22 January 2021
I. Overview
Former US President Trump during his term of office only a week, before the release of its 13959 No. Executive Order ( "Executive Order") has been modified . The previous executive order prohibits Americans from investing in the securities of Chinese military-related enterprises ("military-related enterprises"), continuing his aggressive attitude toward such military-related enterprises. The revised executive order generally prohibits U.S. persons from trading in all military-related corporate securities (not only investments), and requires U.S. persons to withdraw their investments in all securities held by them before November 11, 2021, and make a provision in 365 Withdraw funds from the securities of future military-related companies within days. We discussed the earlier version of Executive Order 13959 in detail in the previous legal newsletter , and discussed OFAC's interpretation of key clauses in another legal newsletter (these key clauses are generally still valid).
After Executive Order 13959 issued on November 12, 2020 and frequent revisions to its interpretation guidelines by the U.S. Department of the Treasury Office of Foreign Assets Control ("OFAC"), which brought weeks of uncertainty to global legal and financial markets , The Trump administration revised Executive Order 13959. Prior to the amendment, the deadlines, divestments and the scope of prohibited activities contained in Administrative Order No. 13959 had been plagued by relevant parties. The revised executive order answers some of these questions, but there is still whether the Biden administration will revise the executive order or issue more guidelines on it to limit its impact on the U.S. and overseas investment communities.
II. Analysis of the main points of the revised administrative order
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Article 1(b) of Executive Order 13959, which has not been amended, allows the purchase of prohibited military-related corporate securities for the value or sale of such securities before November 11, 2021, so that Americans can divest them Such as banned securities. However, Executive Order No. 13959 does not explicitly prohibit Americans from holding military-related corporate securities after this deadline. The revised executive order clarified this, clarifying that Americans may no longer hold prohibited securities after the withdrawal period of November 11, 2021. Article 1(c) allows the purchase of prohibited military-related enterprise securities for the purpose of divestment for the value or sale of such securities, but it also prohibits the holding of prohibited securities after the applicable divestment date. In other words, mere inaction can make American holders of military-related corporate securities bear legal responsibility. Therefore, keep abreast of the latest list of military-related companies, entities with names similar to those of military-related companies (please refer to FAQ No. 864 ), and funds or other financial instruments that include at least one type of prohibited securities in their investment portfolio ( Please see FAQ # 861 ) is essential.
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Article 4(e) of the previous Administrative Order No. 13959 defined "transaction" as the purchase of any publicly traded securities. The revised administrative order changes the definition of "transaction" to the value of any publicly traded securities purchased or sold. As a result, the amendment emphasizes that Americans will no longer be able to sell prohibited securities after the applicable deadline.
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The revised section (a)(ii) still uses the definition of military-related enterprises in Article 1237(b)(4) of the National Defense Authorization Act of 1999, instead of Article 1260H of the National Defense Authorization Act of 2021. Expanded definition of military-related companies (this definition now includes "contributors to military-civilian integration"). Therefore, the scope of military-related enterprises under Executive Order 13959 is different from the scope of military-related enterprises that the Ministry of National Defense must report to Congress under the National Defense Authorization Act of 2021. Despite this difference, in practice, the revised executive order is likely to prohibit transactions with any new military-related enterprises identified by the Ministry of National Defense under the National Defense Authorization Act for the 2021 Fiscal Year.
III. Frequently Asked Questions
Six weeks after the Trump administration issued Executive Order 13959 on November 12, 2020, OFAC began to answer questions from the private industry regarding Executive Order 13959 through some FAQs (please see our first five questions here) A legal newsletter with answers to frequently asked questions). Since we issued the most recent legal newsletter, OFAC has issued eight more frequently asked questions; General License No. 1 , the license authorization name is similar to the military-related enterprise name on the list, but on January 28, 2021 Transactions that were originally prohibited by entities that were not included in OFAC’s list of non-specially designated Chinese military-related enterprises ("Military-related Enterprises List"); and General License No. 2 , which was added to the military-related enterprises in the entity Authorized transactions that were originally prohibited on stock exchanges within one year after the list. The new FAQ answers questions such as divestment, the definition of "transaction", permitted activities for Americans, market intermediaries and stock exchanges.
FAQ No. 862
FAQ No. 862 states that Americans, including American funds and related market intermediaries and market participants, do not need to withdraw their investment in prohibited securities before January 11, 2021. Indeed, as explained in the revised executive order and in the FAQ No. 872 discussed below, Americans must withdraw their investment in military-related corporate securities by November 11, 2021 and withdraw their investment in future military-related corporate securities within 365 days. . Holding prohibited securities after November 11, 2021 or after the applicable 365-day period will be prohibited.
