The Week Ahead in the European Parliament – Friday, November 27, 2020

Next week, Members of the European Parliament (“MEPs”) will gather in person and virtually in Brussels for committee meetings.  Several interesting votes and debates are scheduled to take place.

On Monday and Tuesday, MEPs of the Committee on International Trade (“INTA”) will have an exchange of views with Sabine Weyand, Director-General of DG Trade on the State of Play of EU’s International Trade Negotiations, such as with Australia and New Zealand.  It is likely that the discussions will also touch on the EU-China negotiations on the Comprehensive Agreement on Investments (“CAI”), which is supposed to be concluded before the end of the year.  MEPs will then debate the European Commission’s annual report on the implementation of the EU’s free trade agreements (“FTAs”) with the new Chief Trade Enforcement Officer, Denis Redonnet.  He will also present the review of the Commission’s 15 Points Action Plan on the Implementation and Enforcement of Trade and Sustainable Developments chapters in the EU’s FTAs.  The Annual Report on the Implementation of EU Trade Agreements is available here.

On Monday, INTA will also vote on a draft Regulation that sets up an EU regime for the control of export, transfer, brokering, technical assistance and transit of dual-use items.  The Council of the EU and the Parliament reached a political agreement on November 9, 2020.  The new Regulation would update the EU’s current framework on export controls.  The updated framework would likely impose additional licensing controls on dual-use technology, including hacking software and facial recognition technology.  While critical decisions on export controls will remain with the Member States, they will be obliged to disclose details and provide transparency when granting export licenses.  The increased transparency efforts will provide important means for advocacy efforts.  The draft Regulation is available here.

On Tuesday, the Committee on Industry, Research and Energy (“ITRE”) will debate an own-initiative report on the European Strategy for Data.  The debate will likely be dominated by the proposal for a Data Governance Act, introduced by the European Commission on November 25, 2020.  The Act is the first legislative proposal that follows the European Strategy for Data that the European Commission presented on February 19, 2020.  Among the core provisions of the Act is a legal basis for public and private actors to share their data securely.  It will allow “data intermediaries” to market data without profiting from processing their client’s data.  Data localization requirements were dropped from the Act last minute, following critique that such requirements could violate the EU’s commitment under international trade agreements.  Nevertheless, companies that process EU data must have a representative in the EU to ensure the effective enforceability of the Act’s rules.  The Act also includes obligations for companies to take “adequate measures” to prevent sensitive data, such as health data, from unlawful access by third country governments.  The draft own-initiative report is available here and the proposal for a Data Governance Act is available here.

On Wednesday, the Special Committee on Artificial Intelligence in a Digital Age (“AIDA”) will hold a public hearing on “AI and Health.”  AIDA will host two virtual panels on digital governance and an exchange of views with representatives of the industry, civil society and academia.  The first panel will include the Greek Minister of Digital Governance, Kyriakos Pierrakakis, the Head of Unit Public Health Functions at the European Centre for Disease Prevention and Control, Vicky Lefevre, and Claire Bury, Deputy Director-General at DG SANTE.  The second sessions will see interventions by representatives of the Halland Hospital Group, Exscientia, the European Consumer Organization and the Freie Universität Berlin.

For the complete agenda and overview of the meetings, please see here.

Brexit – The End Game?

The deadline has already passed for any UK-EU Agreement to be reached in time for translation and consideration by the European Parliament before the end of the Parliamentary term on 16th of December.  In a gesture of conciliation, the parliament has indicated it may be prepared to convene on 28 December.

However, as the pressure rises, tempers may be fraying. Yesterday Ursula von der Leyen the European Commission President noted that ‘trust is good but law is better’ in a clear reference to the UK’s Internal Markets Bill that many in the European Union feel has broken promises made by the British government in both the Withdrawal Agreement and the Northern Ireland Protocol signed last December. Michel Barnier the lead negotiator for the EU (who, like the UK PM, has been self-isolating for the last fortnight due to a case of coronavirus in his team) yesterday delivered an ultimatum to the UK government: Either the UK shifts its negotiating stance before Friday or he pulls out of further negotiations.

From the UK side, Lord Frost (the lead negotiator for the UK) argues that the UK must be treated like any other ‘independent’ Third Country in negotiation with the EU and that a level playing field and ECJ jurisdiction are unrealistic in that context.  Members of his negotiating team believe that the EU will, in the end, blink. This has been a running theme in the UK negotiating tactics – a belief that, at the 11th hour, the European Union will give in to the UK’s demands. Whilst the EU – an organization built on compromise – has a history of last minute deal-making and concessions, in this negotiation the UK belief may be a miscalculation since the issues at stake here are fundamental to the European single market.

