The Committee on Foreign Investment in the United States (CFIUS).(Congressional Research Service)(Report)

 Contents  Background Establishment of CFIUS The "Exon-Florio" Provision Treasury Department Regulations The "Byrd Amendment" The Amended CFIUS Process    Procedures    Factors for Consideration    Confidentiality Requirements    Mitigation and Tracking    Congressional Oversight CFIUS Since Exon-Florio Impact of the Exon-Florio Process on CFIUS Conclusions 

February 4, 2010

Summary

The Committee on Foreign Investment in the United States (CFIUS) is comprised of 9 members, two ex officio members, and other members as appointed by the President representing major departments and agencies within the federal Executive Branch. While the group generally has operated in relative obscurity, the proposed acquisition of commercial operations at six U.S. ports by Dubai Ports World in 2006 placed the group's operations under intense scrutiny by Members of Congress and the public. Prompted by this case, some Members of the 109th and 110th Congresses questioned the ability of Congress to exercise its oversight responsibilities given the general view that CFIUS's operations lack transparency. Other Members revisited concerns about the linkage between national security and the role of foreign investment in the U.S. economy. Some Members of Congress and others argued that the nation's security and economic concerns have changed since the September 11, 2001, terrorist attacks and that these concerns were not being reflected sufficiently in the Committee's deliberations. In addition, anecdotal evidence seemed to indicate that the CFIUS process was not market neutral. Instead, a CFIUS investigation of an investment transaction may have been perceived by some firms and by some in the financial markets as a negative factor that added to uncertainty and may have spurred firms to engage in behavior that may not have been optimal for the economy as a whole.

In the first session of the 110th Congress, the House and Senate adopted S. 1610, the Foreign Investment and National Security Act of 2007. On July 11, 2007, the measure was sent to President Bush, who signed it on July 26, 2007. It is designated as P.L. 110-49. On January 23, 2008, President Bush issued Executive Order 13456 implementing the law. The Executive Order also established some caveats that may affect the way in which the law is implemented. These caveats stipulate that the President will provide information that is required under the law as long as it is "consistent" with the President's authority "to (i) conduct the foreign affairs of the United States; (ii) withhold information the disclosure of which could impair the foreign relations, the national security, the deliberative processes of the Executive, or the performance of the Executive's constitutional duties; (iii) recommend for congressional consideration such measures as the President may judge necessary and expedient; and (iv) supervise the unitary executive branch." Despite the relatively recent passage of the amendments, Members of Congress and others have questioned the performance of CFIUS and the way the Committee reviews cases involving foreign governments, particularly with the emergence of direct investments through sovereign wealth funds (SWFs). There have been few policy statements by the Obama Administration to assess its approach to foreign direct investment, but the Administration seems to supportive of a free flow of direct investment.

Background

The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee that serves the President in overseeing the national security implications of foreign investment in the economy. Originally established by an Executive Order of President Ford in 1975, the committee generally has operated in relative obscurity. (1) According to a Treasury Department memorandum, the Committee originally was established in order to placate Congress, which had grown concerned over the rapid increase in investments by Organization of the Petroleum Exporting Countries (OPEC) countries in American portfolio assets (Treasury securities, corporate stocks and bonds), and to respond to concerns of some that much of the OPEC investments were being driven by political, rather than by economic, motives. (2)

Thirty years later, public and congressional concerns about the proposed purchase of commercial port operations of the British-owned Peninsular and Oriental Steam Navigation Company (P&O) (3) in six U.S. ports by Dubai Ports World (DP World) (4) sparked a firestorm of criticism and congressional activity during the 109th Congress concerning CFIUS and the manner in which it operates. Some Members of Congress and the public argued that the nation's economic and national security concerns had fundamentally changed as a result of the September 11, 2001, terrorist attacks on the United States and that these changes required a reassessment of the role of foreign investment in the economy and in the nation's security. As a result of the attention by both the public and Congress, DP World officials announced that they would sell off the U.S. port operations to an American owner. (5) On December 11, 2006, DP World officials announced that a unit of AIG Global Investment Group, a New York-based asset management company with large assets, but no experience in port operations, would acquire the U.S. port operations for an undisclosed amount. (6)

