U.S. government agencies often seek more power. They generally do that in one of two ways: they ask Congress for a new law conferring additional authority on the agency; or they simply assert the power based on old law. The Environmental Protection Agency (EPA), for example, may seek from Congress new laws providing authority to regulate substances previously outside the EPA’s purview. Or the EPA may assert that, properly understood, old laws provide authority to regulate that substance.
The Committee on Foreign Investment in the United States, or CFIUS, has made a recent bold play that follows the second path – finding authority in old legislation – and that is particularly striking.
To protect national security, CFIUS reviews foreign investments in U.S. companies. For approximately 20 years, the Committee’s authority with respect to these investments was commonly understood as limited to two types of actions: (1) CFIUS could recommend to the President that he block a foreign investment (or unwind one that had occurred) to protect national security; or (2) CFIUS could negotiate security agreements with the foreign investor, where the foreign investor would commit to security measures sought by the Committee (e.g., the right to conduct on-site inspections and review the foreign investor’s books).
CFIUS’s second authority – negotiating agreements with the foreign investor – was dependent on its authority to make negative recommendations to the President. The threat of such negative recommendations, and the possibility that the President would act on such recommendations, enabled the Committee to extract security commitments from foreign investors. In exchange for these commitments, the Committee would refrain from making a negative recommendation to the President.
But in CFIUS’s negotiations with foreign investors, the foreign investors had a modicum of leverage: the President’s time is a very scarce resource, and no regulatory agency wants to use that time unless absolutely necessary. So, if the Committee wanted from a foreign investor the right to conduct on-site inspections and review the foreign investor’s books, the foreign investor might propose a somewhat less burdensome arrangement – say, that CFIUS conduct such inspections and reviews no more than once each year. The Committee would have to consider whether it was worth pushing a case to the President or instead accepting the parameters proposed by the foreign investor. Often, when the parameters proposed by the foreign investor were reasonable, the Committee accepted them.
CFIUS now has said, in effect, “we don’t need to accept no stinkin’ parameters.” Why? Because the Committee has found authority that it previously did not know it had – the authority to issue its own orders, rather than merely making recommendations to the President. This newfound authority alters the calculus of negotiations with CFIUS. Indeed, it dramatically diminishes the ability to negotiate with the Committee over security commitments – after all, there is little reason for the Committee to negotiate when it can issue whatever orders it wants.
And where did the Committee find the authority to issue its own orders? In a piece of 2007 legislation that amended the CFIUS process. That legislation provides that the Committee may “negotiate, enter into or impose, and enforce any agreement or condition” with the foreign investor. Before the 2007 legislation, CFIUS’s statutory authority to negotiate agreements was unclear, and one of the purposes of the 2007 legislation was to put that authority on solid footing.
Interestingly, however, the legislative history nowhere suggests an intent to confer on the Committee the authority to issue its own orders – a move that transforms the Committee from a national security watchdog and Presidential proxy into a full-scale regulatory body. More conspicuously, the CFIUS regulations promulgated to implement the 2007 legislation are entirely devoid of any reference to the issuance of orders by the Committee.
The CFIUS regulations do provide that when the Committee grants a request to withdraw a case from CFIUS’s review, the Committee may establish “interim protections” to address national security concerns until the case is re-submitted for review. But this regulatory authority to establish interim protections in limited circumstances seemingly weighs against CFIUS. Juxtaposed with the complete absence of any provision concerning the issuance of orders during the pendency of a case, the regulations authorizing “interim protections” for withdrawn cases seemingly weaken, rather than strengthen, the argument that the Committee has blanket authority to issue its own orders during the pendency of a case.
Indeed, before the Committee began to issue such orders, the conventional understanding among CFIUS lawyers was that CFIUS could “impose” conditions only in two circumstances: (i) when a case is withdrawn, in which event the Committee can establish “interim protections”; and (ii) pursuant to an agreement between the foreign investor and the Committee (e.g., pursuant to an agreement that the Committee must approve the foreign investor’s security plan, the Committee could impose a requirement that the foreign investor alter the security plan in a particular way).
But whatever the conventional understanding, CFIUS now has asserted that it is a full-scale regulator, with the power to issue orders on its own. This substantially raises the stakes of all CFIUS cases, as CFIUS participants should now understand and take into consideration when navigating the CFIUS process.