US Government Issues Executive Order Amending Ban on US Persons Purchasing Securities of

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On June 3, 2021, President Biden issued Executive Order 14032, “Addressing the Threat from Securities Investments that Finance Certain Companies of the People’s Republic of China” (the “CMIC EO”). This amends and replaces Executive Order 13959 (“EO 13959”) and revokes Executive Order 13974 (“EO 13974”) that restricted investments in certain “Communist Chinese Military Companies” (“CCMCs”). The main changes implemented by the CMIC EO and related public guidance are to (1) change the group of targeted Chinese companies to focus on “Chinese Military-Industrial Complex” companies, (2) clarify the scope of the prohibitions, and (3) reset the clock for prohibited investments in the targeted companies. Our blog posts on EO 13959 and prior guidance from the US Treasury Department’s Office of Foreign Assets Control’s (“OFAC”) about the CCMC sanctions program are available here and here.

At a high level, amended EO 13959 continues to prohibit the purchase or sale by US Persons of publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities, of certain Chinese companies listed in the Annex to EO 13959, or determined by the Secretary of the Treasury:

  • “to operate or have operated in the defense and related materiel sector or the surveillance technology sector of the economy of the [PRC];” or
  • “to own or control, or to be owned or controlled by, directly or indirectly,” any such identified company.

Before it was amended by EO 14032, EO 13959’s prohibitions applied to “any securities that are derivative of [publicly traded CCMC] securities or are designed to provide investment exposure to such securities.” Amended EO 13959 limits the scope by only targeting those securities that are “publicly traded.”

Effective June 3, 2021, EO 13959’s Annex is replaced and superseded in its entirety by the CMIC EO’s Annex (“CMIC Annex”). OFAC’s new Non-SDN Chinese Military-Industrial Complex Companies List (“NS-CMIC List”) replaces the Non-SDN Communist Chinese Military Companies List (“NS-CCMC List”), which OFAC deleted from its website. OFAC will subsequently refer to entities on the NS-CMIC List as “Chinese Military-Industrial Complex Companies” or “CMICs.”

The CMIC Annex now includes 59 Chinese companies, including 33 additional entities not included in the previous NS-CCMC List or related lists maintained by the Department of Defense (“DoD”). The current list is available here.

OFAC published several new Frequently Asked Questions (“FAQs”) and updated existing FAQs to reflect the CMIC EO and its amendments to EO 13959. The following points in OFAC’s FAQs are noteworthy:

  • FAQ 905 clarifies that US Persons are not prohibited from engaging in all activities with CMICs. The prohibitions apply only with respect to certain purchases or sales of targeted securities of the NS-CMIC List entities. The CMIC EO does not prohibit the purchase or sale of goods or services related to CMIC subsidiaries.
  • Amended FAQ 857 states that OFAC’s 50% Rule does not apply to the subsidiaries or affiliates of NS-CMIC List entities and only named companies on that list are subject to EO 13959’s investment restrictions.
  • FAQ 902 clarifies that US Persons are not prohibited from providing investment advisory, investment management, or similar services to a non-US person, including a foreign entity or foreign fund, in connection with the non-US person’s purchase or sale of a CMIC’s covered securities, provided that the underlying purchase or sale does not otherwise violate EO 13959 (e.g., where the purchase or sale is not for the benefit of a US Person or an attempted evasion). FAQ 901 addresses due diligence expectations of US Persons when determining the permissibility of particular purchases or sales, specifically that they may rely on information available to them in the ordinary course of business.
  • FAQ 903 provides that US Persons employed by non-US entities are not prohibited from involvement in purchases or sales related to a covered security on behalf of their non-US employer, provided that such activity is in the ordinary course of their employment and otherwise does not violate the EO 13959.
  • FAQ 904 confirms that US market makers are permitted to facilitate divestment from targeted CMIC securities. Along the same lines, amended FAQ 865 addresses the permissibility of market intermediaries and other participants who engage in ancillary or intermediary activities necessary to effect divestiture.
  • FAQ 900 clarifies that OFAC will use its discretion to target under EO 13959 those who operate or have operated in support of “(1) surveillance of persons by Chinese technology companies that occurs outside of the PRC; or (2) the development, marketing, sale, or export of Chinese surveillance technology that is, was, or can be used for surveillance of religious or ethnic minorities or to otherwise facilitate repression or serious human rights abuse.”

The CMIC EO also resets the clock on the investment prohibitions. The prohibitions with respect to purchases and sales of publicly traded securities of CMICs listed in the Annex take effect beginning at 12:01 AM EST on August 2, 2021. Additionally, the CMIC EO permits the purchase or sale of publicly traded securities made solely to effect the divestment of such securities by a US Person prior to 12:01 AM EST on June 3, 2022. For entities not currently listed in the CMIC Annex, the prohibitions go into effect beginning at 12:01 AM EST on the date 60 days after the entity is added to the NS-CMIC List; purchases and sales solely to effect divestment in such securities are allowed up to 365 days after the entity is added to the NS-CMIC List.

The CMIC EO does not include the prohibition on US Persons simply “possessing” targeted securities that had been introduced in EO 13974. Correspondingly, OFAC did not keep FAQ 872 that had advised that US Persons had to divest from covered CCMC securities after the divestment period ended. Accordingly, US Persons may apparently continue to hold covered CMIC securities after the relevant period, but then will not be able to engage in other transactions related to those securities so long as EO 13959’s prohibitions apply.

In addition to OFAC’s updated NS-CMIC List, DoD issued a list of Chinese military companies operating directly or indirectly in the United States in accordance with Section 1260H of the National Defense Authorization Act for Fiscal Year 2021. The list is available here and is not identical to the updated NS-CMIC List. Under the prior statutory provision that required DoD to identify CCMCs, Section 1260H only mandates that DoD provide a report about these Chinese military companies and there is language in the provision providing for sanctions to be imposed on these identified Chinese military companies.

The authors acknowledge the assistance of Alexandra Pasch in the preparation of this blog post.



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