Industry Should Monitor Enforcement of 'Ambitious' FIRRMA Before Drawing Conclusions, Former Treasury Counsel Says

While it is too soon to tell whether recent U.S. reforms of foreign direct investment screening will prove successful, the regulations introduced novel provisions to incentivize improved global investment screening, according to a former investment screening counsel for the Treasury Department. The Foreign Investment Risk Review Modernization Act (see 2001140060) also appears to fill many of the gaps encountered by previous U.S. investment screening efforts, said Anne Salladin, a Hogan Lovells lawyer and former senior counsel to the chairperson of the Committee on Foreign Investment in the U.S.

But while Salladin praised some of the new regulations -- calling FIRRMA’s excepted state concept “remarkable” -- industry should wait to see how Treasury strikes a balance between open investment and protecting national security before drawing major conclusions. “It’s too soon to tell in my view,” Salladin said during a Feb. 26 panel discussion hosted by the Asia Society. “I think we're going to need to see how the regulations are interpreted, and in particular how enforcement is going to be carried out.”

Salladin did say, however, that Treasury and Congress “deserve a lot of credit” for creating regulations “that really try to attack certain areas that were a concern,” such as transactions involving critical technologies. “It's probably an understatement to say that FIRRMA was an ambitious effort,” said Salladin, who worked in Treasury’s Office of the Assistant General Counsel for International Affairs, where she aided reviews of more than 500 CFIUS filings. “It is something that was needed to fill the gaps in the old regulations.”

Among the changes introduced by FIRRMA is the excepted state provision, which allows investors from certain countries -- the United Kingdom, Canada and Australia -- to benefit from certain CFIUS exemptions. Treasury said those countries were chosen in part due to their significant intelligence sharing with the U.S., a detail that Salladin said may incentivize other countries to improve cooperation with the U.S. and boost foreign investment screening. “This is kind of a carrot for countries to upgrade their investment screening process and make it into something of a multilateral effort,” Salladin said. The U.S. will meet with Japan and the European Union to stress improved controls over transactions involving critical technologies (see 2002260042) and is prioritizing improving global investment screening with allies.

Salladin also said the U.K., Canada and Australia were likely chosen due to their “long history” with CFIUS filings. “There’s a relative level of comfort with acquirers from those countries that may not exist in other situations,” she said. The excepted state and investor concepts also give Treasury the ability to update its investment screening regulations to add or remove excepted states, which was “not the case with the prior regime,” Salladin said. Speaking before the panel, Thomas Feddo, Treasury’s assistant secretary of investment security, said he expects his office to consider adding other states. “This is one of the more remarkable aspects of the law,” Salladin said. “For the first time ever, CFIUS legal framework has identified states that can receive preferential treatment, and that in itself is a novelty.”

The excepted states do not include Japan, which some industry representatives lobbied for in comments (see 2001140060). The country passed a bill in November to tighten regulations surrounding foreign investment, which partly arose from concerns that Japanese companies could be used as loopholes to acquire sensitive technologies, said Masaki Ishikawa, former director-general of the Trade and Economic Cooperation Bureau in Japan’s Ministry of Economy, Trade and Industry.

Speaking during the panel, Ishikawa said an increasing number of Japanese companies involved in research and development have experienced technology theft in recent years. “There has been an increasing concern of transfer of critical technologies from Japan to foreign investors,” Ishikawa said, adding that the new law lowered the threshold for foreign investments that are eligible for review.

But Japan has stressed that it does not want to unnecessarily cut off foreign investment, especially in technology sectors, Ishikawa said. He said Japan is working on exemptions related to the law, but those regulations have not yet been released. “My understanding is that the Japanese government has been working seriously to mitigate the burden on investors,” he said.

Japan also plans to publish a list that classifies foreign investors and companies into three categories, Ishikawa said: companies that are not subject to the new investment screening regulations, companies that are subject to the regulations but are eligible for certain exemptions, and companies that are subject to the regulations and have no exemptions. He said Japan may release a draft of those regulations as early as next month. “This list could help investors deal with the procedures more easily,” he said.