On June 3, 2021, President Biden issued a new executive order (E.O.), “Addressing the Threat from Securities Investments that Finance Certain Companies of the People’s Republic of China” (E.O. 14032). The E.O. prohibits U.S. persons from investing in publicly traded securities anywhere in the world that are issued by, or tied to, companies deemed to operate in China’s defense and surveillance technology sectors, as identified in the Annex to the E.O. and on the U.S. Treasury Department Office of Foreign Assets Control’s (OFAC’s) Non-SDN Chinese Military-Industrial Complex Companies (CMICs) List. In terms of its goals and prohibitions, E.O. 14032 stays the course set by E.O. 13959 that former President Trump issued last November to impose sanctions on Communist Chinese Military Companies (CCMCs). However, E.O. 14032 and the guidance issued along with it both expand and limit the previous E.O. in several important ways by (i) broadening the categories of companies and their subsidiaries that could be targeted, (ii) setting new deadlines for compliance, (iii) revoking E.O. 13959’s prohibitions, and (iv) clarifying that U.S. persons are not prohibited from facilitating investments in CMIC securities by non-U.S. investors. For our past coverage of CCMC-related sanctions, see our client alerts Trump Administration Gives Teeth to Pentagon List and Restricts U.S. Investment in Publicly Traded Securities of Chinese Military Companies Operating in the United States, New OFAC FAQs Clarifying and Broadening Sanctions on Chinese Military Companies, Trump Administration Continues Its Aggressive Approach Toward Chinese Military Company Sanctions, and U.S. Court Blocks Trump-Era Designation of Xiaomi as a Chinese Military Company and Permits Continued Trading in its Securities.
- E.O. 14032 does not materially change the CCMC sanctions program restrictions applicable to companies designated pursuant to the E.O. The main prohibition on U.S. person purchases or sales of publicly traded securities of CCMCs – now CMICs – remains intact. As with the CCMC program, U.S. persons continue to be allowed to otherwise deal with CMICs. However, E.O. 14032 replaces and supersedes all five of E.O. 13959’s operative sections with expanded and/or refined criteria targeting the “defense and related materiel sector or the surveillance technology sector” of China’s economy and revokes E.O. 13974 – the E.O. that originally amended E.O. 13959.
- E.O. 14032 broadens the scope of companies potentially subject to designation, including not only those linked to the “military industrial complex” in China, but also the “surveillance technology sector” of the Chinese economy. The E.O. continues to address China’s Military-Civil Fusion strategy by authorizing sanctions on companies that operate in the defense and related materiel sector, or that control or are controlled by persons (individuals or entities) that do, thereby expanding the companies targeted by E.O. 13959. E.O. 14032 targets persons who are identified as being associated with the Chinese surveillance technology sector to combat the use of Chinese surveillance technology within and outside China to “facilitate repression or serious human rights abuse,” highlighting U.S. government concerns over the Chinese government’s treatment of Hong Kong and Xinjiang. The initial list of CMICs includes at least one new company that appears to be a surveillance technology company.
- E.O. 14032 resets and extends the deadlines to comply with its prohibitions. The private sector has 60 days from June 3, 2021 (i.e., until August 2, 2021) to cease new investments in the companies listed in the Annex to the E.O., and a year (i.e., until June 2, 2022) to divest any investments made before the effective date of prohibition. The same 60 day – and one year – grace periods apply to companies that may be added to OFAC’s CMIC List (f.k.a. the CCMC List) in the future. Importantly, the new E.O. fully revoked the previous prohibitions under E.O. 13959, as amended, so that no prohibitions apply between June 3 and August 2, 2021.
- OFAC added more entities to its CMIC List than were previously included on its CCMC List, although there are many overlaps. Although the number of sanctioned entities increased following the issuance of E.O. 14032, many of the 59 CMICs were also on the old CCMC List (except, notably, three entities that filed suit in U.S. District Court in D.C. challenging their inclusion on the CCMC List). Further, OFAC issued a number of Frequently Asked Questions (FAQs) that soften the residual portions of the CCMC program that came under strong criticism, and give a narrower interpretation of the prohibitions. For example, FAQ 899 clarifies that “[o]nly entities whose names exactly match the names of the entities on the [CMIC] List are subject to the prohibitions”; under the CCMC program, the prohibitions also applied to entities whose names “closely match[ed]” listed CCMCs. To facilitate these changes, E.O. 14032 revises E.O. 13959 by authorizing only the Secretary of the Treasury, in consultation with the Secretary of State and, as appropriate, the Secretary of Defense, to add entities to the CMIC List, whereas previously both the Defense and Treasury Departments determined which entities were CCMCs. This clarification should reduce the likelihood that the Biden administration has to confront the types of legal battles that plagued the Trump administration due to E.O. 13959, given the Treasury Department’s familiarity with the legal requirements underpinning sanctions programs.
