Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern, 54961-54972 [2023-17164]

Agencies

• DEPARTMENT OF THE TREASURY
• Office of Investment Security

[Federal Register Volume 88, Number 155 (Monday, August 14, 2023)]
[Proposed Rules]
[Pages 54961-54972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17164]


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DEPARTMENT OF THE TREASURY

Office of Investment Security

31 CFR Chapter VIII

[Docket ID TREAS-DO-2023-0009]
RIN 1505-AC82


Provisions Pertaining to U.S. Investments in Certain National 
Security Technologies and Products in Countries of Concern

AGENCY: Office of Investment Security, Department of the Treasury.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Executive Order of August 9, 2023, ``Addressing United 
States Investments in Certain National Security Technologies and 
Products in Countries of Concern'' (the Order), directs the Secretary 
of the Treasury (the Secretary) to issue regulations that identify 
categories of transactions involving technologies and products that may 
contribute to the threat to the

[[Page 54962]]

national security of the United States identified under the Order and 
require United States persons to notify the Department of the Treasury 
(the Treasury Department) of each such transaction; and identify 
categories of transactions involving technologies and products that 
pose a particularly acute national security threat to the United States 
and prohibit United States persons from engaging in such transactions. 
This advance notice of proposed rulemaking (ANPRM) seeks public comment 
on various topics related to the implementation of the Order.

DATES: Written comments on this ANPRM must be received by September 28, 
2023.

ADDRESSES: Written comments may be submitted through one of two 
methods:
     Electronic Submission: Comments may be submitted 
electronically through the Federal Government eRulemaking portal at 
https://www.regulations.gov.
     Mail: Send to U.S. Department of the Treasury, Attention: 
Meena R. Sharma, Acting Director, Office of Investment Security Policy 
and International Relations, 1500 Pennsylvania Avenue NW, Washington, 
DC 20220.
    We encourage comments to be submitted via https://www.regulations.gov. Please submit comments only and include your name 
and company name (if any) and cite ``Provisions Pertaining to U.S. 
Investments in Certain National Security Technologies and Products in 
Countries of Concern'' in all correspondence.
    Anyone submitting business confidential information should clearly 
identify the business confidential portion at the time of submission, 
file a statement justifying nondisclosure and referring to the specific 
legal authority claimed, and provide a non-confidential version of the 
submission. For comments submitted electronically containing business 
confidential information, the file name of the business confidential 
version should begin with the characters ``BC.'' Any page containing 
business confidential information must be clearly marked ``BUSINESS 
CONFIDENTIAL'' on the top of that page. The corresponding non-
confidential version of those comments must be clearly marked 
``PUBLIC.'' The file name of the non-confidential version should begin 
with the character ``P.'' Any submissions with file names that do not 
begin with either a ``BC'' or a ``P'' will be assumed to be public and 
will be posted without change, including any business or personal 
information provided, such as names, addresses, email addresses, or 
telephone numbers.
    To facilitate an efficient review of submissions, the Treasury 
Department encourages but does not require commenters to: (1) submit a 
short executive summary at the beginning of all comments; (2) provide 
supporting material, including empirical data, findings, and analysis 
in reports or studies by established organizations or research 
institutions; (3) consistent with the questions below, describe the 
relative benefits and costs of the recommended approach; and (4) refer 
to the numbered question(s) herein to which each comment is addressed.
    The Treasury Department welcomes interested parties' submissions of 
written comments discussing relevant experiences, information, and 
views. Parties wishing to supplement their written comments in a 
meeting may request to do so, and the Treasury Department may 
accommodate such requests as resources permit. Additionally, in 
consultation with the Departments of Commerce and State, the Treasury 
Department expects to seek additional opportunities to engage in 
discussions with certain stakeholders, including foreign partners and 
allies.

FOR FURTHER INFORMATION CONTACT: Meena R. Sharma, Acting Director, 
Office of Investment Security Policy and International Relations, at 
U.S. Department of the Treasury, 1500 Pennsylvania Avenue NW, 
Washington, DC 20220; telephone: (202) 622-3425; email: 
[email protected].

SUPPLEMENTARY INFORMATION: 

I. Background

    On August 9, 2023, the President issued the Order pursuant to his 
authority under the Constitution and the laws of the United States, 
including the International Emergency Economic Powers Act (IEEPA), the 
National Emergencies Act, and section 301 of Title 3, United States 
Code. In the Order, the President declared a national emergency and 
determined the need for action due to the policies and actions of 
countries of concern which seek to, among other things, exploit U.S. 
outbound investments to develop sensitive technologies and products 
critical for military, intelligence, surveillance, and cyber-enabled 
capabilities. In an Annex to the Order, the President identified one 
country, the People's Republic of China (PRC), along with the Special 
Administrative Region of Hong Kong and the Special Administrative 
Region of Macau, as a country of concern. The President may modify the 
Annex to the Order and update the list of countries of concern in the 
future.
    Advanced technologies and products that are increasingly developed 
and financed by the private sector form the basis of next-generation 
military, intelligence, surveillance, and cyber-enabled capabilities. 
For example, certain advanced semiconductors and microelectronics, 
quantum information technologies, and artificial intelligence (AI) 
systems will underpin military innovations that improve the speed and 
accuracy of military decision-making, planning, and logistics; enable 
the compromise of encryption and other cybersecurity controls; and 
advance mass surveillance capabilities. The potential military, 
intelligence, surveillance, and cyber-enabled applications of these 
technologies and products pose risks to U.S. national security 
particularly when developed by a country of concern such as the PRC in 
which the government seeks to (1) direct entities to obtain 
technologies to achieve national security objectives; and (2) compel 
entities to share or transfer these technologies to the government's 
military, intelligence, surveillance, and security apparatuses. The PRC 
government explicitly seeks to advance these technologies and to ensure 
that new innovations simultaneously benefit its military and commercial 
aims. The PRC government is aggressively pursuing these objectives to 
confer a decisive advantage to its military, intelligence, 
surveillance, and cyber-enabled services. The PRC government is also 
encouraging a growing number of PRC entities to undertake military 
research and development, including weapons production, which exploit 
private investments in pursuit of this goal.
    U.S. investments are often more valuable than capital alone because 
they can also include the transfer of intangible benefits. Investors 
from the United States often lend support to the companies in which 
they invest, and these could include PRC entities that are developing 
technology with military end uses. Intangible benefits that often 
accompany U.S. investments and help companies succeed include enhanced 
standing and prominence, managerial assistance, access to investment 
and talent networks, market access, and enhanced access to additional 
financing. Certain investments from the United States into a country of 
concern can be exploited to accelerate the development of sensitive 
technologies or products in ways that negatively impact the strategic 
military position of the United States.

[[Page 54963]]

Such investments, therefore, risk exacerbating this threat to U.S. 
national security.
    Cross-border investment creates valuable economic opportunities and 
promotes competitiveness, innovation, and productivity. For these 
reasons, the United States has and will continue to champion open and 
rules-based investment.
    The United States has undertaken efforts to enhance existing policy 
tools and develop new policy initiatives aimed at maintaining U.S. 
leadership in technologies critical to national security, while 
preventing the exploitation of our open economic ecosystem in ways that 
could undermine our national security. Nevertheless, there remain 
instances where the risks presented by U.S. investments enabling 
countries of concern to develop critical military, intelligence, 
surveillance, or cyber-enabled capabilities are not sufficiently 
addressed by existing tools. Accordingly, the Order directs the 
Secretary to establish a program to prohibit or require notification 
concerning certain types of outbound investments by United States 
persons into certain entities located in or subject to the jurisdiction 
of a country of concern, and certain other entities owned by persons of 
a country of concern, involved in discrete categories of advanced 
technologies and products.
    The Order has two primary components that serve different 
objectives with respect to the relevant technologies and products. The 
first component requires the Secretary to prohibit certain types of 
investment by a United States person in a covered foreign person whose 
business involves certain categories of advanced technologies and 
products. The second component requires notification to the Secretary 
regarding certain types of investments by a United States person in a 
covered foreign person whose business involves other categories of 
technologies and products. The focus of both components is on 
investments that could enhance a country of concern's military, 
intelligence, surveillance, or cyber-enabled capabilities through the 
advancement of technologies and products in particularly sensitive 
areas.

