Impact of New US Sanctions on Publicly Traded Securities of Communist Chinese Military Companies - Presentation to Mutual Fund Directors Forum
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Impact of New US Sanctions on Publicly Traded Securities of Communist Chinese Military Companies Presentation to Mutual Fund Directors Forum Darshak Dholakia, Partner January 13, 2021 © 2021 Dechert LLP
Overview
Executive Order 13959, “Addressing the Threat from Securities
Investments that Finance Communist Chinese Military
Companies” issued on November 12, 2020
– The 1999 National Defense Authorization Act called on the DOD to
identify “Communist Chinese military companies” that are
operating directly or indirectly in the United States, but first list not
prepared until June 2020
– Definition includes “any other person that is owned or controlled by
the People’s Liberation Army and is engaged in providing
commercial services, manufacturing, producing, or reporting”
January 13, 2021 Impact of New Sanctions on CCMC Securities 2Summary of Executive Order 13959
As of January 11, 2021 (or the relevant date), Executive Order 13959 prohibits purchases by
any U.S. person of:
– Publicly traded securities of any CCMC
– Any securities that are derivative of publicly traded securities of any CCMC
– Any securities that are designed to provide investment exposure to publicly traded securities of
any CCMC
The Order generally permits:
– Continued holding of targeted securities until Nov. 11, 2021 (or relevant date)
– Continued holding and additional purchases of funds that hold CCMCs but will comply with E.O.
– Limited purchases until Nov. 11, 2021 that are solely to divest from targeted securities (closing
options)
– Divestments to non-U.S. persons
January 13, 2021 Impact of New Sanctions on CCMC Securities 3Definitions
“U.S. person” means 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
“Security” (Sec. 4(d) / 15 U.S.C. 78c(a)(10)) means any note, stock, treasury stock, security future,
security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing
agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate,
preorganization certificate or subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any
security, certificate of deposit, or group or index of securities (including any interest therein or based
on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities
exchange relating to foreign currency, or in general, any instrument commonly known as a “security”;
or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or
warrant or right to subscribe to or purchase, any of the foregoing
“Publicly traded securities” means securities (as defined in section 4(d) of E.O. 13959) denominated
in any currency that trade on a securities exchange or through the method of trading that is commonly
referred to as “over-the-counter,” in any jurisdiction.
January 13, 2021 Impact of New Sanctions on CCMC Securities 4CCMCs on OFAC Non-SDN CCMC List
1. Aero Engine Corporation of China 13. China National Nuclear Corp. Group Co Ltd/China Unicom (Hong
Kong) Limited
2. Aviation Industry Corporation of China 14. China North Industries Group
(AVIC) Corporation (Norinco Group) 25. CRRC Corp.
3. China Academy of Launch Vehicle 15. China Nuclear Engineering & 26. Dawning Information Industry Co
Technology (CALT) Construction Corporation (CNECC) (Sugon)
4. China Aerospace Science and Industry 16. China Railway Construction 27. Hangzhou Hikvision Digital Technology
Corporation (CASIC) Corporation (CRCC) Co., Ltd. (Hikvision)
5. China Aerospace Science and 17. China Shipbuilding Industry 28. Huawei
Technology Corporation (CASC) Corporation (CSIC) 29. Inspur Group
6. China Communications Construction 18. China South Industries Group
30. Panda Electronics Group
Company (CCCC) Corporation (CSGC)
31. Sinochem Group Co Ltd
7. China Electronics Corporation (CEC) 19. China Spacesat
32. China Construction Technology Co. Ltd.
8. China Electronics Technology Group 20. China State Construction Group Co.,
(CCTC)
Corporation (CETC) Ltd.
33. China International Engineering
9. China General Nuclear Power Corp. 21. China State Shipbuilding Corporation
Consulting Corp. (CIECC)
(CSSC)
10. China Mobile Communications
34. China National Offshore Oil Corp.
Group/China Mobile Limited 22. China Telecommunications Corp./China
(CNOOC)/CNOOC Ltd.
