Division of Examinations Issues Risk Alert on Securities Investment that Finance Communist Chinese Military Companies

08 January 2021 Foley Funds Legal Focus Blog
Authors: Peter D. Fetzer Stuart E. Fross Stephen M. Meli Margaret G. Nelson Thomas J. Krysa

On January 6, 2021, the Division of Examinations (“Division”) issued a Risk Alert to notify investment advisers, broker-dealers, and other market participants of a recent action relating to investments in securities associated with Communist Chinese military companies, as well as investors transacting in such securities.

Why We are Sending this Alert:  Investment advisers, broker-dealers, and other market participants should know that effective as of January 11, 2021 at 9:30 a.m. EST, U.S. persons, which includes both individuals and entities, are prohibited from transacting in certain securities and derivatives of Communist China military companies (“CCMCs”), unless such transactions are for purposes of divestment and occur through November 11, 2021.

Details of Division’s Risk Alert:  On November 12, 2020, President Trump signed Executive Order 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies” (the “EO”).The EO states that beginning on January 11, 2021 at 9:30 a.m. EST, U.S. persons, which includes both individuals and entities, will be prohibited from transacting in certain securities and derivatives of CCMCs, unless such transactions are for purposes of divestment and occur through November 11, 2021.  Examples of financial instruments covered by this provision include, but are not limited to, derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (ADRs), global depositary receipts (GDRs), exchange-traded funds (ETFs), index funds, and mutual funds, to the extent such instruments also meet the definition of “security” as defined in section 4(d) of EO 13959.2

The Treasury Department’s Office Foreign Asset Control (“OFAC”) has published guidance concerning the EO on several occasions, available here.

Practice Considerations:  Investment advisers, broker-dealers, and other market participants should:

  • Review and assess the impact of the EO for their own investments as well as on behalf of investors and clients.
  • Review and assess the impact of the EO on their processes related to investments on their own behalf and on behalf of investors and clients.
  • Continue to review OFAC’s website for additional guidance.

------------------------------------------------------

1 https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-securities-investmentsfinance-communist-chinese-military-companies; 85 Fed. Reg. 73185 (Nov. 17, 2020).

2 Office of Foreign Assets Control of the U.S. Department of Treasury, Frequently Asked Question 860 (Dec. 28, 2020); https://home.treasury.gov/policyissues/financial-sanctions/faqs/860.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.