II. Program Overview

    The Treasury Department is considering implementation of the Order 
through the establishment of a program that would (1) prohibit certain 
types of investment by United States persons into certain entities 
located in or subject to the jurisdiction of a country of concern, and 
certain other entities owned by persons of a country of concern, with 
capabilities or activities related to defined technologies and 
products; and (2) require submission of a notification to the Secretary 
by United States persons for certain types of investment into certain 
entities located in or subject to the jurisdiction of a country of 
concern, and certain other entities owned by persons of a country of 
concern, with capabilities or activities related to defined 
technologies and products. The Treasury Department does not contemplate 
that the program will entail a case-by-case review of U.S. outbound 
investments. Rather, the Treasury Department expects that the 
transaction parties will have the obligation to determine whether a 
given transaction is prohibited, subject to notification, or 
permissible without notification.
    Importantly, the program is not intended to impede all U.S. 
investments into a country of concern or impose sector-wide 
restrictions on United States person activity. The high-level 
categories of the technologies and products that are the focus of the 
program, as enumerated in the Order, are: (1) semiconductors and 
microelectronics, for which the Treasury Department is considering a 
prohibition on transactions related to certain advanced technologies 
and products, and considering a notification requirement related to 
other technologies and products; (2) quantum information technologies, 
for which the Treasury Department is considering a prohibition on 
transactions related to certain technologies and products; and (3) AI 
systems, for which the Treasury Department is considering a 
notification requirement for transactions related to certain 
technologies and products with specific end uses and is considering a 
prohibition in certain other cases, as discussed herein.
    The Treasury Department anticipates that transactions covered by 
the program would include certain acquisitions of equity interests 
(e.g., mergers and acquisitions, private equity, and venture capital), 
greenfield, joint ventures, and certain debt financing transactions by 
United States persons. Given the focus on transactions that could aid 
in the development of technological advances that pose a risk to U.S. 
national security, the Treasury Department expects to create a carveout 
or exception for specific types of transactions, such as certain 
investments into publicly-traded securities or into exchange-traded 
funds.
    It is not proposed that the program provide for retroactive 
application of the provisions related to the prohibition of certain 
transactions and the notification of others. However, the Treasury 
Department may, after the effective date of the regulations, request 
information about transactions by United States persons that were 
completed or agreed to after the date of the issuance of the Order to 
better inform the development and implementation of the program.
    The Treasury Department, in consultation with the Department of 
Commerce and, as appropriate, other executive departments and agencies, 
will evaluate the program after an initial period of no longer than one 
year following the effective date of the implementing regulations to 
consider whether adjustments to the program are warranted.

III. Issues for Comment

    The Treasury Department welcomes comments and views from a wide 
range of stakeholders on all aspects of how the Secretary should 
implement this new program under the Order. The Treasury Department is 
particularly interested in obtaining information on the topics 
discussed below.
    Note that this ANPRM does not necessarily identify the full scope 
of potential approaches the Treasury Department might ultimately 
undertake in regulations to implement the Order.

A. Overview

    The Order frames the key terms that will be developed through 
rulemaking. Accordingly, United States persons may either be required 
to notify the Treasury Department of, or be prohibited from 
undertaking, a transaction with a ``covered foreign person''--that is, 
a ``person of a country of concern'' (per the President's designation 
of a country of concern in the Annex to the Order) that is engaged in 
certain defined activities involving ``covered national security 
technologies and products'' that may contribute to the threat to the 
national security of the United States. These requirements would not 
apply to a United States person engaged in an ``excepted transaction.'' 
Definitions under consideration for these and related terms are 
discussed below, along with questions on which the Treasury Department 
seeks comment.

B. U.S. Person

    The Order authorizes the Secretary to prohibit or require 
notification of instances where a ``United States person'' engages in a 
covered transaction. The Order defines a ``United States person'' as 
any United States citizen, lawful permanent resident, entity organized 
under the

[[Page 54964]]

laws of the United States or any jurisdiction within the United States, 
including any foreign branches of any such entity, and any person in 
the United States.
    The Treasury Department is considering adopting the Order's 
definition of the term ``United States person'' without elaboration or 
amendment and referring to it as a ``U.S. person.'' The Treasury 
Department expects the regulations to apply to U.S. persons wherever 
they are located.
    The ANPRM seeks comment on this topic including:

    1. In what ways, if any, should the Treasury Department 
elaborate or amend the definition of ``U.S. person'' to enhance 
clarity or close any loopholes? What, if any, unintended 
consequences could result from the definition under consideration?
    2. Are there additional factors that the Treasury Department 
should consider when determining whether an individual or entity is 
a ``U.S. person''? Please explain.

C. Covered Foreign Person; Person of a Country of Concern

    The Order requires the Treasury Department to prohibit or require 
notification of certain transactions by a U.S. person into a ``covered 
foreign person.'' The Treasury Department is considering elaborating 
upon the definition of a ``covered foreign person'' in the Order to 
mean (1) a person of a country of concern that is engaged in, or a 
person of a country of concern that a U.S. person knows or should know 
will be engaged in, an identified activity with respect to a covered 
national security technology or product; or (2) a person whose direct 
or indirect subsidiaries or branches are referenced in item (1) and 
which, individually or in the aggregate, comprise more than 50 percent 
of that person's consolidated revenue, net income, capital expenditure, 
or operating expenses. (For more information on the knowledge standard 
under consideration, see subsection J below.)
    Further, the Treasury Department is considering elaborating upon 
the definition for the term ``person of a country of concern'' 
mentioned in the Order to mean (1) any individual that is not a U.S. 
citizen or lawful permanent resident of the United States and is a 
citizen or permanent resident of a country of concern; (2) an entity 
with a principal place of business in, or an entity incorporated in or 
otherwise organized under the laws of a country of concern; (3) the 
government of a country of concern, including any political 
subdivision, political party, agency, or instrumentality thereof, or 
any person owned, controlled, or directed by, or acting for or on 
behalf of the government of such country of concern; or (4) any entity 
in which a person or persons identified in items (1) through (3) holds 
individually or in the aggregate, directly or indirectly, an ownership 
interest equal to or greater than 50 percent.
    The Treasury Department intends that the definitions of ``covered 
foreign person'' and ``person of a country of concern'' together 
provide clarity and predictability within the scope of the authorities 
granted by the Order while avoiding major loopholes and unintended 
consequences. For example, item (2) of the definition of ``covered 
foreign person'' is intended to capture parent companies whose 
subsidiaries and branches engage in activities related to a covered 
national security technology or product. (Meanwhile, item (1) would 
capture such subsidiaries and branches themselves as covered foreign 
persons.) In addition, item (4) of the definition of ``person of a 
country of concern'' is intended to capture entities located outside of 
a country of concern that are majority-owned by persons of a country of 
concern.
    The ANPRM seeks comment on this topic including:

    3. Should the Treasury Department further elaborate in any way 
on the definitions of ``covered foreign person'' and ``person of a 
country of concern'' to enhance clarity or close any loopholes?
    4. What additional information would be helpful for U.S. persons 
to ascertain whether a transaction involves a ``covered foreign 
person'' as defined in section III.C?
    5. What, if any, unintended consequences could result from the 
definitions under consideration? What is the likely impact on U.S. 
persons and U.S. investment flows? What is the likely impact on 
persons and investment flows from third countries or economies? If 
you believe there will be impacts on U.S. persons, U.S. investment 
flows, third-country persons, or third-country investment flows, 
please provide specific examples or data.
    6. What could be the specific impacts of item (2) of the 
definition of ``covered foreign person''? What could be the 
consequences of setting a specific threshold of 50 percent in the 
categories of consolidated revenue, net income, capital 
expenditures, and operating expenses? Are there other approaches 
that should be considered with respect to U.S. person transactions 
into companies whose subsidiaries and branches engage in the 
identified activity with respect to a covered national security 
technology or product?
    7. What analysis or due diligence would a U.S. person anticipate 
undertaking to ascertain whether they are investing in a covered 
foreign person? What challenges could arise in this process for the 
investor and what clarification in the regulations would be helpful? 
How would U.S. persons anticipate handling instances where they 
attempt to ascertain needed information but are unable to, or 
receive information they have doubts about? What contractual or 
other methods might a U.S. person employ to enhance certainty that a 
transaction they are undertaking is not a covered transaction?
    8. What other recommendations do you have on how to enhance 
clarity or refine the definitions, given the overall objectives of 
the program?