OBR Assessment

Adding pressure to the UK government to find a compromise was yesterday’s OBR[i] assessment that the effect of a No Deal Brexit would be to add a further 1.5 – 2% overall reduction to GDP by 2025. This would come on the back of an already precipitous 11.3% decline in GDP this year caused by coronavirus. The OBR assessment was given weight earlier this week when the authorities in Calais conducted a nine-hour trial of post-Brexit immigration checks, which resulted in an 8 km tailback of lorries on the roads in Kent.

No Deal could be politically attractive…

A rational assessment of the situation would seem to point to an Agreement being reached this weekend, with both sides compromising on the three final issues (fisheries, level playing- field and dispute resolution jurisdiction). However, this is where UK domestic politics may play a hand. With rebellion already rife in the Conservative party over cuts to foreign aid in yesterday’s Spending Review and frustration over the move from lockdown to local tiered restrictions, Boris Johnson may assess that trying to persuade his increasing restive Party that the compromises he will have to make in order to get an EU Deal are simply a bridge too far. He may calculate that it would be preferable to simply leave the EU without a deal and blame EU intransigence.

The Biden Effect

However, whilst leaving without a deal might be potentially politically attractive to Boris Johnson, the fact would remain that, sooner or later, the UK and the EU will have to agree some form of new trade deal.

And that is where the Biden election victory comes in. The ‘easy deal’ that PM Johnson may have anticipated with a future Trump administration is already much harder with a Biden Administration, reportedly not overly focused on new FTA.  And it becomes even more difficult if the UK leaves the EU without a Deal, since the provisions of the Internal Market Bill and its Ireland Border clauses would come into effect. Yesterday President-elect Joe Biden reiterated his opposition to any political outcome that would see a new border imposed between Northern Ireland and the Republic of Ireland. In those circumstances it is difficult to see how a Trade Deal between the UK and the US could move forward.

That would leave the Johnson government with no path to a Deal with either the EU or the US – its two largest trading partners.

No Deal would have implications for clients across the board as the UK and EU would fall back on WTO trading arrangements.  Although there have been some sectoral agreements (the EU and UK agreeing to equivalence in securities settlements until June next year) in other areas, the indications are of travel in the opposite direction (derivatives and data adequacy).

[i] Office for Budgetary Responsibility

Brexit – all Set for a Deal?

Briefings from both the EU and UK sides have been more positive over the last few days, with the Commission President briefing on 20 November that most major issues were now agreed. That adds to the impression that a Deal is close to being signed off (even if some members of the UK’s Cabinet have been reverting this week to the slogan ‘No Deal is better than a Bad Deal’).

Ratification is the Next Obstacle…

However, any Brexit deal between the UK and the EU must be ratified by the European Parliament.  The Transition Period expires at midnight EU time on 31 December.  In order for ratification to take place, the deal needs about three weeks for translation and consideration.  The European Parliament is due to rise for the Christmas break on 16 December. That timetable means that this week is the last week in which the Deal can be reached.   Given the urgency, it is unfortunate that the EU’s lead negotiator has been in self-isolation this week following a Covid case amongst his team, which has necessitated a reversion to virtual, rather than in person talks this week, slowing down their progress.

But the tight timetable has also raised the possibility of exceptional measures.  One apparently under active consideration is for the Commission to allow any Brexit deal to enter into force provisionally, with the European Parliament giving its consent later on. The Commission would almost certainly need to ask Parliament for prior consent to this approach.  it is likely that Parliament would be reluctant to agree, fearing the creation of a precedent that the Commission may later abuse.

Added to the Parliamentary hurdle is the question of whether each EU Member State must approve any deal.  This is the case if the UK-EU Deal contains any  “mixed” competences that Brussels shares with EU Member States (and regional parliaments – last year’s EU-Canada CETA Deal was held up by Belgium’s Wallonia regional parliament). The Commission could ask Member States to ratify on a provisional basis until such time as they can consider the Deal correctly. Member States are just as keen to avoid this outcome as the Parliament – ceding more power to the Commission not only creates a precedent, but plays badly with domestic audiences.

However, provisional consent is far from ideal and would fail to deliver certainty, since provisional application of the Deal would be terminated if either the Parliament or a Member State indicated it would not ratify.

But There is Some Good News….

