The panel was convened at 9:00 a.m., Friday, April 11, by its moderator, James Mendenhall of Sidley Austin LLP, who introduced the panelists: Stewart Baker of the Department of Homeland Security; Nova Daly of the Treasury Department; Christine Bliss of the Office of the U.S. Trade Representative; Scott Morris of the House Financial Services Committee; and Linda Menghetti of the Emergency Committee for American Trade (ECAT).
INTRODUCTORY REMARKS BY JAMES MENDENHALL *
We have an impressive panel today to talk about CFIUS, the Committee on Foreign Investment in the United States. I am Jim Mendenhall from the law firm of Sidley Austin, formerly from the Office of the United States Trade Representative (USTR), and a former CFIUS Committee member. It is surprising to many people, but CFIUS has been around for several decades now, going back to the mid-seventies. It was created by Executive Order simply as a data collection mechanism, and it did not have a whole lot of responsibility apart from monitoring inbound investments.
That all changed in 1988 with the introduction of the Exon-Florio Amendment, which made CFIUS a much more operational mechanism. It gave CFIUS authority to block investments or to require modifications to investments that presented a credible threat to national security. That change took place in response to concerns, primarily economic concerns, over inbound investment from Japan. At the time there was a big fight about whether CFIUS should be designed to address broader economic issues or should be restricted to national security alone. We are still fighting that fight today. In 1988, the position that carried the day was that CFIUS would be targeted at national security alone.
For the next fifteen years or so, CFIUS remained a fairly sleepy entity, with only a couple of blips along the way, such as the controversial Japanese acquisition of Fairchild Semiconductor. There was another blip in the early 1990s regarding an acquisition by a Chinese company of a Washington State machine tools company, but other than that it was not very controversial. It did not get a lot of attention in the press or in discussions with trading partners.
That all changed in the early 2000s, where two trends started gaining momentum, coming together and affecting the way CFIUS operates. The first of those was, of course, September 11 and the aftermath of that tragedy, where national security, in particular domestic security, moved to the forefront of the U.S. policy agenda. The second trend was increased global economic integration through globalization increased cross-boarder M&A activity and so forth--which created a sense of economic insecurity. Globalization certainly led to much more foreign involvement in the U.S. economy and U.S. involvement in economies around the world. Those two trends, the economic integration trend and the national security trend, came together in a way that really changed the environment in which CFIUS operated.
The first sign of this was a transaction most people have forgotten about now, namely the Global Crossing transaction, in which a Hong Kong entity was involved in the potential acquisition of a U.S. telecom company. That was the first high-profile CFIUS review in this new era, and CFIUS forced a restructuring of that transaction. This was a sign of things to come. Then, of course, there was the earthquake of the Dubai Ports World transaction, followed by several other controversial transactions, including the CNOOC/Unocal transaction, an attempted Chinese acquisition of a U.S. oil company; the Alcatel/Lucent transaction; and the IBM/Lenovo transaction. There was a whole array of these higher-profile cases, culminating most recently in the 3Com/Huawei transaction, which was derailed by CFIUS. All of those transactions presented different problems to be resolved, and all of them were handled differently, both politically and within the context of CFIUS.
On the legal front, these developments forced the recent reform of CFIUS. It culminated last fall with the adoption of the Foreign Investment and National Security Act (FINSA), the new legislation reforming the way CFIUS operates. The Treasury Department is now in the process of drafting implementing regulations for it, and I am sure the panel will speak further to that development.
And so here is where we are at the present date. I think the public perceptions of the way CFIUS has operated are probably driven in large part by the exceptional cases that I have talked about, rather than the day-to-day operations of the Committee. I think the day-to-day operations are still a bit cloudy to those who are not involved in the process, so we have a great panel here today to demystify the process and give us their views about the way the process works day-to-day and what the challenges are going forward. So, our panel today includes: Stewart Baker, the Department of Homeland Security's (DHS) Assistant Secretary for Policy; Nova Daly, the Treasury Department's Deputy Assistant Secretary for Investment Security; Christine Bliss, Assistant USTR for Services and Investment; Scott Morris, who works for Representative Barney Frank on the House Financial Services Committee; and Linda Menghetti, from the Emergency Committee for American Trade (ECAT).
With that I will turn it over to the panel. We will start with Stewart Baker for a discussion about the way CFIUS has evolved in recent years and in particular about DHS's involvement in that process and how it has affected the way CFIUS reviews transactions.
* Partner, Sidley Austin LLP, Washington, DC.
REMARKS BY STEWART BAKER *
We at the Department of Homeland Security have brought two things to the process: first, a very broad view of what the potential risks are in a transaction--that is, a broad view of what homeland security means, since we have to be concerned about attacks on private infrastructure in ways that the Department of Defense (DoD), for example, does not. We started with a broad view of the potential risks that we should be looking for.
And the second thing that we have brought to the process is the determination that this should be a process that functions like any other government regulatory process. This is a process in which we are making determinations about whether the United States Government is going to permit a transaction to go forward, and like any other government process, there are a variety of things that need to happen if the process is to function properly.
For example, there need to be penalties if people do not comply with the understandings that they reach with you about how they are going to behave. We have entered into a lot of mitigation agreements, and we have begun imposing fines in the last three years. For the first time since CFIUS was created, we have fined people for failing to live up to their obligations. There are obligations on the government if you are going to run a process that is regulatory in nature, and that includes making sure that you demonstrate that you care enough about the promises that people have made to you that you will audit their performance, that you will go out and make sure that they have lived up to their promises. We have started the first CFIUS audit team to validate the performance of people who have entered into mitigation agreements with CFIUS to ensure that they actually perform.
Early on in my tenure, we had a transaction where we essentially said "no, you may not make this acquisition," because the acquirer was a company that had not, in our view, lived up to its past mitigation agreements. And I always worded that we had in part misled the company into believing that it should not take those mitigation obligations very seriously, because they were not getting a prompt response from the government when they asked questions about how they should implement the mitigation agreement and the like. So we have now taken steps to make sure people get prompt responses when they have questions, and that they also hear from us at times of our choosing with teams that show up and actually validate their performance. Those are all things that you would not be at all surprised to discover the Securities and Exchange Commission (SEC) or the Federal Trade Commission (FTC) doing, and if CFIUS is to function properly, we also need to demonstrate the ability and willingness to do that.
We have also said "no" in a few transactions, a very limited number of transactions. I think we have demonstrated that there are teeth to CFIUS and that this is not a process in which people simply make routine paper filings and get routine approval. Where there is a national security concern, there is very robust discussion inside government and there is a willingness to impose the toughest penalties.
Finally, we have begun a process of looking closely at those who did not file, essentially asking whether they "should have" filed. Of course, CFIUS is a voluntary process. But if we believe a transaction raises a serious national security concern, we would like people to file so we can evaluate those concerns, rather than have to make, outside of the CFIUS process, a determination that the transaction is a threat to national security. We have had to invite companies to file in a few cases, and we will continue to do so. We do a pretty careful scrub of investments that are occurring in the United States, or transactions that we think ought to be brought to CFIUS. While we have only brought in a handful, I have to say that if you do not file when we think you really should have, because your transaction raises a lot of national security concerns, then one of...