D. Covered Transactions

    The Order requires the Secretary to promulgate regulations defining 
``prohibited transactions'' and ``notifiable transactions.'' These are 
distinct concepts and the scope of each is discussed below in 
connection with specific ``covered national security technologies and 
products.''
    The Treasury Department is considering using a single term, 
``covered transaction,'' that would apply to the definition of both 
prohibited and notifiable transactions. Specifically, the Treasury 
Department is considering defining the term ``covered transaction'' to 
mean a U.S. person's direct or indirect (1) acquisition of an equity 
interest or contingent equity interest in a covered foreign person; (2) 
provision of debt financing to a covered foreign person where such debt 
financing is convertible to an equity interest; (3) greenfield 
investment that could result in the establishment of a covered foreign 
person; or (4) establishment of a joint venture, wherever located, that 
is formed with a covered foreign person or could result in the 
establishment of a covered foreign person. The Treasury Department 
intends this definition to be forward-looking, and not to cover 
transactions and the fulfillment of uncalled, binding capital 
commitments with cancellation consequences made prior to the issuance 
of the Order. The Treasury Department may, after the effective date of 
the regulations, request information about transactions by U.S. persons 
that were completed or agreed to after the date of the issuance of the 
Order to better inform the development and implementation of the 
program.
    The Treasury Department is considering including ``indirect'' 
transactions as ``covered transactions'' in order to close loopholes 
that would otherwise result, and to clarify that attempts to evade 
prohibitions on certain transactions cannot find safe harbor in the use 
of intermediary entities that are not ``U.S. persons'' or ``covered 
foreign persons,'' as defined. Examples of such conduct could include, 
but would not be limited to, a U.S. person knowingly investing in a 
third-country entity that will use the investment to undertake a 
transaction

[[Page 54965]]

with a covered foreign person that would be subject to the program if 
engaged in by a U.S. person directly.
    The Treasury Department does not intend the definition of ``covered 
transaction'' under consideration to apply to the following activities, 
so long as they do not involve any of the definitional elements of a 
``covered transaction'' and are not undertaken as part of an effort to 
evade these rules: university-to-university research collaborations; 
contractual arrangements or the procurement of material inputs for any 
of the covered national security technologies or products (such as raw 
materials); intellectual property licensing arrangements; bank lending; 
the processing, clearing, or sending of payments by a bank; 
underwriting services; debt rating services; prime brokerage; global 
custody; equity research or analysis; or other services secondary to a 
transaction.
    The definition of ``covered transaction'' under consideration would 
also exclude ``excepted transactions,'' as discussed in this ANPRM.
    The Order describes additional activities that are, or may be, 
prohibited. In particular, any conspiracy formed to violate the 
regulations and any action that evades, has the purpose of evading, 
causes a violation of, or attempts to violate the Order or any 
regulation issued thereunder is prohibited.
    In addition, the Order provides authority to the Secretary to 
prohibit U.S. persons from ``knowingly directing transactions'' that 
would be prohibited transactions pursuant to the Order if engaged in by 
a U.S. person.
    The Order also provides authority to the Secretary to require U.S. 
persons to ``take all reasonable steps to prohibit and prevent any 
transaction by a foreign entity controlled by such United States person 
that would be a prohibited transaction if engaged in by a United States 
person.'' With respect to notifiable transactions, the Order provides 
authority to the Secretary to require U.S. persons to provide 
notification of ``any transaction by a foreign entity controlled by 
such United States person that would be a notifiable transaction if 
engaged in by a United States person.'' (For more information on the 
obligations of U.S. persons with respect to controlled foreign 
entities, see subsection M below.)
    The ANPRM seeks comment on this topic including:

    9. What modifications, if any, should be made to the definition 
of ``covered transaction'' under consideration to enhance clarity or 
close any loopholes?
    10. What additional information would be helpful for U.S. 
persons to ascertain whether a transaction is a ``covered 
transaction'' as defined in section III.D?
    11. What, if any, unintended consequences could result from the 
definition of ``covered transaction'' under consideration? What is 
the likely impact on U.S. persons and U.S. investment flows? What is 
the likely impact on persons and investment flows from third 
countries or economies? If you believe there will be impacts on U.S. 
persons, U.S. investment flows, third-country persons, or third-
country investment flows, please provide specific examples or data.
    12. How, if at all, should the inclusion of ``debt financing to 
a covered foreign person where such debt financing is convertible to 
an equity interest'' be further refined? What would be the 
consequences of including additional debt financing transactions in 
the definition of ``covered transaction''?
    13. The Treasury Department is considering how to treat follow-
on transactions into a covered foreign person and a covered national 
security technology or product when the original transaction relates 
to an investment that occurred prior to the effective date of the 
implementing regulations. What would be the consequences of covering 
such follow-on transactions? If you believe certain follow-on 
transactions should or should not be covered, please provide 
examples and information to support that position.
    14. How could the Treasury Department provide clarity on the 
definition of an ``indirect'' covered transaction? What are 
particular categories that should or should not be covered as 
``indirect'' covered transactions, and why?
    15. How could prongs (3) and (4) of the ``covered transaction'' 
definition under consideration be clarified in rulemaking such that 
a U.S. person can ascertain whether a greenfield or joint venture 
investment ``could result'' in the establishment of a covered 
foreign person? What are the impacts and consequences if a knowledge 
standard, actual or constructive, is used as part of these prongs? 
What are the impacts and consequences if a foreseeability standard 
is used as part of these prongs? (For more information on the 
knowledge standard under consideration, see subsection J below.)
    16. Please specify whether and how any of the following could 
fall within the considered definition of ``covered transaction'' 
such that additional clarity would be beneficial given the policy 
intent of this program is not to implicate these activities unless 
undertaken as part of an effort to evade these rules:
     University-to-university research collaborations;
     Contractual arrangements or the procurement of material 
inputs for any of the covered national security technologies or 
products;
     Intellectual property licensing arrangements;
     Bank lending;
     The processing, clearing, or sending of payments by a 
bank;
     Underwriting services;
     Debt rating services;
     Prime brokerage;
     Global custody; and
     Equity research or analysis.
    17. Are there other secondary or intermediary services incident 
to a transaction where there may be questions about whether they 
fall within the definition of ``covered transaction''? What are 
these situations and what are the reasons they should or should not 
be within the definition of a ``covered transaction''?

E. Excepted Transactions

    Certain transactions may fall within the definition of ``covered 
transaction'' as set forth in section III.D but, due to the nature of 
the transaction, present a lower likelihood of concern. With an 
interest in minimizing unintended consequences and focusing on 
transactions that present a higher risk, the Treasury Department is 
considering a category of transactions that would be ``excepted 
transactions'' and thus excluded from the definition of ``covered 
transaction.'' The definition under consideration for ``excepted 
transaction'' is:
    1.a. An investment:

    i. into a publicly traded security, with ``security'' defined as 
set forth in section 3(a)(10) of the Securities Exchange Act of 
1934; or
    ii. into an index fund, mutual fund, exchange-traded fund, or a 
similar instrument (including associated derivatives) offered by an 
investment company as defined in the section 3(a)(1) of the 
Investment Company Act of 1940 or by a private investment fund; or
    iii. made as a limited partner into a venture capital fund, 
private equity fund, fund of funds, or other pooled investment 
funds, in each case where
    A. the limited partner's contribution is solely capital into a 
limited partnership structure and the limited partner cannot make 
managerial decisions, is not responsible for any debts beyond its 
investment, and does not have the ability (formally or informally) 
to influence or participate in the fund's or a covered foreign 
person's decision making or operations and
    B. the investment is below a de minimis threshold to be 
determined by the Secretary.
    1.b. Notwithstanding a., any investment that affords the U.S. 
person rights beyond those reasonably considered to be standard 
minority shareholder protections will not constitute an ``excepted 
transaction;'' such rights include, but are not limited to:
    i. Membership or observer rights on, or the right to nominate an 
individual to a position on, the board of directors or an equivalent 
governing body of the covered foreign person; or
    ii. Any other involvement, beyond the voting of shares, in 
substantive business decisions, management, or strategy of the 
covered foreign person. or
    2. The acquisition of the equity or other interest owned or held 
by a covered foreign person in an entity or assets located outside 
of a country of concern where the U.S. person is acquiring all 
interests in the entity or assets held by covered foreign persons; 
or

[[Page 54966]]

    3. An intracompany transfer of funds from a U.S. parent company 
to a subsidiary located in a country of concern; or
    4. A transaction made pursuant to a binding, uncalled capital 
commitment entered into before the date of the Order.

