Calls for clarity over rules on foreign investment 'risk'

The business community and investors have urged the US Treasury to clarify how foreign investments in the United States will be reviewed for national security risks. At a public meeting to discuss the Treasury's proposed rules, there were calls for clarification on what needs to be submitted, how Congress is involved and what constitutes control of a US business.

"There is a grey area in the definition of control. It could be refined further," Iain McPhie, an attorney with Squire Sanders, said after the meeting. McPhie represents foreign and US businesses.

The proposed regulations put into effect a law passed to strengthen reviews in the wake of Dubai Ports World's controversial 2006 deal to buy US port operations, which was withdrawn after congressional objections.

They also follow purchases by sovereign wealth funds – investment funds owned by foreign governments – of stakes worth billions of dollars in some of the largest US banks hit by the sub-prime mortgage mess. The proposed rules, which were crafted by the Treasury Department, said that transactions in which a foreign entity acquires less than a 10 per cent stake in a US business are not automatically exempt from a review by the Committee on Foreign Investment in the United States (CFIUS).

However, the Treasury Department does give examples of where a foreign deal will not be covered by CFIUS.

"There's a provision that lists types of transactions that are not covered. People are looking at it as a safe harbour," said McPhie. The proposed regulations define control not in terms of percentage of shares or board seats, but as "the ability to exercise certain powers over important matters affecting a business", even if the foreign entity does not exercise that power.

Commentors also urged the Treasury to clarify Congress' role and said the proposed rules potentially implies a partnership approach with lawmakers.

Although Congress does not have a direct role in CFIUS reviews, the law requires CFIUS to keep lawmakers better informed.

"The need to contact Congress in advance to clear the ground is an example of not a predictable environment," Lars Fjell Hansson, the Royal Norwegian Embassy's economy and finance counsellor, said at the meeting. McPhie agreed, saying foreign investors are opposed to increased congressional input.

Others said that requirements to provide detailed information about the foreign company's executives could be burdensome.
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