Webb: Strengthen Proposed Rules Governing Foreign Government Investment in the United States

June 9, 2008 -- Senator Jim Webb (D-VA) today submitted comments to the U.S. Department of the Treasury regarding its proposed rules governing foreign investment in the United States. These draft rules are intended to implement the Foreign Investment and National Security Act of 2007 (FINSA), which Congress passed last year.

“FINSA is a step forward in protecting our country from foreign investment that threatens our national security, while keeping our economy open to investment,” said Webb. “I welcome investment that promotes economic growth and generates good jobs for American workers, but such investment must be made in a manner consistent with U.S. national security and the stability of U.S. markets.”

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Today’s comments follow a series of measures taken by Senator Webb on this issue. Since taking office, Senator Webb has participated in a number of hearings on the strategic consequences of foreign government investment. In February, he also testified before the U.S.-China Economic & Security Commission on the national security implications of sovereign wealth fund investment.

The final rules will be issued by the U.S. Department of the Treasury later this year. The period for public comment ends today.

To read more about Senator Webb’s efforts on this issue, please go to: http://webb.senate.gov/newsroom/record.cfm?id=292389

Comments submitted regarding the proposed rules are contained below:

June 9, 2008

The Honorable Henry M. Paulson

Secretary

U.S. Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220

Re: Docket ID TREAS-DO-2008-0001

Dear Secretary Paulson:

The following comments are submitted in response to a request for comments made by

the U.S. Department of the Treasury (the Department) in a notice of proposed rule making and notice of public hearing issued April 23, 2008, regarding amendments made by the Foreign Investment and National Security Act (FINSA) of 2007 to Section 721 of the Defense Production Act of 1950. These comments all relate to a common theme: welcoming foreign investment that promotes economic growth in the United States, but doing so in a manner consistent with protecting U.S. national security and the stability of our markets.

At the outset, it is essential to recognize that cumulative investments – a series of single investments in different entities – could become a national security concern through their overall impact. There are circumstances under which such investments could allow other governments leverage which could impact our foreign policy.

Section 800.203. Control

The proposed rule’s continued use of an expansive definition of “control” is critical to ensuring that the Committee on Foreign Investment in the United States (CFIUS) reviews all transactions that have national security implications. Control may be exerted through passive investment, outside the traditional benchmarks of voting shares and board seats. The proposed rule should broadly encompass such transactions given that control is defined as the ability to “determine, direct, or decide important matters affecting an entity” through voting shares, board representation, “or other means.” I have raised this issue previously with the Department and I am gratified that the control test has not been narrowed thus far.

It should be noted, however, that the scope of the definition of control is narrowed when juxtaposed with illustrative examples. Specifically, the examples do not adequately reflect the influence that stems from owning a sizeable minority share of a company. Substantial control can surely be exercised by minority investors who own less than ten percent of a company. Corporate leaders consult with such shareholders before making substantial decisions, and considerable efforts are made to accommodate the requests of such shareholders. This is a basic and universally accepted function of corporate management.

Section 800.207. Critical infrastructure

The proposed rule should take into consideration the importance of economic security when defining national security. While FINSA provides for a much-needed additional 45-day investigation by CFIUS where transactions would result in foreign control over “critical infrastructure,” the proposed regulatory standard of a “debilitating impact on national security” should reflect the fact that U.S. economic assets are a critical component of our national security. As the 1988 Conference Report that accompanied the original Exon-Florio provision notes, “[t]he term ‘national security’ is intended to be interpreted broadly without limitation to particular industries.”[1] Thus, the Department’s final rule should define national security to encompass economic security. Although the United States Trade Representative, the Chairman of the Council of Economic Advisers, and the Director of the Office of Management and Budget are members of CFIUS, this representation is not sufficient to ensure that we adequately address threats to national economic security. As the U.S. Director of National Intelligence, Michael McConnell, recently testified before Congress, we should be concerned about “the financial capabilities of Russia, China and the OPEC countries, and the potential use of their market access to exert financial leverage to achieve political ends.”[2]

Section 800.223. Solely for the purpose of investment

The proposed rule should clarify that an exception to CFIUS review is based, in part, on investments motivated solely by monetary gain. As currently drafted, the proposed regulations define the concept of ownership held or acquired “solely for investment purposes.” This definition determines which transactions are excluded from review by CFIUS pursuant to Section 800.302(c). While foreign governments may invest money in our country to make a profit, they may also invest in order to further their foreign policy ambitions or to acquire national security assets. The definition should therefore be revised to specifically limit investments to those motivated “solely for the purpose of monetary gain.”

The Department should also use this definition as a look-back provision to reexamine foreign government investment some period after a transaction is completed. Since governments are motivated by a broader range of factors than commercial investors, we need to ensure that investments remain commercially driven. This concept has been used in securities regulation. A periodic review/look-back provision would ensure that the foreign investment remains commercially motivated.

Section 800.302. Transactions that are not covered transactions

The proposed rule should use consistent definitions of “ownership.” Paragraph (c) of the proposed rule should provide that a transaction is excluded from CFIUS review if it is solely for the purpose of investment (monetary gain) and the foreign person holds “less than a ten percent ownership interest in a U.S. business.” “Ownership interest,” however, reflects both voting and non-voting shares. As currently drafted, “ten percent or less of the outstanding voting interests,” is inconsistent with the definition of “control” as defined in Section 800.203. This definition also includes passive (non-voting) ownership interests. The proposed rule further conflicts with the definition of “transaction” in Section 800.224(a). Section 800.224(a) defines “transaction” as an “acquisition of an ownership interest in an entity” regardless of the voting status of the ownership interest.

Section 800.601. Finality of actions under section 721

The proposed rule provides that a transaction may be reopened by the President or CFIUS in cases where false or misleading material information has been submitted or omitted during the course of review. The authority for reexamination in this instance is accurately cited as Section 721(b)(1)(D)(ii) of FINSA. However, under the proposed rule, the ability to reopen does not extend to situations where parties to a covered transaction might intentionally or unintentionally breach a mitigation agreement or condition which was the basis of approval of the covered transaction. The proposed rule should be expanded to include this later scenario by also citing and incorporating the provisions of Section 721(b)(1)(D)(iii).

Reporting to Congress

While FINSA provides for important improvements in Congressional oversight of CFIUS, the Congress would be well-served by receiving adequate information regarding the basis upon which CFIUS decides 1) not to pursue an investigation, and 2) not to block a transaction following an investigation. The criteria for these decisions will be instrumental in assisting Congress to assess compliance with the statute and should be required in the proposed rule.

I request that the Department give all due consideration to these comments.

Sincerely,

Jim Webb

U.S. Senator

Source: Senator Jim Webb