    The objective of item 1. of the definition of ``excepted 
transaction'' under consideration is to carve out certain transactions 
that are unlikely to involve the transfer of both capital and 
additional benefits to a covered foreign person. With respect to item 
1.a.iii, the Treasury Department is considering whether the exception 
should only apply to investors or investments into funds beneath a 
defined threshold, based on one or more benchmarks such as the size of 
the limited partner's investment in the fund or the size of the limited 
partner itself. The rationale for this approach is that transactions 
above a threshold are more likely to involve the conveyance of 
intangible benefits such as those often associated with larger 
institutional investors, including standing and prominence, managerial 
assistance, and enhanced access to additional financing.
    The objective of item 2. under consideration is to carve out 
buyouts of country of concern ownership, which eliminates the 
opportunity and incentive for a U.S. person to lend support to a 
covered foreign person. The objective of item 3. is to avoid unintended 
interference with the ongoing operation of a U.S. subsidiary in a 
country of concern when that U.S. subsidiary meets the definition of a 
covered foreign person, although the Treasury Department anticipates 
that the definition of a ``covered transaction'' under consideration 
would not apply to most routine intracompany actions such as the sale 
or purchase of inventory or fixed assets, the provision of paid 
services, the licensing of technology, or the provision of loans, 
guarantees, or other obligations. (The subsidiary, as a covered foreign 
person, would still be covered by the relevant provisions as it relates 
to other U.S. persons, and the U.S. parent would have other obligations 
as related to an entity that it controls--see subsection M for more 
information.) The objective of item 4. is to avoid penalizing U.S. 
persons who have entered into binding agreements prior to the date of 
the Order.
    The ANPRM seeks comment on this topic including:

    18. What modifications, if any, should be made to the definition 
of ``excepted transaction'' under consideration to enhance clarity 
or close any loopholes?
    19. What information would a U.S. person need to obtain to 
ascertain whether a transaction is an ``excepted transaction'' as 
defined in section III.E?
    20. What, if any, unintended consequences could result from the 
definition under consideration? What is the definition's likely 
impact on U.S. persons and U.S. investment flows? What is the likely 
impact on persons and investment flows from third countries or 
economies? If you believe there will be impacts on U.S. persons, 
U.S. investment flows, third-country persons, or third-country 
investment flows, please provide specific examples or data.
    21. What other types of investments, if any, should be 
considered ``excepted transactions'' and why? Are there any 
transactions included in the definition under consideration that 
should not be considered ``excepted transactions,'' and if so, why?
    22. The Treasury Department is considering the appropriate scope 
of item 1.a.iii of ``excepted transaction,'' which carves out from 
program coverage certain transactions by U.S. persons made as a 
limited partner where the investment is below a de minimis 
threshold. The goal of the qualifier in item 1.a.iii.B is to exclude 
from the ``excepted transaction'' carveout those transactions in 
excess of a set threshold, which would be set at a high level, where 
there is a greater likelihood of additional benefits being conveyed, 
and the U.S. limited partner knows or should have known that the 
venture capital fund, private equity fund, fund of funds, or other 
pooled investment fund into which the U.S. person is investing as a 
limited partner, itself invests in one or more covered foreign 
persons. The Treasury Department is considering defining such a 
threshold with respect to one or more factors such as the size of 
the U.S. limited partner's transaction, and/or the total assets 
under management of the U.S. limited partner. The concern is the 
enhanced standing and prominence that may be associated with the 
size of the transaction or the investor, and increased likelihood of 
the conveyance of intangible benefits to the covered foreign person. 
What are the considerations as to the impact of this potential 
limitation on U.S. investors, and in particular, categories of U.S. 
investors that may invest in this manner as limited partners? If the 
Treasury Department includes a threshold based on the size of the 
U.S. limited partner's investment in the fund, what should this 
threshold be, and why? If the Treasury Department includes a 
threshold based on assets under management, what should this 
threshold be, and why? What are the costs and benefits to either of 
these approaches? What other approaches should the Treasury 
Department consider in creating a threshold, above which the 
``excepted transaction'' exception would not apply--for example, 
what would be the considerations if the threshold size was with 
respect to the limited partner's investment as a percentage of the 
fund's total capital?
    23. When investing as a limited partner into a financing vehicle 
that involves the pooling of funds from multiple investors with the 
intent to engage in multiple transactions--such as a venture capital 
or private equity fund--what, if any, covenants, contracts, or other 
limitations could a U.S. investor attach to their capital 
contribution to ensure the U.S. investor's capital is not invested 
in a covered transaction, even if the fund continues to invest in 
covered transactions? What burdens would this create for U.S. 
investors? If such limitations existed or were required, how might 
investment firms change how they raise capital from U.S. investors, 
if at all?
    24. With respect to item 3. of ``excepted transaction,'' 
regarding intracompany transfers of funds from a U.S. parent company 
to a subsidiary located in a country of concern, the Treasury 
Department is interested in understanding how frequently such 
intracompany transfers would meet the definition of a ``covered 
transaction.'' What would be the impact if the exception were 
applicable only to relevant subsidiaries that were established as a 
subsidiary of the U.S. parent before the date of the Order versus 
also including subsidiaries established at any time in the future? 
Note that an exception for intracompany transfers from the parent 
company would not change the status of the subsidiary as a covered 
foreign person for purposes of receiving investments from other U.S. 
persons.
    25. Additionally with respect to item 3., the Treasury 
Department is considering defining the parent-subsidiary 
relationship as one in which a U.S. person's ownership interest is 
equal to or greater than 50 percent. What are the costs and benefits 
to this approach?

F. Covered National Security Technologies and Products: Overview

    As discussed in section III.D, the Treasury Department is 
considering defining the term ``covered transaction'' based on an 
investment by a U.S. person in or resulting in a covered foreign 
person. The Order directs the Treasury Department to focus on 
transactions that include certain covered national security 
technologies or products. Accordingly, the Treasury Department is 
considering defining the term ``covered foreign person'' using a 
further reference to an identified activity with respect to a 
designated covered national security technology or product. Thus, the 
Treasury Department is interested in developing clearly defined and 
well understood definitions with respect to each designated covered 
national security technology and product as well as the identified 
activity linking the foreign person to the technology or product.
    The Order defines the term ``covered national security technologies 
and products'' to mean sensitive technologies and products in the 
semiconductors and microelectronics, quantum information technologies, 
and artificial intelligence sectors that are critical for the military, 
intelligence, surveillance, or cyber-enabled capabilities of a country 
of concern, as determined by the Secretary in

[[Page 54967]]

consultation with the Secretary of Commerce and, as appropriate, the 
heads of other relevant agencies. Where applicable, ``covered national 
security technologies and products'' may be limited by reference to 
certain end uses of those technologies or products.
    The Treasury Department is considering regulations that would 
define specific covered national security technologies and products for 
purposes of notifiable transactions and prohibited transactions based 
on a description of the technology or product and the relevant 
activities, capabilities, or end uses of such technology or product, as 
applicable. U.S. persons undertaking a transaction with a covered 
foreign person engaged in activities with respect to the technology or 
product based on the definition would be subject to the program.
    The notification requirement will increase the U.S. Government's 
visibility into U.S. person transactions involving the defined 
technologies and products that may contribute to the threat to the 
national security of the United States. The notifications will be 
helpful in highlighting trends with respect to related capital flows as 
well as inform future policy development. The definitions under 
consideration were crafted with these objectives in mind.
    The prohibitions under consideration would be narrowly tailored 
restrictions on specific, identified areas to prevent U.S. persons from 
investing in the development of technologies and products that pose a 
particularly acute national security threat.

G. Covered National Security Technology or Product: Semiconductors and 
Microelectronics

    Consistent with the Order, the Treasury Department is considering a 
prohibition on U.S. persons undertaking certain transactions involving 
covered foreign persons engaged in activities involving sub-sets of 
advanced semiconductor and microelectronic technologies and products. 
Additionally, the Treasury Department is considering requiring 
notification by U.S. persons for certain other transactions involving 
covered foreign persons engaged in other semiconductor and 
microelectronic technologies and products.
    The U.S. Government is concerned with the development of 
semiconductor and microelectronic technology, equipment, and 
capabilities that will enable the production and certain uses of 
integrated circuits that will underpin military innovations that 
improve the speed and accuracy of military decision-making, planning, 
and logistics, among other things. The prohibition under consideration 
is focused on three concerns: (i) specific technology, equipment, and 
capabilities that enable the design and production of advanced 
integrated circuits or enhance their performance; (ii) advanced 
integrated circuit design, fabrication, and packaging capabilities; and 
(iii) the installation or sale to third-party customers of certain 
supercomputers, which are enabled by advanced integrated circuits. The 
Treasury Department is also considering a notification requirement for 
design, fabrication, and packaging of other integrated circuits. The 
notification requirement is intended to increase the U.S. Government's 
visibility into the volume and nature of investments and inform future 
policy decisions.
    Specifically, the Treasury Department is considering a prohibition 
on U.S. persons undertaking a transaction with a covered foreign person 
engaged in activities involving:

Technologies that Enable Advanced Integrated Circuits

     Software for Electronic Design Automation: The development 
or production of electronic design automation software designed to be 
exclusively used for integrated circuit design.
     Integrated Circuit Manufacturing Equipment: The 
development or production of front-end semiconductor fabrication 
equipment designed to be exclusively used for the volume fabrication of 
integrated circuits.

