CFIUS Signals Enhanced Enforcement Focus With New Proposed Changes to Regulations

The Proposed Rule changes to civil monetary penalties would be effective for violations occurring on or after the effective date of the final rule, and for mitigation agreements entered into, conditions imposed, or orders issued on or after the effective date of the final rule. A summary of key proposed changes is below:

• CFIUS's long-standing practice has been to make inquiries of parties to transactions outside of the formal submission procedures. This occurs most often when CFIUS identifies potential national security concerns and the parties have not filed or when CFIUS has questions concerning compliance with mitigation agreements or the information provided in prior submissions. The regulations do not currently provide much detail regarding the scope of CFIUS's power in this regard or a mechanism to obligate parties to respond to the questions. Rather, parties typically need to weigh the risk of a nonresponse against a decision by the committee to require a filing. The Proposed Rule would add language clarifying the broad scope of CFIUS's ability to make such inquiries and would formally require responses.
  
  
• The Proposed Rule would institute a three-business-day period for substantive party responses to proposed mitigation terms unless the parties request a longer time frame and the staff chairperson grants that request in writing. The CFIUS regulations do not currently dictate a deadline for such responses.

• The Proposed Rule would substantially increase the maximum civil monetary penalty available for violations of obligations (from $250,000 to $5,000,000). It would also introduce a new method for determining the maximum possible penalty by referencing a person's interest in a U.S. business at the time of the violation or the transaction (which, in certain cases, could be greater than the value of the transaction).

• The Proposed Rule would expand the circumstances in which a civil monetary penalty may be imposed due to a party's material misstatement or omission, including when the material misstatement or omission occurs outside a review or investigation of a transaction and when it occurs in the context of the committee's monitoring and compliance functions.

• The Proposed Rule would extend the time frame for submission of a petition for reconsideration of a penalty to the committee and the number of days for the committee to respond to such a petition—extending both from 15 days to 20 days.

Requests for Information

Under the current rules and framework, CFIUS focuses requests for information on non-notified transactions on whether a transaction was "covered"—i.e., subject to CFIUS jurisdiction. Existing provisions contemplate requests related to a transaction's potential status as "covered," but do not specifically address other types of information requests. Specifically, the Proposed Rule addresses this perceived gap by expressly providing that the staff chairperson, acting on the recommendation of the committee, may request information from transaction parties and other persons related to:

• Information that would enable the committee to determine whether a transaction meets the criteria for a mandatory declaration under section 800.401; or

• Information that would enable the committee to determine whether a transaction may raise national security considerations.

The Proposed Rule would make corresponding amendments to the regulations to require transaction parties and other persons to respond to such requests for information.

The Proposed Rule would further amend sections 800.801(a) and 802.801(a) to require parties to provide information to the committee upon request in two other circumstances:

• When the committee seeks information to monitor compliance with or enforce the terms of a mitigation agreement, order, or condition; and
  
  
• When it seeks information to determine whether the transaction parties had made a material misstatement or omitted material information during the course of a previously concluded review or investigation (including a review or investigation that ended with rejection of the parties' notice).

The regulations currently authorize the committee to request information in both circumstances, but the regulations do not expressly obligate parties to respond.

Finally, the Proposed Rule would amend CFIUS's subpoena power from its current use when "necessary" to when deemed "appropriate."

Time Frame for Responding to Proposed Mitigation Terms

Currently the regulations do not require transaction parties to respond within a specific time frame to committee proposals of terms to mitigate identified national security risks. The Proposed Rule would amend the regulations to specify a three-business-day period for substantive party responses to proposed mitigation terms (both initial and subsequent proposals or revisions) unless the parties request a longer time frame and the staff chairperson grants that request in writing.

Changes to Civil Monetary Penalties

CFIUS notes in the supplementary information that it believes the current penalty maximum of $250,000 (or the greater of $250,000 or the value of the transaction) may not sufficiently deter or penalize certain violations, particularly in scenarios where the "value" of the transaction is determined to be zero (e.g., the acquisition of a board seat or voting interest).

The Proposed Rule would increase the maximum penalty amount to:

• $5,000,000 per violation for specified material misstatements or omissions, applicable to violations occurring on or after the effective date of the final rule;

• The greater of $5,000,000 or the value of the transaction per violation for failure to file a mandatory declaration, applicable to violations occurring on or after the effective date of the final rule; and

• The greater of $5,000,000 or the value of the transaction (or, as discussed below, the value of the party's interest in the U.S. business at the time of the violation or time of the transaction) per violation for intentional or grossly negligent violations of a material provision of a mitigation agreement, applicable to mitigation agreements entered into, conditions imposed, or orders issued on or after the effective date of the final rule.

In the supplementary information provided with the Proposed Rule, CFIUS notes that it anticipates that the relevant value of the transaction or interest would be determined through, for example, audited financial statements or other industry standard methods of valuation.

Pertaining to violations of mitigation agreements or conditions, the Proposed Rule would further allow for the maximum penalty to be determined by reference to a person's interest in a U.S. business at the time of the violation or the transaction (which, in certain cases, could be greater than the value of the transaction). The current regulations do not pin the value of the transaction to a specific moment in time. Thus, the maximum penalty for a violation of material provisions of mitigation agreements, material conditions imposed by the committee, or orders issued by the committee would be the greatest, per violation, of:

• $5,000,000;

• The value of the violating party's interest in the U.S. business (or covered real estate) at the time of the transaction;

• The value of the violating party's interest in the U.S. business (or covered real estate) at the time of the violation or the most proximate time to the violation for which assessing such value is practicable; or

• The value of the transaction.

CFIUS notes in the supplementary information accompanying the Proposed Rule that this range of measurements for the maximum penalty would provide an additional deterrent or penalty in the case of certain transactions valued at less than $5,000,000.

The Proposed Rule would also expand the list of circumstances in which a penalty may be imposed for material misstatements or omissions, which is currently limited to those in a declaration or notice or false certifications. Under the Proposed Rule, CFIUS penalties also would apply to material misstatements or omissions in contexts outside of declarations and notices—in particular:

• Responses to the committee's requests for information related to non-notified transactions;

• Certain responses to the committee's requests for information related to monitoring or enforcing compliance; and

• Other responses to the committee's requests for information, such as for agency notices, as described in sections 800.901(a)(2) and 802.901(a)(2).

CFIUS further notes in the supplementary information accompanying the Proposed Rule that the committee will notify parties in writing when parties' response to a particular communication may be subject to a penalty due to a material misstatement or omission.

Finally, under the current regulations, upon receiving notice of a penalty to be imposed, the subject person may submit a petition within 15 business days of receipt of such notice, subject to an extension through written agreement with the committee. Similarly, the committee has 15 business days to assess the petition and issue a final penalty determination. The Proposed Rule would extend both time frames to 20 business days.