On April 15, 2024, the Committee on Foreign Investment in the United States (CFIUS) released a Notice of Proposed Rulemaking (NPRM) addressing several enduring issues: its ability to gather information, particularly about so-called "non-notified transactions," processing timelines, and compliance. The release of the NPRM is not particularly surprising — CFIUS previewed its intent to amend the regulations during its 2023 Annual Conference, which featured discussions of these issues and more. The surprises are, instead, in the details.

Refresher on CFIUS

CFIUS is an interagency committee tasked by Section 721 of the Defense Production Act of 1950, as amended (DPA), with reviewing "covered transactions" involving investments by foreign persons to determine whether the transactions affect U.S. national security. "Covered transactions" include transactions that result in foreign control of a U.S. business, non-controlling foreign investments in certain types of U.S. businesses, and certain transactions involving real estate. If CFIUS determines a transaction poses a national security risk, it can mitigate that risk up to and including prohibiting the transaction. The DPA and CFIUS regulations (31 C.F.R. Parts 800-802) detail when and how parties are required to or can voluntarily notify CFIUS about a proposed transaction, its ability to review transactions for which the parties did not submit a notification, and enforcement of violations including failure to file, failure to comply with mitigation, and material misstatements, omissions, and false certifications.

The Proposed Amendments

CFIUS's NPRM presents three categories of amendments to its regulations.

1. Information Requests: The proposed rules would formally expand the categories of information that CFIUS may request, the contexts in which CFIUS may make requests, and the powers by which CFIUS may require parties to respond. 
    
   Current regulations specify that parties to a non-notified transaction "shall respond" to a CFIUS request seeking to determine whether their transaction is "covered." In practice, CFIUS asks questions that probe beyond potential "covered transaction" status, including questions directed at determining whether the transaction was subject to a filing mandate and the possible national security risks it presents. Current regulations do not require parties to respond to these additional probing questions. With these changes, CFIUS seeks to formalize its current practice and guarantee responses.
    
   The proposed revisions would also expand parties' obligations to respond to requests for information when CFIUS reviews prior filings or compliance with mitigation agreements for potential material omissions and misstatements. Additionally, the proposed rules lower the standard by which CFIUS may use its subpoena power, allowing it to subpoena information when it deems appropriate, instead of only when necessary.
2. Tight Timelines for Negotiating Mitigation: CFIUS is exploring imposing a three-business-day clock on responding to its proposals of mitigation terms. Currently, parties have three business days to respond to CFIUS's questions during its review of a filing but are not subject to a deadline for responding to mitigation proposals. Delayed responses impact CFIUS's ability to close transactions by the expiration of its overarching review and investigation deadlines (90 days, combined). CFIUS notes that, in spite of the quick turn around, responses must be "substantive," involving acceptance, a counterproposal, and/or an explanation why the parties cannot comply with the terms. 
3. Enhanced Penalties: The NPRM proposes significantly raising the allowed maximum civil penalties for failure to comply with CFIUS regulations. It would also expand the types of violations that may result in civil penalties. CFIUS posits, based on its enforcement experience, that the current maximum penalty — the greater of $250,000 or the value of the transaction — does not have a sufficient deterrent effect, particularly for low-value transactions. CFIUS instead proposes a dramatic 1,900 percent raise: from $250,000 to $5,000,000. The proposed rules would also allow CFIUS to impose civil penalties (not to exceed $5,000,000) for material misstatements and omissions in contexts including responses to non-notified transaction inquiries. Finally, the proposed rules would expand the period in which a person subject to a CFIUS penalty notice may petition for reconsideration from 15 business days to 20.

Key Takeaways

Whether the NPRM is ultimately implemented as published remains to be seen. While some adjustments are likely, parties should be alert to the overarching themes of the proposed rule and plan accordingly.

• Do Your Deal Homework: The stakes are only increasing for parties who assume their transactions are not covered or are low risk and who do not confirm the former through careful analysis before closing. If responding to additional non-notified transaction questions from CFIUS (such as whether the transaction involved "critical technology") becomes mandatory and the penalties for a material misstatement in response could be in the millions instead of thousands, cutting corners on pre-closing analysis becomes a more risky enterprise than it is at present. 
• Prepare for the Worst: Well before submitting a notification, parties should consider the possibility that CFIUS will impose mitigation and should review the feasibility of implementing common mitigation provisions. Absent pre-filing preparation, many parties may not be able to provide substantive responses to mitigation proposals in three business days. 
   
  In addition, it is already difficult to confirm that terms which appear feasible on paper during negotiations can actually be implemented after closing a deal. Having to react on a three-business-day clock increases the chances that critical considerations will be overlooked. Building aspects of common mitigation measures into deal terms and/or having preemptive detailed discussions about the timelines and funds needed to implement them could prove invaluable.
• Enforcement Is Here to Stay: There is no doubt that CFIUS is increasing its enforcement endeavors and has likely been frustrated by parties' continued filing and mitigation failures. While the CFIUS Monitoring and Enforcement page lists only two older enforcement cases, CFIUS issued new enforcement and penalty guidelines in October 2022, has hired additional staff, and has hinted at significant increases in enforcement activities in prior public statements. The NPRM emphasizes that the proposed amendments are focused on making enforcement more efficient and effective, not on changing CFIUS's discretionary approach to determining appropriate penalties in individual cases. In the absence of a public track record, parties may well wonder how CFIUS's promises of discretion, combined with expanded powers, will be applied in practice. 

Comments on the proposed rules may be submitted via mail or online at www.regulations.gov and must be received by May 15, 2024.

For more information, please contact:

Timothy P. O'Toole, totoole@milchev.com, 202-626-5552

Laura Deegan, ldeegan@milchev.com, 202-626-5942

Melissa Burgess, mburgess@milchev.com, 202-626-5914

Manuel Levitt, mlevitt@milchev.com, 202-626-5921

Rebecca Tweedie, rtweedie@milchev.com, 202-626-1487

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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