Advanced Integrated Circuit Design and Production

     Advanced Integrated Circuit Design: The design of 
integrated circuits that exceed the thresholds in Export Control 
Classification Number (ECCN) 3A090 in supplement No. 1 to 15 CFR part 
774 of the Export Administration Regulations (EAR), or integrated 
circuits designed for operation at or below 4.5 Kelvin.
     Advanced Integrated Circuit Fabrication: The fabrication 
of integrated circuits that meet any of the following criteria: (i) 
logic integrated circuits using a non-planar transistor architecture or 
with a technology node of 16/14 nanometers or less, including but not 
limited to fully depleted silicon-on-insulator (FDSOI) integrated 
circuits; (ii) NOT-AND (NAND) memory integrated circuits with 128 
layers or more; (iii) dynamic random-access memory (DRAM) integrated 
circuits using a technology node of 18 nanometer half-pitch or less; 
(iv) integrated circuits manufactured from a gallium-based compound 
semiconductor; (v) integrated circuits using graphene transistors or 
carbon nanotubes; or (vi) integrated circuits designed for operation at 
or below 4.5 Kelvin.
    [cir] ``Fabrication of integrated circuits'' is defined as the 
process of forming devices such as transistors, poly capacitors, non-
metal resistors, and diodes, on a wafer of semiconductor material.
     Advanced Integrated Circuit Packaging: The packaging of 
integrated circuits that support the three-dimensional integration of 
integrated circuits, using silicon vias or through mold vias.
    [cir] ``Packaging of integrated circuits'' is defined as the 
assembly of various components, such as the integrated circuit die, 
lead frames, interconnects, and substrate materials, to form a complete 
package that safeguards the semiconductor device and provides 
electrical connections between different parts of the die.

Supercomputers

     Supercomputers: The installation or sale to third-party 
customers of a supercomputer, which are enabled by advanced integrated 
circuits, that can provide a theoretical compute capacity of 100 or 
more double-precision (64-bit) petaflops or 200 or more single-
precision (32-bit) petaflops of processing power within a 41,600 cubic 
foot or smaller envelope.
    In addition, the Treasury Department is considering a requirement 
for U.S. persons to notify the Treasury Department if undertaking a 
transaction with a covered foreign person engaged in activities 
involving any of the below:
     Integrated Circuit Design: The design of integrated 
circuits for which transactions involving U.S. persons are not 
otherwise prohibited in section III.G.
     Integrated Circuit Fabrication: The fabrication of 
integrated circuits for which transactions involving U.S. persons are 
not otherwise prohibited in section III.G.
     Integrated Circuit Packaging: The packaging of integrated 
circuits for which transactions involving U.S. persons are not 
otherwise prohibited in section III.G.
    The ANPRM seeks comment on this topic including:

    26. Where possible, please provide empirical data about trends 
in U.S. investment into country of concern entities engaged in the 
activities described in section III.G. Based on this data, are there 
emerging trends with respect to U.S. outbound investments in 
semiconductors and microelectronics in countries of concern that 
would not be captured by the definitions in section III.G? If so, 
what are they?

[[Page 54968]]

    27. Please identify any areas within this category where 
investments by U.S. persons in countries of concern may provide a 
strategic benefit to the United States, such that continuing such 
investment would benefit, and not impair, U.S. national security. 
Please also identify any key factors that affect the size of these 
benefits (e.g., do these benefits differ in size depending on the 
application of the technology or product at issue?). Please be 
specific and where possible, provide supporting material, including 
empirical data, findings, and analysis in reports or studies by 
established organizations or research institutions and indicate 
material that is business confidential per the instructions at the 
beginning of this ANPRM.
    28. What modifications, if any, should be made to the 
definitions under consideration to enhance clarity or close any 
loopholes? Please provide supporting rationale(s) and data, as 
applicable, for any such proposed modification.
    29. With respect to the definition of ``Electronic Design 
Automation Software,'' would incorporation of a definition, 
including one found in the EAR, be beneficial? If so, how? 
Practically speaking, how would a focus on software for the design 
of particular integrated circuits--e.g., fin field-effect 
transistors (FinFET) or gate-all-around field effect transistors 
(GAAFET)--be beneficial? If so, how could such a focus be 
incorporated into the definition?
    30. Should the Treasury Department consider additional existing 
definitions from other U.S. Government regulations or programs? 
Should the Treasury Department consider any industry definitions 
that may be relevant? If so, please note any additional specific 
definitions, with citations, that the Treasury Department should 
consider in this category.
    31. How might the Treasury Department further clarify when 
transactions into entities engaged in activities involving 
semiconductors and microelectronics in countries of concern would be 
prohibited, and when they would be allowed but require notification?
    32. In what ways could the definition of ``Supercomputer'' be 
clarified? Are there any alternative ways to focus this definition 
on a threshold of computing power without using the volume metric, 
such that it would distinguish supercomputers from data centers, 
including how to distinguish between low latency high-performance 
computers and large datacenters with disparate computing clusters? 
Are there any other activities relevant to such supercomputers other 
than the installation or sale of systems that should be captured?

H. Covered National Security Technology or Product: Quantum Information 
Technologies

    The Order states that the regulations will define ``covered 
national security technologies and products'' to include sensitive 
technologies and products in the quantum information technologies 
category.
    The U.S. Government is concerned with the development and 
production of quantum information technologies and products that enable 
capabilities that could compromise encryption and other cybersecurity 
controls and jeopardize military communications, among other things. To 
address these concerns, the Treasury Department is considering a 
prohibition that would focus on specific and advanced quantum 
information technologies and products, or with respect to end uses. In 
the case of quantum sensors, the end-use provisions seek to distinguish 
from use cases in civilian fields such as medicine and geology, and in 
the case of quantum networking systems, they seek to avoid capturing 
quantum systems with no relevance to secure communications or systems 
related to classical encryption. The Treasury Department is currently 
not considering a separate notification requirement for quantum 
information technologies.
    The Treasury Department is considering a prohibition on U.S. 
persons undertaking a transaction with a covered foreign person engaged 
in activities involving:
     Quantum Computers and Components: The production of a 
quantum computer, dilution refrigerator, or two-stage pulse tube 
cryocooler.
    [cir] ``Quantum computer'' is defined as a computer that performs 
computations that harness the collective properties of quantum states, 
such as superposition, interference, or entanglement.
     Quantum Sensors: The development of a quantum sensing 
platform designed to be exclusively used for military end uses, 
government intelligence, or mass-surveillance end uses.
     Quantum Networking and Quantum Communication Systems: The 
development of a quantum network or quantum communication system 
designed to be exclusively used for secure communications, such as 
quantum key distribution.
    The ANPRM seeks comment on this topic including:

    33. Where possible, please provide empirical data about trends 
in U.S. investment into country of concern entities engaged in 
quantum information technologies as described in section III.H. 
Please identify any technologies notable for the high volume or 
frequency of outbound investment activity or for the low volume or 
frequency of outbound investment activity. Based on this data, are 
there U.S. outbound investment trends in quantum information 
technologies in countries of concern that would not be captured by 
the definitions in section III.H? If so, what are they?
    34. Please identify any areas within this category where 
investments by U.S. persons in countries of concern may provide a 
strategic benefit to the United States, such that continuing such 
investment would benefit, and not impair, U.S. national security. 
Please also identify any key factors that affect the size of these 
benefits (e.g., do these benefits differ in size depending on the 
application of the technology or product at issue?). Please be 
specific and where possible, provide supporting material, including 
empirical data, findings, and analysis in reports or studies by 
established organizations or research institutions, and indicate 
material that is business confidential per the instructions at the 
beginning of this ANPRM.
    35. With respect to the definition of ``Quantum Computers and 
Components,'' would any further specificity be beneficial and, if 
so, what, and why? Are there existing definitions from other U.S. 
Government regulations or programs that are not reflected in section 
III.H and should be considered? Please provide specificity.
    36. In defining ``Quantum Sensors,'' the policy objective is to 
avoid covering quantum sensors designed for commercial uses such as 
medical and geological applications. As such, the definition under 
consideration references certain end uses that have national 
security implications. What are the costs and benefits or unintended 
consequences with this approach? What alternative frameworks or 
definitions, if any, should the Treasury Department consider, and 
why?
    37. With respect to ``Quantum Sensors'' and ``Quantum Networking 
and Quantum Communication Systems,'' what could be the impact of the 
language ``designed to be exclusively used''? How would the 
alternative formulation ``designed to be primarily used'' change the 
scope? Is there another approach that should be considered?
    38. Additionally, with respect to ``Quantum Networking and 
Quantum Communications Systems,'' the definition is intended to 
cover quantum cryptography. Are there other clarifications or 
enhancements that should be made to this definition? What might 
inadvertently be captured that was not intended as noted in section 
III.H?
    39. Are there other areas of quantum information technologies 
that should be considered as an addition or alternative to the 
definitions in section III.H?
    Please be specific and where possible, provide supporting 
material, including empirical data, findings, and analysis in 
reports or studies by established organizations or research 
institutions.