FAQ No. 863
FAQ No. 863 states that Americans can participate in activities related to military-related companies related to clearing, execution, settlement, custody, transfer agency and back-end services, and other such support services, provided that these activities are not provided to the United States People involved in transactions that were originally prohibited.
FAQ No. 864
FAQ No. 864 states that Administrative Order No. 13959 applies to the securities of entities whose names are completely or very similar to the names of military-related enterprises. This includes transactions with entities including subsidiaries of military-related companies, because the names of these entities are similar to the names of previously designated military-related companies, but they are not on the list of military-related companies. When OFAC released FAQ No. 864, it reiterated that it will continue to work hard to update the list of military-related companies, including detailed information such as company name, alias (ie "AKA" title), issuer name, and stock code.
However, OFAC issued FAQ No. 864 two days after the release of General License No. 1 , which authorizes the military-related names on the list before 9:30 am Eastern Time on January 28, 2021. Entities with similar names but not included in the list of military-related enterprises conduct prohibited transactions. However, after this time, transactions with entities whose names are similar to those of military-related enterprises but have not been added to the list of military-related enterprises will be prohibited.
FAQ No. 865
FAQ No. 865 clarifies that market intermediaries and other participants can participate in auxiliary or intermediary activities, which are necessary during the closing period of the relevant capital reduction, or were not prohibited by administrative orders. Transactions between U.S. individuals and investment funds for divestment purposes are also allowed.
FAQ No. 871
FAQ No. 871 concerns a stock exchange operated by a U.S. person, and cited General License No. 2, which authorizes originally prohibited transactions involving stock exchanges within one year after the entity is added to the list of military-related enterprises. Together with General License No. 1, the new term contained in these two general licenses emphasizes that Americans and other securities holders must not only monitor which entities are added to the military-related enterprise list, but also monitor every transaction. Nature to ensure full compliance.
FAQ No. 872
FAQ No. 872 states that Americans must divest their banned securities before November 11, 2021 or 365 days when a military-related company is added to this list. As mentioned earlier, after this period, the possession of prohibited securities is prohibited.
FAQ No. 873
FAQ No. 873 restates the revised definition of "transaction", which is the purchase or sale of any publicly traded securities.
FAQ No. 874
In response to further questions regarding the scope of permitted activities for Americans seeking to divest, FAQ No. 874 reiterated that any transactions involving military-related companies conducted by Americans on November 11, 2021 for the purpose of divesting capital are permitted. Within one year after the new military-related companies are added to the list of military-related companies, Americans can conduct prohibited transactions for the purpose of divestment.
IV. Conclusion
Although the revised Executive Order has provided much-needed clarification on the scope of Executive Order No. 13959, it may still take some time for industry insiders to fully understand the exact scope of permitted and prohibited transactions, especially as the Biden administration takes office. Indeed, although the Trump administration has left the White House, sanctions on military-related companies are likely to continue. At the same time, sanctions are accompanied by increased pressure on China and its "military-civilian integration" policy.
The Biden administration has stated that it will maintain a tough attitude towards China. President Biden recently hired a long-time critic of China to serve as the cabinet post of the U.S. Trade Representative, and stated that he will not immediately abolish the tariffs imposed by the Trump administration, and President Trump has left a series of direct or Administrative orders directed against China indirectly. On January 15, OFAC added several Hong Kong people to its list of specially designated nationals and blocked persons ("SDN list"), and issued basic regulations for the implementation of Executive Order No. 13936 , which authorizes participation in a series of so-called The parties that undermine Hong Kong’s democratic process or democratic institutions impose blocking sanctions. Please refer to our previous legal newsletter on the Hong Kong Autonomy Act here .
At the same time, global financial institutions should take measures to carefully evaluate transactions involving the purchase of military-related corporate securities and securities with similarly-named entities that may have U.S. connections. In particular, for foreign financial institutions that manage or hold securities on behalf of U.S. investors Any index or mutual fund that includes securities of companies involved in the military may also be affected. The national security team of Meifu Law Firm will continue to monitor this situation and help you to be aware of any major developments or clarify information from OFAC.
For further information, please contact:
B. Chen Zhu, Partner, Morrison Foester
chenzhu@mofo.com