The EU is considering possible extreme solutions to these two problems.  There is some discussion of the Parliament meeting on 28 December to ratify any Deal; and the Commission may either ask the Council to decide that any ‘mixed competences’ will be exercised on an EU-only level.  If the Council agrees to exercise the shared competences, the deal will be an EU-only Deal and not require national ratification.  This is not a total panacea for the situation, since some EU MS must brief their national parliaments on the potential deal before being able to approve it, even if the deal is considered EU-only.

That consideration is being given to these solutions is positive in that it indicates a determination to reach and ratify a Deal before midnight on 31 December.

And that is Important for UK Trade in Services with EFTA/EEA

Reaching a Deal is important not just for the EU, but also for countries in the EEA and EFTA. The failure (so far) to reach a Deal between the UK and the EU has meant that a Deal on trade in services between the UK and Norway, Iceland and Liechtenstein is unlikely to be agreed by the end of the year. Whilst not on the same scale as any Deal with the EU, it is worth noting that UK trade with Norway alone was worth £26.3 billion in 2019, with services accounting for nearly 50% of Britain’s exports to Norway.

The key to unlocking this delay is a UK/EU Agreement on data sharing. If the UK’s data regime is not considered as adequate by the EU, it impacts on the ability of EEA and EFTA countries to fulfill trade in services because controllers or processors of personal data in an EEA/EFTA state are subject to the same rules as in an EU member country.

OCC Proposes “Fair Access” Requirements for Large Banks

On November 20, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a proposed rule that would impose on large national banks and federal savings associations (collectively, “banks”) a requirement to provide “fair access” to the financial products and services those institutions offer. The proposal is intended to preclude the banks it covers from making decisions about providing financial services based categorically on the type of a customer’s business or the customer’s geographic location. In support of the proposal, the OCC gives examples of nonprofit and for-profit organizations and businesses that it says banks have been encouraged or pressured to boycott, including family planning organizations, privately owned correctional facilities, gun manufacturers, independent ATM operators, agricultural businesses, and businesses conducting various activities in the energy sector of the U.S. economy.

The proposal would establish an affirmative obligation for a bank to make each of its products and services available to all individuals and lawful businesses in the geographic market it serves on “proportionally equal terms.” The text of the proposed regulation does not provide a definition of “proportionally equal terms.” A footnote in the preamble describes the standard as requiring, at a minimum, that a bank make pricing and denial decisions commensurate with “measurable risks based on quantitative and qualitative characteristics.” Elsewhere, the preamble indicates that pricing and denial decisions should be supported by quantitative, risk-based analysis and not made on the basis of personal beliefs on matters of substantive government policy or on assessments about future legal or political changes. The preamble suggests that the OCC would disfavor denial decisions based on a bank’s assessment of its reputation risk, but it does not indicate how considerations such as enhancement or preservation of shareholder value or customer relationships could affect a bank’s decisions.

In addition, the proposal would impose three prohibitions on the banks it covers. First, a bank would be prohibited from denying financial services to an individual or business except as justified by the potential customer’s “documented failure to meet quantitative, impartial risk-based standards established in advance.” Second, a bank would be prohibited from denying financial services if the denial impedes the customer from conducting business in a particular market or produces a benefit to an individual or business in which the bank has a financial interest. Third, a bank would not be permitted to act in coordination with others to deny a financial service to an individual or business.

A bank would be subject to the rule if it has the ability to affect markets by raising the price for financial services offered by that bank or its competitors, or by “significantly impeding” the business of one individual or legal entity to the advantage of another. A bank with $100 billion or more in assets would be presumed to satisfy this standard, but it could seek to rebut the presumption by submitting written argument to the OCC.  A bank with less than $100 billion in assets is presumed not to satisfy the standard.

The authority that the OCC specifically cites in support of the fair access proposal is 12 U.S.C. § 1, which was amended by the Dodd-Frank Act to describe the agency as “charged with” assuring fair access to financial services by the institutions and other persons subject to its jurisdiction, and 12 U.S.C. § 93a, which authorizes the OCC to prescribe rules to “carry out the responsibilities of the office.”  The comment period for the proposal closes on January 4, 2021.

Federal Banking Agencies and FinCEN Issue Joint Statement on Risk-Based Approach to Customer Due Diligence for Charities and Non-Profit Organizations

On November 19, 2020, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, and Office of the Comptroller of the Currency (collectively, the “Agencies”) issued a joint fact sheet clarifying how banks subject to the Bank Secrecy Act (“BSA”) should apply a risk-based approach to customer due diligence (“CDD”) requirements for charities and other non-profit organizations.

In the past, U.S. and foreign regulators have expressed the view that “the flow of funds both into and out of [non-governmental organizations] can be complex, making them susceptible to abuse by money launderers and terrorists.”  In that context, the joint fact sheet provides welcome clarification that the U.S. government does not generally view the charitable sector as presenting unique AML, terrorist financing, or sanctions risks and that access to financial services is critical for charities to achieve their important missions, particularly during the COVID-19 pandemic.