I. Covered National Security Technology and Product: AI Systems

    The Order states that the regulations will define ``covered 
national security technologies and products'' to include sensitive 
technologies and products in the AI systems category.
    The U.S. Government is concerned with the development of AI systems 
that enable the military modernization of countries of concern--
including weapons, intelligence, and surveillance capabilities--and 
that have applications in areas such as cybersecurity and

[[Page 54969]]

robotics. The policy objective is to cover U.S. investment into 
entities that develop AI systems that have applications that pose 
significant national security risks without broadly capturing entities 
that develop AI systems intended only for consumer applications or 
other civilian end uses that do not have national security 
consequences. To address these concerns, the Treasury Department is 
considering a notification requirement and a potential prohibition.
    Whether for purposes of a notification or prohibition, the Treasury 
Department is considering defining ``AI system'' as an engineered or 
machine-based system that can, for a given set of objectives, generate 
outputs such as predictions, recommendations, or decisions influencing 
real or virtual environments. AI systems are designed to operate with 
varying levels of autonomy. Covered foreign persons engaging in the 
development of software that incorporates an AI system with certain 
applications or end uses would be within scope.
    If the Treasury Department were to pursue a prohibition in this 
category, a potential approach is to focus on U.S. investments into 
covered foreign persons engaged in the development of software that 
incorporates an AI system and is designed to be exclusively used for 
military, government intelligence, or mass-surveillance end uses. 
Alternatively, ``primarily used'' could take the place of ``exclusively 
used.''
    The Treasury Department is considering a requirement for U.S. 
persons to notify the Treasury Department if undertaking a transaction 
with a covered foreign person engaged in the development of software 
that incorporates an artificial intelligence system and is designed to 
be exclusively used for: cybersecurity applications, digital forensics 
tools, and penetration testing tools; the control of robotic systems; 
surreptitious listening devices that can intercept live conversations 
without the consent of the parties involved; non-cooperative location 
tracking (including international mobile subscriber identity (IMSI) 
Catchers and automatic license plate readers); or facial recognition. 
Alternatively, ``primarily used'' could take the place of ``exclusively 
used.''
    AI is a fast-changing technology area with novel aspects. The 
Treasury Department welcomes comments on this category, including 
specific suggestions for additional approaches or definitions that 
should be considered in light of the national security concerns stated 
in section III.I.
    The ANPRM seeks comment on this topic including:

    40. Where possible, please provide empirical data about trends 
in U.S. investment into country of concern entities engaged in AI 
systems as described in section III.I. Please identify any 
technologies notable for the high volume or frequency of outbound 
investment activity or for the low volume or frequency of outbound 
investment activity. Based on this data, are there U.S. outbound 
investment trends in software that incorporates an AI system in 
countries of concern that would not be captured by the definitions 
in section III.I? If so, what are they?
    41. Please identify any areas within this category where 
investments by U.S. persons in countries of concern may provide a 
strategic benefit to the United States, such that continuing such 
investment would benefit, and not impair, U.S. national security. 
Please also identify any key factors that affect the size of these 
benefits (e.g., do these benefits differ in size depending on the 
application of the technology or product at issue?). Please be 
specific and where possible, provide supporting material, including 
empirical data, findings, and analysis in reports or studies by 
established organizations or research institutions and indicate 
material that is business confidential per the instructions at the 
beginning of this ANPRM.
    42. As stated in section III.I, the Treasury Department is 
considering a single definition of an ``AI system'' whether for 
purposes of a notification or prohibition. Are there any changes or 
clarifications that should be made to the definition of ``AI 
system''? What are the consequences and impacts of such a 
definition? Please provide supporting rationale(s) and data, as 
applicable, for any such proposed modification.
    43. Given the nature of AI, the Treasury Department is 
considering the scope of transactions subject to notification and a 
prohibition by reference to certain end uses of the technologies or 
products that have national security implications. What are the 
general policy and practical considerations with an approach related 
to AI systems designed to be used for specific end uses? What 
alternative frameworks, if any, should the Treasury Department 
consider, and why?
    44. With respect to AI systems designed to be used for specific 
end uses, what are the impacts or consequences of including the 
following end uses:
     Military;
     Government intelligence;
     Mass-surveillance;
     Cybersecurity applications;
     Digital forensics tools;
     Penetration testing tools;
     Control of robotic systems;
     Surreptitious listening devices that can intercept live 
conversations without the consent of the parties involved;
     Non-cooperative location tracking (including IMSI 
catchers and automatic license plate readers); or
     Facial recognition?

    Should any of these items be clarified? Are there other end uses 
that should be considered?

    45. To make sure the development of the software that 
incorporates an AI system is sufficiently tied to the end use, two 
primary alternatives are under consideration: ``designed to be 
exclusively used'' and ``designed to be primarily used.'' What are 
the considerations regarding each approach? Is there another 
approach that should be considered?
    46. The Treasury Department is interested in ways to structure 
this element of the program that may increase efficiency for U.S. 
persons in evaluating covered transactions. One approach may be to 
focus on transactions involving entities engaged in the development 
of software incorporating AI systems that are also identified on an 
existing list under a different U.S. Government program that has 
similar national security underpinnings. What are the considerations 
as to whether such an approach would be beneficial or not and why? 
What list or lists, if any, should the Treasury Department consider?
    47. What analysis or considerations would a U.S. person 
anticipate undertaking to ascertain whether investments in this 
category are covered? In what manner would the investor approach 
this via due diligence with the target? What challenges could arise 
in this process for the investor and what clarification in the 
regulations would be helpful? How would U.S. persons anticipate 
handling instances where they attempt to ascertain the information 
but are unable to, or receive information they have doubts about?
    48. What, if any, additional considerations not discussed in 
section III.I should the Treasury Department be aware of in 
considering a prohibition and notification framework as it relates 
to AI systems? What if any alternate frameworks should the Treasury 
Department consider, and why?

J. Knowledge Standard

    The Treasury Department is considering regulations that condition a 
person's obligations on that person's knowledge of relevant 
circumstances--e.g., where the U.S. person has actual or constructive 
knowledge that the covered foreign person is engaged in, or will 
foreseeably be engaged in, certain activity regarding the technology or 
product. One approach under consideration is to adopt a definition 
similar to that found in the EAR at 15 CFR 772.1, where ``knowledge'' 
means knowledge of a circumstance (including variations such as 
``know,'' ``reason to know,'' or ``reason to believe'') including not 
only positive knowledge that the circumstance exists or is 
substantially certain to occur, but also an awareness of a high 
probability of its existence or future occurrence. Such awareness is 
inferred from evidence of a person's conscious disregard of facts known 
to that person and is also inferred from a person's willful avoidance 
of facts.
    The Treasury Department is considering adopting this knowledge

[[Page 54970]]

standard across this program as described herein. This would mean that 
to be covered by the regulations, a U.S. person would need to know, or 
reasonably should know based on publicly available information and 
other information available through a reasonable and appropriate amount 
of due diligence, that it is undertaking a transaction involving a 
covered foreign person and that the transaction is a covered 
transaction. This knowledge standard would also apply to end uses as 
applicable to some of the definitions of covered national security 
technologies and products.
    The ANPRM seeks comment on this topic including:

    49. How could this standard be clarified for the purposes of 
this program? What, if any, alternatives should be considered?
    50. Is this due diligence already being done by U.S. persons in 
connection with transactions that would be covered transactions--
e.g., for other regulatory purposes, prudential purposes, or 
otherwise? If so, please explain. What, if any, third-party services 
are used to perform due diligence as it relates to transactions 
involving the country of concern or more generally?
    51. What are the practicalities of complying with this standard? 
What, if any, changes to the way that U.S. persons undertake due 
diligence in a country of concern would be required because of this 
standard? What might be the cost to U.S. persons of undertaking such 
due diligence? Please be specific.

