As the Committee on Foreign Investment in the United States (CFIUS) continues to expand its reach and aggressively investigate foreign investment transactions, the calculus for determining whether to make voluntary filings has shifted. Where a fund investment or acquisition is subject to CFIUS jurisdiction, but a filing is not mandatory, private equity sponsors must confront the decision of whether to voluntarily make a CFIUS filing. For the reasons discussed below, sponsors or other transaction parties may want to consider not making a voluntary CFIUS filing, including in circumstances where they may have elected to make a voluntary filing in the past.

CFIUS is an interagency U.S. government body that has jurisdiction to evaluate whether certain transactions involving foreign investment in U.S. businesses raise national security concerns. If, after reviewing a transaction, CFIUS identifies a national security concern, it can either require the parties to implement national security risk mitigation measures or, if no mitigation measures are adequate and appropriate to address the identified national security concerns, CFIUS can recommend that the President block the transaction or require a divestiture or unwinding. Should CFIUS determine that there are no unresolved national security concerns arising from a transaction, CFIUS essentially approves the transaction by informing the parties that it has concluded action, and the parties will then enjoy safe harbor from any further CFIUS scrutiny of the transaction. This safe harbor applies even if the national security landscape shifts in the future.

Securing that safe harbor and the regulatory certainty it brings, along with a desire to demonstrate good corporate citizenship, has prompted many private equity funds to choose to file voluntarily, even given the time and expense necessary to do so. The calculus of this decision, however, is changing due to CFIUS’s more aggressive stance, which can be seen in the following:

• Increased Politicization. As widely reported, CFIUS has recently taken steps toward recommending that the President prohibit Nippon Steel’s acquisition of U.S. Steel—a move that appears to have been motivated more by political considerations than national security concerns. However one interprets CFIUS’s actions, the debate over the Nippon Steel-U.S. Steel transaction underscores the potential for CFIUS to be used for political ends. If sponsors no longer assume CFIUS will be a neutral arbiter of national security concerns, they may be disinclined to voluntarily subject a transaction to a review process that could be politically charged.
• Onerous Mitigation. CFIUS has increasingly required onerous mitigation steps to clear transactions in certain industries, even when the foreign investor is from an allied country. As we have previously discussed, in 2022 and 2023, nearly 20% of notices filed with CFIUS resulted in required mitigations—about twice the rate in 2020 and 2021. Further, the risk mitigation measures now required to gain CFIUS approval frequently include significant reporting obligations to the U.S. government, the appointment of Security Officers and other personnel to ensure compliance with risk mitigation measures, and restrictions on commercial relationships with vendors. These risk mitigation measures are then subject to increasingly aggressive scrutiny and enforcement by CFIUS.
• Aggressive Enforcement. CFIUS’s evolution into an enforcement-focused body is illustrated by its November 18, 2024 final rule, which (1) expands the circumstances under which a civil monetary penalty may be imposed on transaction parties in the context of CFIUS’s monitoring and compliance functions; (2) substantially increases the maximum civil monetary penalty for violations of risk mitigation compliance obligations; and (3) expands the instances in which CFIUS may use its subpoena authority. These rule changes come on the heels of a record $60 million civil monetary penalty and public naming—despite existing CFIUS regulations regarding confidentiality—of a company from a North Atlantic Treaty Organization ally that CFIUS found to have failed to comply with risk mitigation measures. Importantly, these aggressive CFIUS actions come at a time when CFIUS has reviewed the lowest number of notices since 2018 and only half the number of notices from China, CFIUS’s principal country of concern, when compared to 2015.

Faced with an increasingly aggressive CFIUS, parties should carefully consider whether the benefits of making a voluntary CFIUS filing are worth inviting CFIUS scrutiny and the potential for perpetual government involvement in business operations. This consideration is particularly poignant given that the data suggests that transactions that are not voluntarily filed face little risk of being formally reviewed by CFIUS. According to CFIUS’s 2023 Annual Report, CFIUS and its member agencies identified and considered thousands of transactions not filed with CFIUS (known as “non-notified transactions”), but formal inquiries were only opened into 60 of them. Of these, CFIUS requested filings for just 13, with another three transactions being submitted voluntarily after CFIUS initiated a formal inquiry.

CFIUS requests filings for such a small fraction of non-notified transactions because doing so is resource intensive and can only be initiated if senior executive branch officials approve the request. Given these limitations, CFIUS only seeks the filing of those non-notified transactions that are most likely to raise national security concerns. By contrast, if parties file voluntarily, senior executive branch officials from multiple agencies are required either to certify that there are no unresolved national security concerns arising from the transaction or to send the transaction to the President. And the reality is that those senior officials can more comfortably make the requisite certification—which may be subject to congressional scrutiny—if they impose national security risk mitigation measures as a condition. In other words, structural considerations both make it difficult for CFIUS to pursue parties that don’t file and to let transactions that are filed pass without requiring mitigations. As a result, parties that file voluntarily may well end up having to perform mitigations they would not have needed to if they had not filed.

While parties should carefully consider each transaction’s unique national security risk profile for purposes of making a voluntary CFIUS filing, overarching CFIUS trends currently suggest that only those transactions that are significantly at risk for a CFIUS non-notified request for a filing should be filed voluntarily. Otherwise, should they make a voluntary CFIUS filing, parties to a transaction may be unnecessarily inviting an increasingly aggressive CFIUS to require onerous and perpetual government scrutiny under threat of significant civil monetary penalties.

The Private Equity Report Fall 2024, Vol 24, No 3