The Committee on Foreign Investment in the United States (CFIUS) is increasingly scrutinizing private equity transactions. This new emphasis was reflected in an addition made last year to CFIUS’s Frequently Asked Questions that highlighted the depth of information regarding passive non-U.S. limited partners that CFIUS may request, including the limited partner’s identity and their governance and transaction rights—regardless of whether such information is subject to confidentiality restrictions. CFIUS’s increased scrutiny of private equity mirrors trends within other federal agencies and we expect it to continue, with a growing impact on direct and indirect foreign investment made through private equity.

CFIUS’s enhanced attention to private equity should alert sponsors to the importance of monitoring CFIUS-related regulatory changes and guidance. Below, we provide a brief overview of some recent developments and look ahead to what may be on the horizon.

The Post-FIRRMA CFIUS Landscape

Since the enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018, CFIUS has undergone remarkable change. Historically, CFIUS’s jurisdiction was limited to potential transactions that could result in control of U.S. businesses by foreign persons. FIRRMA’s implementing regulations expanded that scope to include certain non-controlling, non-passive investments in critical technologies, critical infrastructure, or sensitive personal data (collectively defined in the regulations as “TID U.S. businesses”) and certain real estate transactions. The regulations also introduced mandatory filings for certain transactions involving TID U.S. businesses.

Subsequent executive action further broadened CFIUS’s reach. In September 2022, President Biden issued Executive Order 14083, expanding the list of national security factors CFIUS is required to consider when reviewing transactions, including the proposed transaction’s impact on U.S. supply chain resiliency (both within and outside of the defense industrial base) and on U.S. technological leadership, with a particular focus on industries including (but not limited to) microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy and climate adaption technologies. The Executive Order also directs the Office of Science and Technology Policy to periodically publish a list of industries of national security concern for CFIUS’s consideration.

There have been additional efforts to enhance CFIUS’s monitoring and enforcement capabilities, including most notably the publication of the CFIUS Enforcement and Penalty Guidelines by the U.S. Department of the Treasury. These guidelines identify certain actions or omissions that may trigger monetary penalties—namely, failure to make a mandatory filing, violation of a mitigation agreement entered into with CFIUS, or material misstatements or omissions in information or certifications filed with CFIUS—as well as the aggravating and mitigating factors CFIUS may consider in determining an appropriate penalty. While few penalties have been issued to date, the numbers are expected to increase: In remarks at the 2023 annual CFIUS conference, Assistant Secretary of the Treasury for Investment Security Paul Rosen stated that CFIUS had issued two civil monetary penalties in 2023—the same number as issued in all of CFIUS’s operating history—and had “several more pending at various stages.”

Looking Ahead: Increased Regulation and Enforcement

The CFIUS regulatory environment is expected to continue to evolve in coming years. In particular, a recent proposed rule would enhance CFIUS’s compliance and enforcement procedures in a manner that demonstrates CFIUS’s commitment to heighted enforcement efforts. Among other things, the proposed rule would amend the CFIUS regulations by expanding obligations to respond to CFIUS inquiries regarding transactions not filed with CFIUS, instituting a timeline for parties to respond to CFIUS risk mitigation proposals, expanding CFIUS’s ability to impose civil monetary penalties, increasing the amount of such penalties when imposed, and expanding CFIUS’s ability to use its subpoena authority.

Additionally, certain amendments to the CFIUS regulations are regularly under consideration, including those that would: (i) expand the list of “excepted foreign states” eligible for certain carve-outs and exemptions under the CFIUS regulations to include jurisdictions with robust foreign direct investment controls; and (ii) expand the list of sensitive sites that trigger CFIUS jurisdiction over real estate transactions. Recent executive action suggests increased attention to transactions involving sensitive personal data, as well as the possible expansion of U.S. government jurisdiction to reach certain outbound transactions in countries of concern. Although they address additional national security review processes outside of CFIUS, these executive actions represent areas in which CFIUS is likely to focus its reviews and enforcement efforts.

Implications for Private Equity Sponsors

In this new environment, private equity sponsors have increasingly needed to conduct intensive analyses of complex fund structures to determine whether their transactions may be subject to CFIUS review—and, in light of recent enforcement trends, the stakes for getting it right are now significantly higher. The FIRRMA implementing regulations include a number of provisions relevant to this detailed, fact-specific analysis, including: (i) the introduction of the defined term “principal place of business”; (ii) revisions to the definition of “control” to include the ability to appoint or dismiss a general partner; and (iii) exemptions for certain passive investments.

As demonstrated by the added FAQ, U.S. sponsors are finding themselves subject to enhanced diligence requests for information regarding non-U.S. limited partners in their fund structure, including non-controlling passive limited partners, regardless of any confidentiality obligations binding on the sponsor. CFIUS is particularly interested in identifying non-U.S. limited partners from countries of concern and in the context of transactions involving particularly sensitive industries. As we expect this level of scrutiny to increase, sponsors should continue to monitor the rapidly developing CFIUS landscape and address CFIUS regulatory concerns early in any transaction.

Private Equity Report Spring 2024, Vol 24, No 1