K. Notification Requirements; Form, Content, and Timing

    The Order states that the regulations shall identify categories of 
notifiable transactions that may contribute to the threat to the 
national security of the United States identified under the Order and 
require U.S. persons to notify the Treasury Department of each such 
transaction.
    The Treasury Department is considering requiring U.S. persons to 
furnish information in the form of a notification for applicable 
covered transactions in semiconductors and microelectronics and AI 
systems that includes, but is not limited to: (i) The identity of the 
person(s) engaged in the transaction and nationality (for individuals) 
or place of incorporation or other legal organization (for entities); 
(ii) basic business information about the parties to the transaction, 
including name, location(s), business identifiers, key personnel, and 
beneficial ownership; (iii) the relevant or expected date of the 
transaction; (iv) the nature of the transaction, including how it will 
be effectuated, the value, and a brief statement of business rationale; 
(v) a description of the basis for determining that the transaction is 
a covered transaction--including identifying the covered national 
security technologies and products of the covered foreign person; (vi) 
additional transaction information including transaction documents, any 
agreements or options to undertake future transactions, partnership 
agreements, integration agreements, or other side agreements relating 
to the transaction with the covered foreign person and a description of 
rights or other involvement afforded to the U.S. person(s); (vii) 
additional detailed information about the covered foreign person, which 
could include products, services, research and development, business 
plans, and commercial and government relationships with a country of 
concern; (viii) a description of due diligence conducted regarding the 
investment; (ix) information about previous transactions made by the 
U.S. person into the covered foreign person that is the subject of the 
notification, as well as planned or contemplated future investments 
into such covered foreign person; and (x) additional details and 
information about the U.S. person, such as its primary business 
activities and plans for growth.
    With regard to the time frame in which U.S. persons must file 
notifications, the Treasury Department is considering requiring that 
notifications be filed no later than 30 days following the closing of a 
covered transaction.
    Information would be collected via a portal hosted on the Treasury 
Department's website to allow U.S. persons to electronically file 
notifications. The Treasury Department is considering the appropriate 
confidentiality requirements and restrictions around the disclosure of 
any information or documentary material submitted or filed with the 
Treasury Department pursuant to the implementing regulations. The 
Treasury Department is considering an approach whereby any information 
or documentary material submitted or filed would not be made public 
unless required by law, except that the following could be disclosed: 
(i) Information relevant to any administrative or judicial action or 
proceeding, including the issuance of any penalties; (ii) information 
to Congress or to any duly authorized committee or subcommittee of 
Congress; (iii) information important to the national security analysis 
or actions of the Treasury Department to any domestic government 
entity, or to any foreign governmental entity of a United States ally 
or partner, under the exclusive direction and authorization of the 
Secretary, only to the extent necessary for national security purposes, 
and subject to appropriate confidentiality and classification 
requirements; (iv) information relevant to any enforcement action under 
the Order and implementing regulations; and (v) information that the 
parties have consented to be disclosed to third parties.
    The ANPRM seeks comment on this topic including:

    52. How could the categories of information requested be 
clarified? Where might there be anticipated challenges or 
difficulties in furnishing the requested information? Please be 
specific and explain why.
    53. What additional information, if any, should the Treasury 
Department collect in support of the objectives of this program and 
informing future policy development?
    54. If there are multiple U.S. persons involved in a 
transaction, would there be benefit to a process that allows a 
combined notification or should each U.S. person be required to make 
a separate notification?
    55. What are the considerations with respect to a certification 
requirement as to the accuracy of the information based on the 
knowledge of the U.S. person?
    56. The Treasury Department is considering encouraging joint 
filings by the relevant U.S. person and covered foreign person. How 
might joint filings enhance the fidelity of the information 
provided? What practicalities should be considered?
    57. Should the Treasury Department require prior notification of 
a covered transaction (i.e., pre-closing) or permit post-closing 
notification within a specified period, such as 30 days? What are 
the anticipated consequences and impacts of these alternatives? 
Should the notification period be shorter or longer, and why?
    58. How could the specific information requirements affect 
transaction activity, if at all? Please be specific.
    59. How should the Treasury Department address the scenario 
where a transaction for which notification was provided was actually 
a prohibited transaction? How should the Treasury Department 
consider options such as ordering divestment and/or the issuance of 
civil monetary penalties?
    60. How should the Treasury Department address the scenario 
where a U.S. person is unable to gain the knowledge necessary to 
meaningfully respond to the information requirements? What might a 
U.S. person do in such a circumstance?
    61. Would U.S. persons ordinarily rely on legal counsel to 
assemble and submit the required information for notification? What 
factors might inform parties' decision as to whether to engage legal 
counsel?

L. Knowingly Directing Transactions

    The Order states that ``the Secretary [of the Treasury] may 
prohibit United States persons from knowingly directing transactions if 
such transactions would be prohibited transactions pursuant to

[[Page 54971]]

this order if engaged in by a United States person.'' Pursuant to this 
authority, the Treasury Department is considering defining 
``knowingly'' for purposes of this provision in the Order to mean that 
the U.S. person had actual knowledge, or should have known, about the 
conduct, the circumstance, or the result. And the Treasury Department 
is considering defining ``directing'' to mean that a U.S. person 
orders, decides, approves, or otherwise causes to be performed a 
transaction that would be prohibited under these regulations if engaged 
in by a U.S. person. The Treasury Department is considering excluding 
from this definition certain identified conduct that is attenuated from 
the risks to U.S. national security identified in the Order, including 
the provision of a secondary, wraparound, or intermediary service or 
services such as third-party investment advisory services, 
underwriting, debt rating, prime brokerage, global custody, or the 
processing, clearing, or sending of payments by a bank, or legal, 
investigatory, or insurance services.
    This approach is narrower than the authority afforded to the 
Treasury Department under the Order. The Treasury Department intends to 
use the authority to tailor the regulations to prevent loopholes and 
target the identified national security threat by prohibiting U.S. 
person activity such as:
     Scenario 1: A U.S. person General Partner manages a 
foreign fund that undertakes a transaction that would be prohibited if 
performed by a U.S. person.
     Scenario 2: A U.S. person is an officer, senior manager, 
or equivalent senior-level employee at a foreign fund that undertakes a 
transaction at that U.S. person's direction when the transaction would 
be prohibited if performed by a U.S. person.
     Scenario 3: Several U.S. person venture partners launch a 
non-U.S. fund focused on undertaking transactions that would be 
prohibited if performed by a U.S. person.
    By contrast, the Treasury Department currently does not intend 
``knowingly directing'' transactions to cover scenarios such as those 
described below, and is considering explicitly excluding them from this 
prohibition:
     Scenario 4: A U.S. bank processes a payment from a U.S. 
person into a covered foreign person as part of that U.S. person's 
engagement in a prohibited transaction. (Note, while the U.S. bank's 
activity would not be prohibited, the U.S. person's would be.)
     Scenario 5: A U.S. person employed at a foreign fund signs 
paperwork approving the foreign fund's procurement of real estate for 
its operations. The same fund invests into a person of a country of 
concern that would be a prohibited transaction if performed by a U.S. 
person.
     Scenario 6: A U.S. person serves on the management 
committee at a foreign fund, which makes an investment into a person of 
a country of concern that would be a prohibited transaction if 
performed by a U.S. person. While the management committee reviews and 
approves all investments made by the fund, the U.S. person has recused 
themself from the particular investment.
    The ANPRM seeks comment on this topic including:

    62. What modifications, if any, should be made to the proposed 
definition of ``knowingly directing'' to enhance clarity or close 
any loopholes?
    63. What, if any, unintended consequences could result from the 
proposed definition? What is the proposed definition's likely impact 
on U.S. persons and U.S. investment flows? If you believe there will 
be impacts on U.S. persons and U.S. investment flows, please provide 
specific examples or data.
    64. What, if any, alternate approaches should the Treasury 
Department consider in order to prevent the conduct enumerated in 
scenarios 1, 2, and 3 in section III.L?
    65. If you believe any additional secondary or intermediate 
services not discussed in section III.L should be explicitly 
excluded from consideration, please explain why a given service 
should be excluded.
    66. Are there other advisory or other similar services provided 
in the context of foreign investment into a country of concern in 
the technology and product areas described in this ANPRM that may 
pose a threat to U.S. national security and should therefore be 
considered?