- There is no broad prohibition on actions by U.S. persons for foreign entities. The new OFAC FAQs also clarify, as discussed in further detail below, issues that had stymied U.S. companies with subsidiaries or affiliates abroad, clearly noting that U.S. persons – including those employed by non-U.S. entities – can be involved in purchases or sales of CMIC securities. That is, U.S. persons may provide investment advisory, investment management, and similar services to non-U.S. persons, including foreign entities and funds, in connection with a non-U.S. person’s purchase or sale of a prohibited security, so long as the purchase or sale is not intended to circumvent sanctions by, for example, engaging in the purchase or sale for the ultimate benefit of a U.S. person.
- The issuance of E.O. 14032 by the Biden administration signals its willingness to further the previous administration’s tough stance on China. E.O. 14032 is merely one piece of a larger effort to enhance the Unites States’ competitive strategy against China and promote American interests and values. The Biden administration also intends for E.O. 14032 to clarify and fortify E.O. 13959’s framework to ensure that such policies are on more solid legal footing and protected against future legal challenges.
For much of the private sector, E.O. 14032 serves as a welcome revision to E.O. 13959 by clarifying previously convoluted prohibitions that caused widespread confusion. The new E.O. does not, however, scale back the Trump administration’s aggressive posture toward China or change its direction. On the contrary, this new E.O., coming within the first six months of President Biden’s term, and recent activity in Congress to increase pressure on China, such as the recently proposed amendment to the Endless Frontiers Act titled “Meeting the China Challenge Act of 2021,” evidence a continuity of that posture. Accordingly, global financial institutions and other companies should take steps to carefully monitor changes to OFAC’s CMIC List and thoroughly evaluate business involving other relevant areas of U.S. government concern, including with respect to Hong Kong, Xinjiang, and sensitive technology.
For those who wish to learn more about E.O. 14032 and how its prohibitions may apply in practice, we have included a “deep dive” into OFAC’s new and updated CMIC FAQs below.
Deep Dive: OFAC FAQs
Following the issuance of E.O. 14032, OFAC issued guidance to clarify the E.O.’s scope and answer pressing questions that had, since E.O. 13959 was issued on November 12, 2020, caused confusion among market participants. Specifically, in addition to updating several FAQs relating to E.O. 13959, OFAC issued eight new FAQs, as enumerated below.
- FAQ 898 explains that E.O. 14032 amends E.O. 13959 and revokes E.O. 13974. It also outlines the scope of E.O. 14032, as captured in the discussion above, and notes OFAC’s publication of the CMIC List and the changes made to the E.O. 13959-related FAQs.
- FAQ 899 clarifies that only the entities on the CMIC List, including entities whose names exactly match the names of entities on that list, are subject to E.O. 14032. FAQ 899 also reiterates the updated effective dates and restates that purchases or sales made for divestment purposes for one year after an entity is added to the CMIC List are allowed.
- FAQ 900 explains that OFAC plans to use its discretion to identify persons whose operations, now or in the past, include or support surveillance of persons by Chinese technology companies outside China or in “the development, marketing, sale, or export of Chinese surveillance technology that is, was, or can be used for surveillance of religious or ethnic minorities or to otherwise facilitate repression or serious human rights abuse.”
- FAQ 901 clarifies that OFAC expects U.S. persons, including financial institutions, security exchanges, and other market intermediaries and participants, to rely upon the information available to them in the ordinary course of business when conducting due diligence to determine if a purchase or sale is permissible under the new E.O.
- FAQ 902 provides that U.S. persons are not prohibited from providing investment advisory, investment management, or similar services (such as advising on, authorizing, directing, or approving purchases or sales) to a non-U.S. person who purchases or sells a prohibited security, provided that the underlying purchase or sale would not otherwise violate the new E.O. (e.g., neither the purchase nor the sale of the security is for the “ultimate benefit of a U.S. person” or the purchase or sale is not intended to evade the new E.O.’s prohibitions).
- FAQ 903 clarifies that U.S. persons who work at non-U.S. entities may facilitate purchases or sales of prohibited securities on behalf of their employer, provided that the U.S. person’s involvement is in the ordinary course of their employment and the purchase or sale is otherwise permissible under the new E.O.
- FAQ 904 explains that U.S. market makers and non-U.S. market makers with U.S. person employees may engage in activities necessary to divest during the authorized period.
- FAQ 905 clarifies that U.S. persons may continue to engage with entities on the CMIC List as long as the activities do not involve the purchase or sale of prohibited securities as provided for in the new E.O.
