Pilot Program Gives Foreign Investment Watchdog Sharper Teeth

Nov. 10 marks the beginning of a pilot program that will tighten federal regulations on non-controlling foreign investment in 27 sensitive industries such as technology and telecommunications. Not specifically addressed in the pilot, but due for stepped-up enforcement later, is real estate investment by overseas entities, especially from China.

The year-long pilot program is intended to put teeth into provisions of the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018, signed into law by President Trump in August.

“These temporary regulations address specific risks to U.S. critical technology, while informing the development of final regulations that will fully implement FIRRMA,” Treasury Secretary Steven Mnuchin said when the pilot was announced Oct. 10.

FIRRMA authorizes the Treasury Department’s Committee on Foreign Investment in the United States, which was created in 1950, to conduct pilot programs to implement provisions in the legislation that did not become effective immediately upon enactment. Full implementation of FIRRMA will occur no later than February 2020.

Although CFIUS looks at deals from other foreign countries—for instance, Bayer AG’s $66-billion takeover of Monsanto last year needed the committee’s signoff—Reuters reported that much of its highest profile work focuses on Chinese companies, many with government links, which have tried to buy U.S. high-end semiconductor makers and other tech companies.

The interim regulations are likely to lead to more filings with the committee, Sylvia Lis of law firm Baker McKenzie told Reuters. “It has a significant impact,” she said.

Although the pilot program doesn’t focus on real estate investment, FIRRMA itself added language that broadens CFIUS’ jurisdiction to “a purchase, lease, or concession by or to a foreign person of real estate located in proximity to sensitive government facilities.”

Also explicitly spelled out in FIRRMA are: “other investments” in certain U.S. businesses that afford a foreign person access to material nonpublic technical information in the possession of the U.S. business, membership on the board of directors, or other decision-making rights, other than through voting of shares; any change in a foreign investor’s rights resulting in foreign control of a U.S. business or an “other investment” in certain U.S. businesses; and any other transaction, transfer, agreement, or arrangement designed to circumvent CFIUS jurisdiction.

Even before FIRRMA was enacted, though, CFIUS had stepped into the commercial real estate sector more than once. In August, the Wall Street Journal reported that CFIUS had ordered Chinese conglomerate HNA Group Co. to sell its majority stake in 850 Third Ave. The Midtown Manhattan office tower houses a police precinct tasked with protecting Trump Tower.

The committee reportedly was behind Blackstone’s decision to remove the Hotel del Coronado in San Diego from its $6.5-billion sale of the Strategic Hotels & Resorts portfolio to Anbang in 2016. The landmark property is located on the same peninsula as a U.S. naval base.

Anbang’s single-asset purchase of the Waldorf Astoria in 2015, also from Blackstone, had previously come under CFIUS scrutiny. In that instance, though, the committee signed off on the deal.

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