New Executive Order Targets Investments in Chinese Companies Linked to the Military

On November 12, 2020, the President issued Executive Order 13959 (the Order) to prohibit U.S. persons from purchasing the publicly traded securities of certain companies that are affiliated with China’s military. While the Order does not come into force until January 11, 2021, U.S. financial services companies and U.S. investors will need to carefully review the Order to assess its potential impact.

What companies are targeted by the Order?

The Order applies to the securities of any company designated as a Communist Chinese military company” (CCMC) by the U.S. Department of Defense (DoD) or Treasury’s Office of Foreign Assets Control (OFAC). The Order initially applies to 31 companies previously designated as CCMCs by DoD earlier this year. The Order will also apply to newly listed CCMCs 60 days after they are designated by the U.S. government.

As written, the Order does not appear to apply to subsidiaries of CCMCs that are not explicitly designated by DoD or OFAC. Further guidance from OFAC on that point would be helpful, however.

What securities are subject to the Order?

The Order applies to all publicly traded securities of CCMCs, including securities that are derivative of or are designed to provide investment exposure to CCMC securities. The Order defines securities” to include those specified in Section 3(a)(10) of the Securities Exchange Act of 1934.

Are there any exceptions?

The Order allows U.S. persons to divest from existing holdings in the currently listed CCMCs until November 21, 2021, provided that the securities are sold to non-U.S. persons. The Order provides for a 365-day divestment period for CCMCs that are designated in the future. Similar divestment periods are available under various OFAC sanctions programs that target securities.

What’s next?

We expect OFAC to issue guidance clarifying the scope of the Order before it becomes effective, as the agency has done for similar sanctions programs in the past. There are a number of questions that could be addressed by the agency, including how the Order will apply to U.S. broker dealers who facilitate divestment activities by U.S. persons and transactions by non-U.S. persons, U.S. and non-U.S. funds that are backed by CCMC securities, and to what extent the Order will apply to subsidiaries of listed CCMCs.

Notably, the Order takes effect only nine days before the inauguration of the Biden administration. The next administration could suspend or modify the Order, although immediate action on the Order may not be a top priority given other challenges the administration is expected to face upon taking office.