To that end, the joint fact sheet outlines considerations to assist banks in evaluating a charitable customer’s risk profile and conducting appropriate risk-based CDD.  These considerations are:

  • The purpose, nature, activities, and programs of the organization;
  • The geographic locations served, particularly if these locations include high-risk areas where terrorist groups are active;
  • The organization’s structure, including key individuals and internal controls;
  • The organization’s incorporation, registration, tax-exempt status, and reporting with regulatory authorities;
  • Voluntary participation in self-regulatory programs to enhance governance, management, and operational practices;
  • Financial statements, audits, and any self-assessment activities;
  • General information about the donor base and funding sources;
  • General information about beneficiaries and criteria for disbursing funds; and
  • Affiliations with other organizations, governments, or groups.

The joint fact sheet reminds banks that charities report specific information annually on IRS Form 990, which may provide useful information with respect to these considerations.

The joint fact sheet, which as informal guidance does not formally alter existing BSA/AML requirements or supervisory expectations, concludes by affirming that charities and non-profit organizations provide vital services and that banks should apply a risk-based approach to these organizations, consistent with existing CDD and other BSA/AML requirements.

The Week Ahead in the European Parliament – Friday, November 20, 2020

Next week, Members of the European Parliament (“MEPs”) will gather in person and virtually in Brussels for plenary sessions.  Several interesting votes and debates are scheduled to take place.

On Monday, MEPs will debate how to update the new Industrial Strategy for Europe.  The Commission presented its initial Industrial Strategy on March 10, 2020, but given the developments in the context of the COVID-19 pandemic and Next Generation EU (“NGEU”), the EU’s EUR 750 bn recovery fund, MEPs are likely to call on the Commission to revise the strategy.  Rapporteur Carlo Calenda (S&D, IT) thinks the Industrial Strategy should have two distinct phases, a recovery phase and a phase for reconstruction and transformation.  In the first phase, Commission-managed EU programs should replace the Member States’ aid to companies in distress to balance the discrepancy of available funds between Member States.  He also thinks the Commission should be able to allocate funds to individual companies from the recovery fund.  In the second phase, the recovery fund would be transformed into a “Reconstruction and Transformation Fund” to achieve the EU’s digital and environmental objectives.  On Wednesday, MEPs will vote on the draft report, which has already been adopted by the Committee on Industry, Research and Energy (“ITRE”) with a comfortable majority on October 16, 2020.  The draft report is available here.  The current Industrial Strategy is available here.

On Thursday, MEPs are set to clear a mini EU-U.S. trade deal that eliminates duties on live or frozen lobsters imported from the U.S. in exchange for tariff relief on several EU products, including prepared meals, certain crystal glassware and cigarette lighters.  While very limited in scope and only covering EUR 168 million in exports, the mini deal is interpreted by some as stepping stone for a more constructive dialogue on trade between the EU and U.S.  Nevertheless, trade relations are strained over, for example, the U.S. tariff measures on steel and aluminum and WTO-related issues, such as the Airbus-Boeing trade disputes and institutional reforms.  The draft Regulation to eliminate the customs duties on certain products is available here.  The list of concerned products is available here.

On Thursday, Health Commissioner Stella Kyriakides will present the new EU Pharmaceutical Strategy in the European Parliament, which is set to be formally adopted by the European Commission on November 24, 2020.  MEPs are expected to question Commissioner Kyriakides how the Strategy will contribute to safe and affordable medicine and foster innovation in the pharmaceutical industry.  They will also ask the Commissioner to what extent she took the MEPs’ thoughts and suggestions into account, such as increasing efforts to reduce medicine shortages and moving towards sensible use and disposal of pharmaceutical products.

For the complete agenda and overview of the meetings, please see here.

The UK’s 10-point Green Industrial Revolution Plan

With the UK due to host the COP 26 climate summit in a year’s time, the UK Government is keen to set out its credentials as a global ‘green‘ leader and demonstrate not only that it can make good on its election promise to level up (with much of the promised Green Industrial Revolution investment being focused in old industrial heartlands in the North of England), but that it intends to seize the coronavirus pandemic as an opportunity to build back better and create a genuine green revolution.

On 18 November, the Prime Minister  announced a 10-point Plan billed as the Green Industrial Revolution Plan—which should be seen in that context and is the Government’s Blueprint for delivering on the UK’s domestic legal commitment to be a net zero economy by 2050. There will be a slew of legislation over the coming months which will implement the Plan and a Hydrogen Strategy is also promised (see below).