Telecom Corporation Limited
11. China National Chemical Corporation
35. Semiconductor Manufacturing
(ChemChina) 23. China Three Gorges Corporation
International Corp. (SMIC)
Limited
12. China National Chemical Engineering
Group Co., Ltd. (CNCEC) 24. China United Network Communications
January 13, 2021 Impact of New Sanctions on CCMC Securities 5Summary of Prohibitions on Publicly Traded Securities
CCMCs Listed as of Nov. 12, 2020:
– Until January 11, 2021: No restrictions
– January 11, 2021 – November 11, 2021: Purchases of CCMC securities are prohibited (but purchases of certain
funds providing CCMC exposure permitted), U.S. persons permitted to hold but must divest to non-U.S. persons
by end of period
– On or after November 12, 2021: No activities authorized (except perhaps continued holding of illiquid securities)
CCMCs listed in the future:
– Date [T]: Entity listed as CCMC by Treasury or Defense
– Until [T + 59 days]: No restrictions
– [T + 60 days] through [T + 365 days]: Purchases of CCMC securities are prohibited (but purchases of certain
funds providing CCMC exposure permitted), US persons permitted to hold but must divest to non-US persons
by end of period
– On or after [T + 366 days]: No activities authorized (except perhaps continued holding of illiquid securities)
January 13, 2021 Impact of New Sanctions on CCMC Securities 6FAQs 860 and 861: “Investment Exposure”
860. For purposes of Executive Order (E.O.) 13959, what financial instruments are covered by the
provision stating the prohibitions apply to “any transaction in … any securities that are derivative
of, or are designed to provide investment exposure to such” publicly traded securities?
Examples of financial instruments covered by this provision include, but are not limited to,
derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (ADRs), global
depositary receipts (GDRs), exchange-traded funds (ETFs), index funds, and mutual funds, to the
extent such instruments also meet the definition of “security” as defined in section 4(d) of E.O.
13959.
12/28/2020
861. Does Executive Order (E.O.) 13959 prohibit U.S. persons from investing in U.S. or foreign
funds, such as exchange-traded funds (ETFs) or other mutual funds, that hold publicly traded
securities of a Communist Chinese military company?
Yes. 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 is prohibited regardless of such securities’ share of the underlying index
fund, ETF, or derivative thereof.
12/28/2020
January 13, 2021 Impact of New Sanctions on CCMC Securities 7FAQ 865: Permitted Investments in Funds
865. 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.
01/06/2021
January 13, 2021 Impact of New Sanctions on CCMC Securities 8FAQ 857: Subsidiaries 857. Do the prohibitions in E.O. 13959 apply to transactions in publicly traded securities of subsidiaries of Communist Chinese military companies? The prohibitions in E.O. 13959 apply to any subsidiary of a Communist Chinese military company, after such subsidiary is publicly listed by Treasury pursuant to section (4)(a)(iii) of the Order. The initial prohibitions pursuant to section 1(a)(ii) of E.O. 13959 would go into effect beginning 9:30 a.m. eastern time on the date that is 60 days after such subsidiary is added to OFAC’s new list to further implement E.O. 13959. Treasury intends to publicly list as subsidiaries any entity that issues publicly traded securities and that is (1) 50 percent or more owned by one or more Communist Chinese military company(ies) identified in or pursuant to E.O. 13959, consistent with OFAC’s 50 Percent Rule Guidance; or (2) determined to be controlled by one or more Communist Chinese military company(ies) identified in or pursuant to E.O. 13959. 12/28/2020 January 13, 2021 Impact of New Sanctions on CCMC Securities 9
FAQ 864: Subsidiaries (cont.)
864. 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.
01/06/2021
January 13, 2021 Impact of New Sanctions on CCMC Securities 10General License 1: Non-listed Closely Matching Subsidiaries General License 1 (issued Jan. 8, 2021), authorizes all transactions and activities…“involving publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of an entity whose name closely matches the name of a Communist Chinese military company identified in the Annex to E.O. 13959 but that has not been listed on the Office of Foreign Assets Control’s Non-SDN Communist Chinese Military Companies List” until January 28, 2021 January 13, 2021 Impact of New Sanctions on CCMC Securities 11
FAQ 863: Permitted Ancillary Activities 863. 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. 01/06/2021 January 13, 2021 Impact of New Sanctions on CCMC Securities 12
Index Providers Statements from FTSE Russell (Dec. 4), S&P Dow Jones Indices (Dec. 9), and MSIC (Dec. 15) regarding the removal of CCMCs from indexes January 13, 2021 Impact of New Sanctions on CCMC Securities 13
Other Issues Due Diligence Expectations Holding Foreign Companies Accountable Act Addition of Chinese companies to U.S. Commerce Department’s Entity List January 13, 2021 Impact of New Sanctions on CCMC Securities 14
Questions?
Darshak Dholakia
Partner, Dechert LLP
darshak.dholakia@dechert.com
202-261-3467
January 13, 2021 Impact of New Sanctions on CCMC Securities 15For further information, visit our website at dechert.com Dechert practices as a limited liability partnership or limited liability company other than in Dublin and Hong Kong
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