Treasury Issues Proposed Rule Strengthening CFIUS Enforcement Authority and Penalties

Proposed Rule shifts focus toward stricter review and enforcement

 On April 11, 2024, the U.S. Department of the Treasury, as chair and lead agency of the Committee on Foreign Investment in the United States (CFIUS or Committee), issued a Notice of Proposed Rulemaking (Proposed Rule) to enhance its investigative and enforcement authorities, as well as strengthen penalties for noncompliance.

If adopted, the Proposed Rule essentially would:

• Provide CFIUS with enhanced authority to issue subpoenas to compel responses in its investigation of non-notified transactions or potential compliance violations.
• Broaden the range of circumstances in which civil monetary penalties may be imposed for misstatements or omissions in reviews and also for breach of mitigation agreements—and substantially raise the maximum penalties to up to $5 million (20 times the current maximum), the value of the transaction, or (for breaches of mitigation agreements) the value of the violating party’s interest in the U.S. business.
• Set timelines where the parties are responding to CFIUS mitigation proposals while allowing discretionary extensions.
• Allow longer timeframes for petitions for reconsideration of penalties with discretionary extensions permitted.

Investigating Non-Notified Transactions

CFIUS’s most recent Annual Report to Congress (in 2023 for calendar year 2022) indicated the commitment of increased attention and resources toward investigating non-notified (no CFIUS filing) transactions. Currently, CFIUS may request information from parties regarding such transactions to determine whether they were/are subject to the Committee’s jurisdiction and whether a mandatory filing should have been made, or if national security considerations/concerns may be raised by the transaction. The proposed strengthened subpoena authority — including that of issuance to third parties who may have relevant information — is intended to increase effectiveness of such reviews.

Expanded Civil Penalties

Under current regulations, CFIUS may impose a penalty of up to $250,000 in cases of submission of material misstatement or omission in the course of a review. Additionally, for failure to submit a mandatory filing where obligated, or for material breach of the terms of a mitigation agreement, CFIUS may impose a penalty of the greater of up to $250,000 or the value of the transaction.

The Proposed Rule significantly increases these penalties by authorizing CFIUS to impose a penalty of the greater of up to $5 million or the value of the transaction for failure to make a mandatory filing. For a material violation of the terms of a mitigation agreement, the Proposed Rule authorizes imposition of a penalty of $5 million; or the value of the offending party’s interest in the U.S. business at the time of the breach; or the value of the transaction — whichever is greatest. Notably, these penalties would also be applicable in cases outside the actual CFIUS review, such as in the course of CFIUS monitoring compliance with mitigation agreements.

Response Time

Currently, the regulations do not specify the time within which parties must respond to mitigation proposals — used by CFIUS to attempt to resolve potential national security concerns—from CFIUS. The lack of such a mandatory timeline in some cases has resulted in substantially extended review periods. The Proposed Rule seeks to eliminate such delays by requiring a “substantive” response to the proposed terms within three (3) business days. Extensions may be granted by CFIUS at its discretion, presumably for cause shown.

Penalty Reconsideration

A petition to CFIUS to reconsider a penalty (currently 15 days) and the time for CFIUS to answer such petition (also currently 15 days) would both be extended under the Proposed Rule to 20 days.

Bottom Line

The clarified timelines, the expanded subpoena authority, the emphasis on non-noticed transactions, and the dramatically steepened potential monetary penalties all seem calculated to communicate a shifting focus toward broader review and stronger enforcement. While the majority of CFIUS-reviewed transactions may not be affected, this clearly signaled message reiterates the need to carefully consult  counsel as to whether an anticipated foreign investment is potentially subject to an obligatory filing, and whether, even if not mandatory, submission of at least a short-form Declaration for CFIUS review should be considered as a matter of prudence to avoid post-closing concerns.

CFIUS is accepting public comment on the Proposed Rule until May 15, 2024.