An initial £4 billion has been allocated in financial support to the Plan, with the Government having already committed £8 billion in the Spring Budget with an objective of securing three times as much investment from the private sector by 2030. The Government announced that 250,000 new jobs would be created as a result of the Plan’s implementation.

The Plan has been broadly welcomed as a good starting point, though some critics note that the finances allocated are insufficient given the size of the challenge. The Plan positions the UK as a leader in the run-up to COP26 and enables the Government to credibly encourage other countries to follow suit.

This Alert summarises the main points of the Plan, and provides some preliminary comments relevant for companies in the energy, project finance and technology fields.

1) Offshore wind: The UK will quadruple its offshore wind capacity to 40GW by 2030.

Comment: That is enough to power every UK home at current demand levels, but the UK’s electricity demand will go up as homes switch from gas to electric heating and from hydrocarbon to electric-powered vehicles, so significant additional generating capacity will have to come on line in the years up to and beyond 2030.

2) Hydrogen: The UK will aim to generate 5GW of “low-carbon” hydrogen production capacity by 2030, with the creation of a Hydrogen Neighbourhood in 2023 and a Hydrogen Village by 2025. Domestic hydrogen supplies will initially be blended with gas (the concentrations are currently unspecified).

Comment: Although the Plan does not say so specifically, given the measures for electric cars—see below—investment in hydrogen as a transportation fuel for vans and the heavy haulage road industry will also have to be brought forward. This will presumably form part of the Government’s consultation on diesel in lorries—see below. The focus is currently on ‘blue’, rather than ‘green’ hydrogen. An implementing strategy (the UK’s Hydrogen Strategy) will be released in Q1 2021.

3) Nuclear: The UK will scale up large nuclear generation at Hinkley Point and Sizewell C, while also developing small and advanced reactors.

Comment: This is a problematic area for the government. The UK currently gets about 20% of its power from nuclear, but all but one of its plants are due to come off-line in the next 15 years, so replacing them to ensure reliable baseload is important. Replacing them is expensive and only two new reactors are currently under discussion—Hinkley Point (which will produce 7% of the UK’s electricity), where development has been hit by delays and cost overruns, and Sizewell C ­—where the plans are still under review. The cost to consumers of nuclear-generated electricity is already extremely high compared to other forms of generation and public acceptance remains low. And technology of the small reactors has yet to be proved.

4) Electric Vehicles: The UK will end the sale of new petrol and diesel cars and vans by 2030 and the sale of new Hybrid cars will end in 2035. The UK will accelerate the rollout of charge points and make grants available to incentivise EV purchasing, with a large-scale factory for the production of EV batteries planned to be built in the Midlands. And the government will begin a consultation on the phasing out of diesel lorries.

Comment: the 2030 deadline is 10 years earlier than the UK government had initially indicated it would ban the sale of new petrol and diesel cars. It makes the UK’s measure the second toughest in the world, after Norway’s 2025 deadline. To support this measure there will need to be significant investment in a network of charging points and the purchase cost of new electric cars will (at least initially) have to be reduced through tax breaks or similar incentives.

The measure places pressure on the car manufacturing sector, which may now decide to discontinue R & D into new petrol and diesel cars for the UK market. There are no provisions (yet) concerning the manufacture in the UK of petrol and diesel cars destined for export.

5) Public transport: The UK will incentivise cycling, walking and investment in zero-emission public transport.

Comment: COVID has demonstrated the attractiveness and the public health and climate benefits of city centres free of cars. However, encouraging people to forego their cars over the long term will require major infrastructure and town-planning changes as well as discouraging private car use in cities.  Added to these issues, COVID-19 has reduced the attractiveness of public transport, and enticing passengers back may prove difficult.

6) Aviation and shipping: Research projects for zero-emission planes and ships will be conducted to support airlines, airports and shipping firms.

Comment: This is a notoriously difficult sector to decarbonise, along with the heavy haulage road transport sector. Concepts under consideration are ammonia-based fuels for shipping and a frequent-flier passenger levy for airlines.

7) Domestic and public buildings: A £1 billion spending commitment starting next year will aim to make homes, schools and hospitals become more energy efficient. The UK will install 600,000 domestic heat pumps annually by 2028 and the Green Homes Grant voucher scheme will be extended to install insulation in homes. By 2023 no new homes may be heated by gas boilers.