- FAQ 857 clarifies that the prohibition on U.S. person purchases and sales of CMIC securities only applies to subsidiaries of CMICs if those subsidiaries are listed on OFAC’s CMIC List. Furthermore, OFAC’s 50 Percent Rule, which provides that any entity that is owned 50 percent or more by one or more persons on OFAC’s List of Specially Designated Nationals and Blocked Persons is subject to the same restrictions as its sanctioned owners, does not apply to entities listed only pursuant to E.O. 13959. Before this update, FAQ 857 previously provided that OFAC intended to list CCMC subsidiaries in accordance with the 50 Percent Rule or if the subsidiary was owned or controlled by one or more CCMCs.
- FAQ 859 clarifies that the term “publicly traded securities” includes any “security,” as defined in the Securities Exchange Act of 1934, denominated in any currency that trades on a security exchange or “over-the-counter,” regardless of jurisdiction. While E.O. 14032 preserved E.O. 13959’s definition of “publicly traded securities” to include the Securities Exchange Act of 1934 definition of “security,” E.O. 14032 omits the second half of E.O. 13959’s “publicly traded securities” definition, which specified that “currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding 9 months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited, shall be a security for purposes of this order.”
- FAQ 860 provides examples of the types of financial instruments that may be considered “publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such” publicly traded securities, to include derivatives (e.g., futures, options, and swaps), warrants, American depositary receipts, global depositary receipts, exchange-traded funds (ETFs), index funds, and mutual funds. Prior to the update, FAQ 860 addressed the financial instruments implicated by the prohibition’s application to “any securities that are derivative of, or are designed to provide investment exposure to such” securities, instead of “publicly traded securities” as it reads today.
- FAQ 861 clarifies that the new E.O. continues to prohibit U.S. person investments in foreign funds, such as ETFs or other mutual funds, that contain CMIC securities, no matter how small the position (the “One Drop Rule”). The updates to FAQ 861 are minor, non-substantive changes (i.e., replacing “Communist Chinese Military Company” with “CMIC,” and “E.O. 13959” with “E.O. 13959, as amended”).
- FAQ 863 clarifies that U.S. persons may engage in the following support services, provided that the underlying transaction is otherwise permissible: clearing, execution, settlement, custody, transfer agency, back-end services, as well as other such support services. Like FAQ 861, only minor, non-substantive changes were made to FAQ 863.
- Relatedly, FAQ 865 explains that market intermediaries, including market makers, may facilitate divestment from prohibited securities, including divestment by investment fund managers, as long as the ancillary or intermediary activities are made during the appropriate divestment period or otherwise do not run afoul of the prohibitions in the new E.O. Furthermore, U.S. persons may make purchases or sales “involving investment funds that are seeking to divest” during the applicable divestment period. The old FAQ 865 also made reference to the One Drop Rule and FAQ 862 (since deleted), which clarified that E.O. 13959 did not require U.S. persons to divest prohibited securities by January 11, 2021.
- FAQ 871 clarifies that transactions and activities by securities exchanges operated by U.S. persons involving the purchase or sale of prohibited securities is permissible. FAQ 871 had previously referred to a general license that authorized these types of transactions for one year following an entity’s addition to the CCMC List.
MoFo’s National Security practice will continue to monitor the situation and keep you apprised of any significant developments.
 In full, the prohibition applies to “the purchase or sale of any publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities, of any” CMIC. “[P]ublicly traded” is a new modifier to the phrase “securities that are derivative of such securities or are designed to provide investment exposure to such securities….” Previously, there was confusion among market participants about whether and which categories of non-publicly traded derivatives were covered by the prohibition.
 The three entities are Gowin Semiconductor, Luokung Technology Corporation, and Xiaomi Corporation.
 The Secretary of Defense is still required to provide annual lists of and reports on CMICs by the law that gave rise to the “Pentagon List,” section 1237 of the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 and section 1260H of the National Defense Authorization Act for Fiscal Year 2021. To that end, on the same day President Biden issued E.O. 14032, the Department of Defense released its own list of 47 Chinese Military Companies. This list does not impose new restrictions and contains most of the same entities included on OFAC’s CMIC List.
 Alex Leary and Gordon Lubold, Biden Expands Blacklist of Chinese Companies Banned from U.S. Investment, WSJ (June 3, 2021), available at https://www.wsj.com/articles/biden-expands-blacklist-of-chinese-companies-banned-from-u-s-investment-11622741711.
 Kellie Mejdrich, Biden broadens Trump policy restricting investment in Chinese firms, Politico (June 3, 2021), available at https://www.politico.com/news/2021/06/03/biden-restricting-investment-chinese-firms-491784.
 OFAC deleted a number of FAQs relating to E.O. 13959. Notably, OFAC deleted FAQ 872, which clarified that possession of prohibited securities by a U.S. person after November 11, 2021 (or one year after an entity was added to the CCMC List) was prohibited: “United States persons are thus prohibited from holding covered securities after the relevant deadline.”