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June 04, 2021

EO Bans Transactions in Publicly Traded Securities of ‘Chinese Military-Industrial Complex’ Companies

On June 3, 2021, President Biden issued an Executive Order (EO) amending former President Trump’s November 12, 2020, EO 13959, which prohibited U.S. persons from engaging in certain transactions concerning the publicly traded securities of designated Chinese Communist Military Companies (CCMCs). For more information on EO 13959 and its January amendment, please see our previous client alert.

The list appended to President Biden’s amended EO replaces the previously published CCMC list in its entirety. Therefore, the previous prohibition on entering into transactions with companies that had been designated in EO 13959 or related Department of Defense (DOD) or Office of Foreign Assets Control (OFAC) guidance is discontinued, effective immediately. Biden’s amended EO takes effect on August 2, 2021, with a full divestment deadline of June 3, 2022.

New Prohibitions

The Biden EO prohibits U.S. persons from certain activities involving the publicly traded securities of entities specifically listed on OFAC’s non-Specially Designated National (SDN) Chinese Military-Industrial Complex (NS-CMIC) Companies list. Specifically, the EO prohibits U.S. persons from the purchase or sale of any publicly traded securities — or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities.

The EO includes an appendix naming specific NS-CMIC entities, mostly focused on companies engaged in infrastructure (such as energy, telecommunications, transportation, utilities), aircraft and rocket technologies, semiconductors and consumer electronics industries. However, the EO does delegate the Secretary of the Treasury, in consultation with the Secretary of Defense and the Secretary of State, to name additional NS-CMIC entities if the Secretary determines that such entities:

  • Operate or have operated in the defense and related materiel sector or the surveillance technology sector of the economy of the PRC; or
  • Own or control, or are owned or controlled by, directly or indirectly, a person who operates or has operated in any sector described in the EO, or a person who is listed in the annex to the EO order or who has otherwise been determined to be subject to the prohibitions described in the EO.

For the entities listed on the annex to the EO, the prohibition takes effect at 12:01 Eastern Daylight Time on August 2, 2021. The EO allows transactions solely to divest from the publicly traded securities of the listed entities by 12:01 Eastern Daylight Time on June 3, 2022. For any entities subsequently delegated by the Secretary, the prohibitions on such entities will take effect 60 days after listing, and transactions solely to divest will be allowed until 365 days after the date of the listing.

Treasury Department FAQs

In addition to the amended EO, OFAC has issued FAQs that provide guidance on several of the key terms and concepts articulated in the EO. These are summarized thematically below.

The EO’s Application to NS-CMICs and Subsidiaries Thereof

OFAC states, in FAQ 899, that the EO applies to securities of NS-CMIC entities with a name that exactly matches the name on the OFAC-published list.

Under OFAC’s “50 percent rule,” subsidiaries of sanctioned entities are normally also subject to sanctions. Under the previous EO 13959 and its FAQs, OFAC had clarified that its “50 percent rule” would apply, but only to the extent that OFAC identified and listed such subsidiaries. The amended EO did not specify whether and precisely how subsidiaries of listed NS-CMIC entities would be covered by the restrictions. However, for the NS-CMIC companies list, OFAC has specifically stated in FAQ 857 that its 50 percent rule does not apply.

The EO’s Application to U.S. Persons Employed by Non-U.S. Entities

The previous EO 13959 and related FAQs did not address the role of U.S. persons employed by non-U.S. entities in transactions involving publicly traded securities of NS-CMIC entities. However, FAQ 903 to the Biden EO clarifies that “U.S. persons employed by non-U.S. entities are not prohibited from being involved in, or otherwise facilitating, purchases or sales related to a covered security on behalf of their non-U.S. employer, provided that such activity is in the ordinary course of their employment and the underlying purchase or sale would not otherwise violate” the EO.

The EO’s Application to Publicly Traded Securities, Derivatives and Foreign Funds

While adopting the Exchange Act definition of “security,” the EO does not define the scope of the terms “publicly traded securities” or “derivatives” of those securities as used in the EO. However, OFAC (in FAQ 859) specifies that the term “publicly traded securities” in the EO includes both exchange-listed and over-the-counter securities in any jurisdiction.

Additionally, OFAC FAQ 860 provides examples of financial instruments that are “securities that are derivative of, or are designed to provide investment exposure to” publicly traded securities of NS-CMIC entities. Examples include “derivatives (e.g., futures, options, swaps), warrants, 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 the EO.