Comment: Additional measures will be needed to force the switchover of existing housing stock from oil and gas-fired heating to electric central heating. Given the cost of heat-pump boilers and of installing new electric heating, the government will either need a stick (to force existing houses to move away from gas for domestic heating), or a carrot (to create an incentive to install new electrical central-heating) to encourage that massive switchover. Given the UK’s poorly insulated housing, the GHG voucher scheme may need to be further extended beyond the middle of next year.

8) Clean hydrogen, carbon capture and storage (CCS): The UK will target the removal of 10MT of carbon dioxide by 2030 through CCS and create two carbon capture clusters by the mid-2020s, with another two set to be created by 2030.

Comment: the £200 million for CCS comes on top of the £800 million already pledged in the Spring budget. It would make the UK a global CCS leader, enabling export of the know-how to countries such as India and China which will need massive CCS rollouts to reduce their emissions from coal-fired power stations. But the technology has drawn criticism from green campaigners who argue it extends the lifespan of hydrocarbon assets. And CCS is expensive and brings an efficiency penalty if it is attached to an existing gas power station. The UK has a history of beginning CCS projects and then abandoning them when the cost and time implications become apparent—most recently the Peterhead Project.

9) Nature: The UK will plant 30,000 hectares of trees every year to restore the natural environment and invest to improve new flood and coastal defences in England by 2027.

Comment: the flood-and coastal defence improvement will cost £5 billion of the total £12 billion committed to support this suite of measures.

10) Innovation and finance: The UK will make the City of London the global centre of green finance.

Comment: Green finance, prioritising low-carbon technologies, is already a growing sector, and investors such as pension funds are increasingly looking to green their portfolios. Tax incentives could help encourage more investors down the same route. Proposals for a publicly funded green infrastructure bank do not appear to have made it into this plan; likewise a proposal for the British government to withdraw funding and support for hydrocarbon projects overseas.

President Trump Issues Executive Order Prohibiting Transactions Involving Publicly Traded Securities of  “Communist Chinese Military Companies”

On Thursday, November 12, 2020, President Trump signed an Executive Order (the “Order”) that, beginning on January 11, 2021, will prohibit U.S. persons from transacting in the publicly traded securities of 31 companies that the Department of Defense has identified as “Communist Chinese military companies.” The requirement for the Department of Defense to create a list of companies was directed by Congress pursuant to Section 1237 of the National Defense Authorization Act (“NDAA”) for Fiscal Year 1999. The Order, entitled “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies,” follows months of U.S. government scrutiny and regulatory action with respect to the activity of Chinese companies. It may also represent one in a series of last-minute actions taken on China by the Trump Administration as it nears the end of its term.

Finding that China “is increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and other security apparatuses, which continues to allow the PRC to directly threaten the United States homeland and United States forces overseas, including by developing and deploying weapons of mass destruction, advanced conventional weapons, and malicious cyber-enabled actions against the United States and its people,” the Order declares a national emergency with respect to the threat posed by China’s “military-industrial complex” under the authorities granted in the International Emergency Economic Powers Act (“IEEPA”), the National Emergencies Act, and Section 301 of Title 3 of the United States Code.

Under the Order, U.S. persons will have through November 11, 2021, to divest securities in these companies. Furthermore, the Order authorizes the Secretaries of Defense and/or Treasury to designate additional parties as Communist Chinese military companies subject to the same prohibitions (also accompanied by a one-year divestment period), and delegates authority to the Secretary of the Treasury, in consultation with other agencies, to enforce the Order, including by promulgating implementing rules and regulations.

Principal Elements of the Executive Order

Prohibited Conduct

Pursuant to the Order, beginning at 9:30 AM Eastern Standard Time on January 11, 2021, U.S. persons are prohibited from engaging in “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities,” of the “Communist Chinese military companies” on two existing lists of Chinese companies incorporated by reference in the Order. Moreover, the same restriction applies beginning 60 days after the designation of any additional Communist Chinese military companies pursuant to the Order.

The Order defines “United States person” as “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.” The Order defines “security” by reference to Section 3(a)(10) of the Securities Exchange Act of 1934, but then adds to this definition “currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding 9 months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” The latter portion of the definition appears to refer to debt instruments collectively known as commercial paper.

Importantly, the prohibitions in Section 1(a) of the Order do not apply unless the security also is “publicly traded,” and the Order includes no definition for this concept. The Order also includes no obvious geographic limitation for where covered securities are publicly traded, so absent contrary guidance from the U.S. Department of the Treasury, even transactions by U.S. persons involving affected securities traded on non-U.S. exchanges would appear to be prohibited. Nevertheless, by focusing on “publicly traded” securities, the Order appears to make clear that certain securities transactions involving the affected companies—such as joint venture investments—are not prohibited.