Members of Congress introduced more than 25 bills in the 2nd session of the 109th Congress that addressed various aspects of foreign investment since the proposed DP World transaction. In the 1st session of the 110th Congress, Members approved, and President Bush signed, a measure that was designated as P.L. 110-49 that alters the CFIUS process in order to provide greater oversight by Congress and increased reporting by the Committee on its decisions. In addition, P.L. 110-49 broadened the definition of national security and required greater scrutiny by CFIUS of certain types of foreign direct investments. The law demonstrated the concern some Members had with the way CFIUS operated and with the lack of transparency in the CFIUS review process that some Members believed had hampered Congress's ability to exercise its oversight responsibilities. Not all Members were satisfied with the law. Some Members argued that the law remained deficient in reviewing investment by foreign governments through sovereign wealth funds (SWFs), an issue that was just beginning to attract attention when the law was adopted.

Establishment of CFIUS

President Ford's 1975 Executive Order established the basic structure of CFIUS, and directed that the "representative" (7) of the Secretary of the Treasury be the chairman of the Committee. The Executive Order also stipulated that the Committee would have "the primary continuing responsibility within the Executive Branch for monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy on such investment." In particular, CFIUS was directed to: (1) arrange for the preparation of analyses of trends and significant developments in foreign investments in the United States; (2) provide guidance on arrangements with foreign governments for advance consultations on prospective major foreign governmental investments in the United States; (3) review investments in the United States which, in the judgment of the Committee, might have major implications for United States national interests; and (4) consider proposals for new legislation or regulations relating to foreign investment as may appear necessary. (8)

President Ford's Executive Order also stipulated that information submitted "in confidence shall not be publicly disclosed" and that information submitted to CFIUS be used "only for the purpose of carrying out the functions and activities" of the order. In addition, the Secretary of Commerce was directed to perform a number of activities, including

(1) obtaining, consolidating, and analyzing information on foreign investment in the United States;

(2) improving the procedures for the collection and dissemination of information on such foreign investment;

(3) the close observing of foreign investment in the United States;

(4) preparing reports and analyses of trends and of significant developments in appropriate categories of such investment;

(5) compiling data and preparing evaluation of significant transactions; and

(6) submitting to the Committee on Foreign Investment in the United States appropriate reports, analyses, data, and recommendations as to how information on foreign investment can be kept current.

The Executive Order, however, raised questions among various observers and government officials who doubted that federal agencies had the legal authority to collect the types of data that were required by the order. As a result, Congress and the President sought to clarify this issue, and in the following year President Ford signed the International Investment Survey Act of 1976. (9) The act gave the President "clear and unambiguous authority" to collect information on "international investment." In addition, the act authorized "the collection and use of information on direct investments owned or controlled directly or indirectly by foreign governments or persons, and to provide analyses of such information to the Congress, the executive agencies, and the general public." (10)

By 1980, some Members of Congress had come to believe that CFIUS was not fulfilling its mandate. Between 1975 and 1980, for instance, the Committee had met only ten times and seemed unable to decide whether it should respond to the political or the economic aspects of foreign direct investment in the United States. (11) One critic of the Committee argued in a congressional hearing in 1979 that, "the Committee has been reduced over the last four years to a body that only responds to the political aspects or the political questions that foreign investment in the United States poses and not with what we really want to know about foreign investments in the United States, that is: Is it good for the economy?" (12)

From 1980 to 1987, CFIUS investigated a number of foreign investments, mostly at the request of the Department of Defense. In 1983, for instance, a Japanese firm sought to acquire a U.S. specialty steel producer. The Department of Defense subsequently classified the metals produced by the firm because they were used in the production of military aircraft, which caused the Japanese firm to withdraw its offer. Another Japanese company attempted to acquire a U.S. firm in 1985 that manufactured specialized ball bearings for the military. The acquisition was completed after the Japanese firm agreed that production would be maintained in the United States. In a similar case in 1987, the Defense Department objected to a proposed acquisition of the computer division of a U.S. multinational company by a French firm because of classified work engaged in by the computer division. The acquisition proceeded after the classified contracts were reassigned to the U.S. parent company. (13)

The "Exon-Florio" Provision

In 1988, amid concerns over foreign acquisition of certain types of U.S. firms, particularly by Japanese firms, Congress approved the Exon-Florio provision. (14) This statute grants the President the authority to block proposed or pending foreign "mergers, acquisitions, or takeovers" of "persons engaged in …