This week the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published three Frequently Asked Questions (FAQ) related to Executive Order (E.O.) 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.”
- Can U.S. persons custody, offer for sale, serve as a transfer agent, and trade in covered securities?
For purposes of E.O. 13959, activity by U.S. persons related to the following services are considered permissible, to the extent that such support services are not provided to U.S. persons in connection with prohibited transactions: clearing, execution, settlement, custody, transfer agency, back-end services, as well as other such support services.
- Does the prohibition in E.O. 13959 apply to transactions in securities of a Communist Chinese military company subsidiary with a name that exactly or closely matches the name of an entity identified in the Annex to E.O. 13959?
Yes. As stated in FAQ 858, the prohibitions of E.O. 13959 apply with respect to “publicly traded securities (or any publicly traded securities that are derivative of, or are designed to provide investment exposure to, such securities) of an entity with a name that exactly or closely matches the name of an entity identified in the Annex to E.O. 13959 (effectively January 11, 2021).” OFAC has published and will continue to update a list on its website to aid in the implementation of E.O. 13959, including the names of certain entities that closely match the name of entities identified in the Annex to E.O. 13959. Among other names, OFAC’s current list includes (1) China Telecommunications Corp. / China Telecommunications; (2) China Mobile Communications Group / China Mobile Communications / China Mobile Communications Group Co Ltd; and (3) China United Network Communications Group Co Ltd / China United Network Communications Ltd. These names closely match the names of China Telecom Corporation Limited (NYSE: CHA), China Mobile Limited (NYSE: CHL), and China Unicom (Hong Kong) Limited (NYSE: CHU). Transactions in the securities of any Communist Chinese military company subsidiary (whether expressly listed or not) are prohibited if the subsidiary’s name exactly or closely matches the name of these or any other entities identified in the Annex to E.O. 13959 or the name of any Communist Chinese military company listed by the Departments of the Treasury or Defense.
In addition, as OFAC stated in FAQ 860, the prohibitions in section 1(a)(i) of E.O. 13959 expressly apply to “any securities that are derivative of, or are designed to provide investment exposure to” the publicly traded securities of any Communist Chinese military company, including American depository receipts (ADRs).
The prohibition in section 1(a)(i) of E.O. 13959 takes effect at 9:30 a.m. eastern time on January 11, 2021. Compliance with this prohibition is measured by trade date, rather than settlement date.
- May market intermediaries and other participants facilitate divestment from publicly traded securities of Communist Chinese military companies, including divestment by investment fund managers?
Yes. Market intermediaries and other participants may engage in ancillary or intermediary activities that are necessary to effect divestiture during the relevant wind-down periods or that are otherwise not prohibited under the E.O. Transactions by U.S. persons (including investors and intermediaries) involving investment funds that are seeking to divest during the relevant wind-down periods to ensure compliance with the E.O. are permitted.
As explained in FAQ 861, under E.O. 13959, any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Communist Chinese military company, as defined in E.O. 13959, is prohibited regardless of such securities’ share of the underlying index fund, ETF, or derivative thereof. FAQ 862 also notes that U.S. funds are not required to divest covered securities of companies identified in the Annex to E.O. 13959 by January 11, 2021. Divestment must be completed by November 11, 2021.