Affected Securities

For the initial round of prohibitions slated to go into effect on January 11, 2021, the Order relies on a list of “Communist Chinese military companies” promulgated by the Department of Defense pursuant to a mandate in Section 1237 of the Fiscal Year 1999 NDAA (as amended). The Act required the Department of Defense to create a list of “those persons operating directly or indirectly in the United States or any of its territories and possessions that are Communist Chinese military companies,” with such persons defined to include parties listed in one of two Defense Intelligence Agency reports from the 1990s, and any other person that “is owned or controlled by, or affiliated with, the People’s Liberation Army,” and “is engaged in providing commercial services, manufacturing, producing, or exporting.”

Although the mandate to promulgate a list of Communist Chinese military companies is more than 20 years old, the Department of Defense issued the first names, in response to Congressional interest, in June and August 2020. A total of 31 companies have now been formally identified by the Department of Defense as “Communist Chinese military companies.” These companies include, for example, China Mobile Communications Group and China Telecommunications Corp., both of whose shares are traded on U.S. exchanges.[1]

The Order also contemplates future additional designations by the Secretaries of Defense and/or Treasury. Sections 4(a)(ii) and (iii) of the Order define “Communist Chinese military company” to include:

  • any person that the Secretary of Defense, in consultation with the Secretary of the Treasury, designates in the future pursuant to the authority” of the Order; or
  • any person that the Secretary of the Treasury separately determines “is owned or controlled by the People’s Liberation Army” and “is engaged in providing commercial services, manufacturing, producing, or exporting” or is a “subsidiary of a person already determined to be a Communist Chinese military company.”

Certain Divestitures Authorized

Notwithstanding these prohibitions on the specified transactions, Section 1(b) of the Order authorizes on or before November 11, 2021, “purchases for value or sales . . . solely to divest, in whole or in part” securities in companies designated under Section 4(a)(i) of the Order. With respect to future designations that may be made under Section 4(a)(ii) or (iii) of the Order, Section 1(c) of the Order authorizes, for one year from the date on which a person is determined to be a Communist Chinese military company, “purchases for value or sales . . . solely to divest, in whole or in part, from securities that any United States person held” on the date that the applicable prohibition takes effect.

Interpretive Questions

The Order leaves several open questions about the scope of its prohibitions, which may be addressed in near-term guidance and/or implementing regulations. Potential questions include, among others:

  • What it means for a security to be “publicly traded.” As noted, there is no clear geographic limitation in the Order that requires the securities to be traded on U.S. exchanges. Even in the United States, however, the term “publicly traded” could include securities registered with the Securities and Exchange Commission (“SEC”) and listed on national securities exchanges, registered securities not listed on national exchanges, or even securities not registered with the SEC pursuant to regulatory exemptions.
  • Whether the securities of unlisted subsidiaries of designated companies are affected by the Order. Although property-blocking and sectoral economic sanctions administered by the Treasury Department’s Office of Foreign Assets Control apply not only to specifically designated persons, but also to persons owned 50% or more, individually or in the aggregate, with other persons whose property is blocked or who are subject to the same sectoral sanctions, it does not appear that principle will govern here. Section 4(a)(iii) of the Order, which empowers the Secretary of the Treasury to list “subsidiar[ies] of a person already determined to be a Communist Chinese military company,” would presumably be unnecessary if subsidiaries were already included in the Order’s prohibitions.
  • What transactions are included as authorized divestment activity under Sections 1(b) and (c) of the Order. In addition to authorizing “sales . . . solely to divest” from affected securities, the Order also authorizes “purchases for value . . . solely to divest” from such securities. What purchases may be included in this time-limited divestiture authorization (such as purchase transactions necessary to unwind short positions), and the range of activities by third-parties that are authorized to facilitate them, appear to remain open questions.

Because the Department of the Treasury (in consultation with other officials) is authorized to promulgate rules and regulations and otherwise carry out the Order, it is possible regulations to implement the Order and/or interpretative guidance or frequently asked questions will be issued that address these and other questions in the weeks ahead.

Looking Ahead

The Order follows increasing expressions of concern from lawmakers and the Trump Administration about the convergence of civilian and military activities in China. For example, legislation recently proposed by Senator Marco Rubio of Florida seeks to prohibit certain Chinese firms from accessing U.S. capital markets, and the Trump Administration has adopted a number of related measures, such as the May 15, 2019 Executive Order on Securing the Information and Communications Technology and Services Supply Chain, and the April 2020 expansion of export controls restrictions for Chinese, Russian, and Venezuelan military end uses and end users in the Export Administration Regulations. Similarly, the Secretary of Defense has the authority to add Chinese telecommunications companies to the list of companies that the U.S. government or its contractors may not obtain or use telecommunications equipment or services from under Section 889 of the John S. McCain NDAA for Fiscal Year 2019. It is possible that the telecommunications companies included on the Department of Defense’s Section 1237 list may be considered by the Defense Secretary for addition to the Section 889 restrictions.

