Today, President Biden issued an Executive Order expanding U.S. restrictions on dealings in the publicly traded securities of Chinese companies. Today’s move amends Executive Order 13959 to prohibit U.S. persons from buying or selling the publicly traded securities of listed companies operating in (1) the surveillance technology sector or (2) the defense and related material sector of the Chinese economy. E.O. 13959 was previously limited to companies affiliated with the Chinese military.
The amended order reflects a growing emphasis on human rights and “democratic values” in U.S. sanctions policy related to China. The White House fact sheet announcing today’s amendment indicated that the Order is intended to prevent the flow of U.S. capital to companies that develop or use surveillance technology to facilitate repression or serious human rights abuse in and outside of China, including technology used to surveil religious or ethnic minorities. Other recent moves, including those in response to Chinese government policies in the Xinjiang region and Hong Kong, have similar human rights policy motivations. The administration may cite to security and adherence to democratic values in imposing future sanctions.
Below, we summarize the key features of the new restrictions and guidance issued by the Office of Foreign Assets Control (“OFAC”).
The amended E.O. initially applies to the 59 Chinese companies listed in the annex to the E.O. The companies are also included on OFAC’s new “Non-SDN Chinese Military-Industrial Complex Companies List” (“NS-CMIC List”), which replaces the previous “Communist Chinese Military Company” (“CCMC”) list. The NS-CMIC List includes a number of new Chinese companies that did not appear in the prior CCMC list and excludes a handful of companies that were on the prior list. (A table summarizing the list changes is below the break.) Notably, the NS-CMIC List captures companies operating in the defense sector, subsidiaries and affiliates of companies on the CCMC list, and two companies operating in the surveillance technology sector.
The Biden administration indicated that it expects to add additional parties to the NS-CIMC List in the future.
As in the original E.O. 13959, the prohibition on purchasing and selling publicly traded securities also applies to derivatives and securities designed to provide investment exposure to such securities, including ADRs, GDRs, ETFs, index funds, and mutual funds. Restrictions apply regardless of the CMIC securities’ share of the underlying index fund, ETF, or derivative. The amended E.O. defines “securities” as those specified in Section 3(a)(10) of the Securities Exchange Act of 1934.
The amended E.O.’s prohibitions come into effect on August 2, 2021 for the 59 companies currently on the NS-CMIC List, and U.S. persons are permitted to divest holdings in those securities until June 3, 2022. The amended E.O. also provides for a 365-day divestment period for CMICs that are designated in the future.
Guidance for U.S. financial service companies and investors
OFAC guidance issued today explains how the agency will apply the new E.O. to broker-dealers, market intermediates, and other market participants. In particular:
- U.S. financial service companies that provide clearing, execution, settlement, and related services can continue to deal in CMIC securities so long as they do not facilitate prohibited transactions by U.S. persons.
- Securities exchanges operated by U.S. persons, along with market makers, market intermediaries and other participants, are not prohibited from effecting U.S. persons’ divesture of publicly traded securities in the listed CMICs during the wind-down period.
- U.S. persons employed by non-U.S. entities are not prohibited from facilitating purchases or sales related to a CMIC security on behalf of their non-U.S. employer or providing investment management or similar services to a non-U.S. person.
- U.S. financial service companies can rely on “information available to them in the ordinary course of business” in conducting due diligence on whether an underlying purchase or sale is prohibited under the amended E.O
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Our team is actively monitoring developments in this area, please contact us with questions on how the new rules may apply to your business.