Finally, OFAC FAQ 861 clarifies that the EO applies to both U.S. and foreign funds, including ETFs and mutual funds, that hold publicly traded securities of NS-CMIC entities. According to OFAC, the EO’s restrictions apply “regardless of such securities’ share of the underlying index fund, ETF, or derivative thereof.” This interpretation is problematic for mutual funds, ETFs and other funds which would be prohibited from selling to U.S. persons regardless of the amount of NS-CMIC or derivative exposure. Index-based funds that sell to U.S. investors may not be able to closely track their indexes if the index provider does not remove NS-CMIC entities from its index.

The EO’s Prohibited Transactions

The previous EO 13959 provided that U.S. persons (including U.S. funds and related market intermediaries and participants) were prohibited from engaging in certain transactions but did not address whether U.S. persons are prohibited from additional commercial transactions. OFAC FAQ 905 related to the amended EO clarifies that transactions unrelated to certain purchases or sales of publicly-traded securities are not prohibited.

In addition, OFAC (in FAQ 863) has explained that notwithstanding the prohibition, U.S. persons can continue to engage in activity related to the “clearing, execution, settlement, custody, transfer agency, back-end services, as well as other such support services” of NS-CMIC securities “to the extent that such support services are not provided to US persons in connection with prohibited transactions.” Whether U.S. exchanges, broker-dealers and other financial institutions will be willing to continue these support transactions given the scrutiny that NS-CMIC securities will receive remains an open question.

OFAC, in FAQ 902, also provides that U.S. persons are not prohibited from providing “investment advisory, investment management, or similar services” to non-U.S. persons in connection with that person’s purchase or sale of a covered security.

The EO provides that transactions made “solely to divest, in whole or in part” from the covered securities are not subject to a ban. However, the EO is unclear on whether intermediaries who are U.S. persons will be permitted to process such divestiture transactions.

Accordingly, OFAC (in FAQ 865) has clarified that “market intermediaries and other participants may engage in ancillary or intermediary activities that are necessary to effect divestiture.” Specifically, the FAQ states that investment fund transactions involving U.S. person investors and intermediaries who are seeking to divest are permitted. The revised FAQ also clarifies that market makers are included as market intermediaries.

A new FAQ issued further expands the role of market makers in non-prohibited transactions. Specifically FAQ 904 states that U.S. market makers, and non-U.S. market makers who employ U.S. persons, are “permitted to engage in activities that are necessary to effect divestiture during the during the 365-day periods in which divestment transactions are permitted or that are not otherwise prohibited under E.O. 13959, as amended, including the conversion of American depositary receipts (ADRs) of a CMIC into underlying securities of the CMIC on the foreign exchange where the underlying securities are listed.”

FAQ 871 expands upon the above clarifications of the EO’s prohibitions. Specifically, it clarifies that the EO does “not prohibit activity with entities on the NS-CMIC List that are unrelated to such securities, such as the purchase of goods or services.”

Due Diligence Requirements

The previous EO 13959 and related FAQs did not address the level of due diligence expected from U.S. persons in assessing the prohibitions of the EO nor the level of due diligence that intermediaries should undertake to ensure they are only processing transactions intended to divest from the covered securities. OFAC has clarified in FAQ 901 that it expects U.S. persons to “rely upon information available to them in the ordinary course of business.”

Additional Prohibition on Surveillance Technology

The amended EO includes “surveillance technology,” which had not previously been addressed by EO 13959 or its amendment. In FAQ 900, OFAC has clarified that it will use its discretion to target “persons whose operations include or support, or have included or supported, (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 amended EO builds upon the broad scope of the previous prohibition and its potentially sizable market impact. Investors should take careful note of the prohibitions and deadlines established by the EOs for divestiture and begin to take action now to protect their interests. The revisions to the EO are likely the result of recent successful court challenges to the Department of Defense methodology for adding entities to the CCMC list, as well as the overall review the Biden administration is undertaking of actions taken in the last few months of the Trump administration.

We continue to recommend that fund managers, advisers, broker-dealers and other market participants assess their current and potential exposure to the updated NS-CMIC entities and compliance deadlines and review existing controls, due diligence practices and communications with clients, prospective clients and shareholders, as well as disclosures in prospectuses and other documents. Firms should also monitor the OFAC website and the Federal Register for updates to the NS-CMIC Companies list, as well as for the issuance of additional guidance. The EO prohibitions will apply automatically to companies added by OFAC after 60 days since their inclusion, regardless of publication in the Federal Register. The entities on the new NS-CMIC Companies list are not all the same as were on the previous CCMC list. Therefore, we recommend close review of the new list to ensure compliance measures are put into place prior to the August 2 deadline.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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