In the final weeks of the Trump Administration, it is possible that additional actions—such as designation of additional parties pursuant to the Order, or designation of additional Chinese parties on the Entity List maintained by the Commerce Department’s Bureau of Industry and Security—could be taken to further restrict Chinese companies’ access to U.S. investment capital or commodities, software, and technology subject to U.S. export control jurisdiction. It remains to be seen whether the incoming Biden Administration—which likewise has expressed concern about China on a range of issues, including trade and national security—will maintain or modify the Order, which could be repealed without Congressional involvement.

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[1] See Chinese Companies Listed on Major U.S. Stock Exchanges, U.S.-China Economic and Security Review Commission, Oct. 2, 2020,


A Primer for Navigating the Presidential Appointee Vetting and Confirmation Process

With the election over, the process of selecting and vetting individuals to fill the next administration’s key appointed positions is quickly shifting into high gear. For those who are called to serve in such positions, the decision to enter the process may be one of the most important and life-changing decisions they ever make. Accordingly, it is critical for anyone considering an appointed position to understand the vetting process from the start and to consider seeking the advice of experienced vetting counsel.

In this client advisory, we provide a high-level overview of the presidential appointee vetting process, highlighting the top five issues that typically are examined by the lawyers and others who conduct the vetting.

US-China Economic Relations in a Biden Administration

Before the new administration takes office, we may well see further US actions on China during the transition that will be hard to reverse. The Trump Administration has invested great effort to reorient US China policy and may try to lock in its approach that sees the Chinese Communist Party as a grave threat. Actions could include new restrictions on Chinese companies deemed to be controlled by the Chinese military, actions against China’s internet and cloud computing giants, and sanctions over human rights issues involving Hong Kong or the Uyghur minority in Xinjiang. The Phase One trade deal, however, will likely remain intact, as will US tariffs on $370 billion in Chinese goods.

We should not expect a Biden-Harris Administration to immediately undo most of the actions taken by the Trump Administration given the bipartisan consensus favoring a tough stance toward China. And a Biden Administration’s greater emphasis on human rights may lead to continued friction and use of sanctions.

But Biden sees China more as a competitor than an existential threat, and his Administration will likely focus more on bolstering America’s advantages to compete with China than on confronting China at every turn. This will likely result in three significant changes in approach to the economic relationship with China:

First, a priority on strengthening US competitive capacities through investments in R&D in areas such as advanced manufacturing, telecommunications, and artificial intelligence; workforce development; and infrastructure.

Second, much greater strategic focus and effort on working with other countries on multiple levels to confront the challenges of China’s economic and political systems. This will not simply involve rallying allies to stand up to China, but to shape the global order to promote allied interests and values. We will not likely see a major trade deal in the near-term, but we could see narrower agreements in key sectors or efforts to craft common standards in areas like data security and telecommunications infrastructure. We may also see less unilateral action and more efforts to coordinate on export controls and sanctions.

And third, a shift away from the Trump Administration’s push to decouple broadly from China toward a more targeted and selective approach. This may involve more focus on specific technologies and objectives rather than sanctioning entire Chinese companies, more effort to define the boundaries where national security or human rights concerns require limiting technology flows, and a narrower focus on key sectors in promoting reshoring.

How might China respond?  China is likely to play it cool and act with restraint during the transition as it waits for the new administration.  It would be relieved to see a shift away from US rhetoric that to the ears of the Communist Party sounds like calls for regime change, and it would seek to stabilize the relationship by re-establishing more lines of communication at senior levels and by pursuing a Biden Administration’s openness to cooperating in some areas where interests overlap.

But China’s long-term assessment of US intentions appears to be set and will not change. It believes the United States is determined to impede China’s technological development and to undermine the rule and influence of the Communist Party. Thus, China will continue its efforts to reduce or eliminate dependency on US technology, replacing US technology deeper and deeper in its supply chains, and to orient its economy to rely more on domestic consumption. China will also continue to develop new legal tools that can be used for retaliation — such as its Unreliable Entity List and new Export Control Law — but it will likely continue to exercise restraint to avoid driving away foreign investment or accelerating the movement of supply chains out of China.