST: The effective date of the Order, after which purchases for value by US persons of publicly traded securities of CCMCs, derivatives of such securities, or securities that are designed to provide exposure to targeted securities will be prohibited, except where permitted pursuant to an authorized divestment transaction through November 11, 2021.


• November 11, 2021, at 11:59 pm EST: The Order includes a 10-month wind down period ending at this date and time, during which purchases or sales of covered securities solely for the purpose of divestment of securities that a US person held as of January 11, 2021, at 9:30 am EST in any CCMC designated as of November 12, 2020, are permitted.


• Future CCMC determinations: For any entities determined in the future to be CCMCs, the Order prohibits purchases for value by US persons of publicly traded securities of such CCMCs, derivatives of such securities, or securities that are designed to provide exposure to targeted securities from 9:30 am EST on the date that is 60 days after such determination. Purchases for value or sales by US persons to divest, in whole or in part, from such securities are permitted for 365 days from the date such person is determined to be a CCMC.

Further regulations in the future

EO 13959 authorizes the Secretary of the Treasury, after consultation with the Secretary of State, the Secretary of Defense, the Director of National Intelligence, and the heads of other executive departments and agencies as deemed appropriate by the Secretary of the Treasury, to take actions in furtherance of the Order, including the promulgation of rules and regulations. Due to various ambiguities, such as whether the prohibitions apply to non-listed subsidiaries or affiliates of listed CCMCs, further guidance from the Department of the Treasury is needed, and we expect such guidance to be forthcoming.

We will continue to monitor these developments and provide updates, as warranted.