M. Controlled Foreign Entities--Obligations of U.S. Persons

    The Order states that the Secretary may require U.S. persons to: 
(1) ``provide notification to the Department of the Treasury of any 
transaction by a foreign entity controlled by such United States person 
that would be a notifiable transaction if engaged in by a United States 
person''; and (2) ``take all reasonable steps to prohibit and prevent 
any transaction by a foreign entity controlled by such United States 
person that would be a prohibited transaction if engaged in by a United 
States person.''
    These two components serve different objectives, but they are 
implemented using a similar mechanism that places responsibility with 
the U.S. parent, and they share certain definitions and concepts. 
Pursuant to this authority, the Treasury Department is considering 
rules that would place certain obligations on U.S. persons related to 
foreign entities that they control. The Treasury Department is 
considering defining a ``controlled foreign entity'' as a foreign 
entity in which a U.S. person owns, directly or indirectly, a 50 
percent or greater interest.
    Further, the Treasury Department is considering whether and how to 
define ``all reasonable steps.'' These could include factors such as 
(i) relevant binding agreements between a U.S. person and the relevant 
controlled foreign entity or entities; (ii) relevant internal policies, 
procedures, or guidelines that are periodically reviewed internally; 
(iii) implementation of periodic training and internal reporting 
requirements; (iv) implementation of effective internal controls; (v) a 
testing and auditing function; and (vi) the exercise of governance or 
shareholder rights, where applicable.
    The ANPRM seeks comment on this topic including:

    67. What are the considerations as to whether a foreign entity 
is a ``controlled foreign entity'' of a U.S. person, as the Treasury 
Department is considering defining it? What if any changes should be 
made to the definition of ``controlled foreign entity'' to make its 
scope and application clearer? Why? What, if any, changes should be 
made to broaden or narrow it? Why?
    68. What, if any, changes should be made to the factors 
informing ``all reasonable steps'' in order to make its scope and 
application clearer? Why? What would be the consequences and impacts 
of adopting these factors?

N. National Interest Exemption

    The Order authorizes the Secretary to ``exempt from applicable 
prohibitions or notification requirements any transaction or 
transactions determined by the Secretary, in consultation with the 
heads of relevant agencies, as appropriate, to be in the national 
interest of the United States.''
    While the Treasury Department is not considering a case-by-case 
determination on an individual transaction basis as to whether the 
transaction is prohibited, must be notified, or is not subject to the 
program, the Treasury Department likely would need to review the facts 
and circumstances of the individual transaction subject to 
consideration for a national interest exemption.
    The Treasury Department is considering exempting from prohibition 
certain transactions in exceptional circumstances where the Secretary 
determines, in consultation with the heads of relevant departments and 
agencies, as appropriate, and in her sole discretion, that a particular 
transaction that would otherwise be a prohibited transaction should be 
permitted because

[[Page 54972]]

it either (i) provides an extraordinary benefit to U.S. national 
security; or (ii) provides an extraordinary benefit to the U.S. 
national interest in a way that overwhelmingly outweighs relevant U.S. 
national security concerns.
    The Secretary may request detailed documentation from the relevant 
U.S. person(s) involved in such proposed transaction(s) in order to 
consider whether to grant an exemption. The Treasury Department is not 
considering granting retroactive waivers or exemptions (i.e., waivers 
or exemptions after a prohibited transaction has been completed).
    The ANPRM seeks comment on this topic including:

    69. What would be the consequences and impacts of allowing for 
exemptions for certain transactions that ordinarily would be 
prohibited? What, if any, additional or alternate criteria should be 
enumerated for an exemption?
    70. What should the Treasury Department require from the U.S. 
person to substantiate the need for an exemption from the 
prohibition?

O. Compliance; Record-Keeping

    The Treasury Department wishes to achieve widespread compliance, 
and to gather the information necessary to administer and enforce the 
program, without unduly burdening U.S. persons or discouraging 
transactions the program is not intended to address. The Treasury 
Department therefore seeks comment on the compliance and record-keeping 
controls that may be put in place under the program.
    The ANPRM seeks comment on this topic including:

    71. What new compliance and recordkeeping controls will U.S. 
persons anticipate needing to comply with the program as described 
in this ANPRM? To what extent would existing controls for compliance 
with other U.S. Government laws and regulations be useful for 
compliance with this program?
    72. What additional information will U.S. persons need to 
collect for compliance purposes as a result of this program?

P. Penalties

    The Order requires the Secretary to investigate, in consultation 
with the heads of relevant agencies, as appropriate, violations of the 
Order or the regulations and pursue available civil penalties for such 
violations. The Order also explicitly prohibits ``any conspiracy formed 
to violate'' the Order or implementing regulations as well as ``any 
action that evades, has the purpose of evading, causes a violation of, 
or attempts to violate'' the Order or implementing regulations. It 
authorizes the Secretary to ``refer potential criminal violations of 
this order or the regulations issued under this order to the Attorney 
General.''
    Further, under the Order, consistent with IEEPA, the Secretary can 
``nullify, void, or otherwise compel the divestment of any prohibited 
transaction entered into after the effective date'' of the implementing 
regulations. The Treasury Department would not use this authority to 
unwind a transaction that was not prohibited at the time it was 
completed.
    The Treasury Department is considering penalizing the following 
with a civil penalty up to the maximum allowed under IEEPA: (i) 
material misstatements made in or material omissions from information 
or documentary material submitted or filed with the Treasury 
Department; (ii) the undertaking of a prohibited transaction; or (iii) 
the failure to timely notify a transaction for which notification is 
required.
    The ANPRM seeks comment on this topic including:

    73. How, if at all, should penalties and other enforcement 
mechanisms (such as ordering the divestment of a prohibited 
transaction) be tailored to the size, type, or sophistication of the 
U.S. person or to the nature of the violation?
    74. What factors should the Treasury Department analyze when 
determining whether to impose a civil penalty, as well as the 
amount?
    75. What transaction data sources should the Treasury Department 
use to monitor compliance with this program?
    76. What process should the Treasury Department institute in the 
event of a required divestment order?

Q. Overarching and Additional Inquiries

    The Treasury Department welcomes comments and views from a wide 
range of stakeholders on all aspects of how the Secretary should 
implement the Order. A non-exclusive list of overarching and additional 
questions for comment is below:

    77. The Order identifies semiconductors and microelectronics, 
quantum information technologies, and AI systems as technologies and 
products covered by this program because of their critical role in 
enhancing the military, intelligence, surveillance, or cyber-enabled 
capabilities of countries of concern in ways that threaten the 
national security of the United States. Are there questions about 
why and how these categories fit into the objectives of the program? 
Are there specific technologies and products that should be 
considered and not already discussed in this ANPRM?
    78. In light of the Order, what structural features should this 
program include that are not already previewed in this ANPRM, and 
why?
    79. What would be the major risks or obstacles to the effective 
operation of the program, as proposed? Where possible, please 
provide supporting material, including empirical data, findings, and 
analysis in reports or studies by established organizations or 
research institutions, to illustrate these risks.
    80. How significant are the anticipated costs and burdens of the 
regulations the Treasury Department is proposing? What types of U.S. 
businesses or firms (e.g., small businesses) would be particularly 
burdened by the program? How can such burdens be alleviated, 
consistent with the stated objectives of the program?
    81. The Treasury Department is interested in exploring public 
insights and supporting literature associated with outbound 
investment, to complement our own research to date. Have researchers 
(including in the fields of political science, international 
relations, national security law, economics, corporate finance, and 
other related fields) studied the national security costs and 
benefits of U.S. investment in countries of concern? Please provide 
any insights (and supporting literature) that characterize these 
costs and benefits and/or provides conclusions about net effects.
    82. How might firms approach compliance related to regulations 
issued under this Order? What types of requirements would lead to 
higher compliance costs for firms? What alternatives would result in 
lower compliance costs? Are there any baseline costs that firms 
would face regardless of choices the Treasury Department makes 
during rulemaking? Where possible, please quantify these costs 
(rough estimates or ranges are helpful as well).
    83. The Treasury Department is interested in understanding the 
risks of evasion and avoidance; how might U.S. persons or investment 
targets evade or avoid these regulations, and how should the 
Treasury Department account for these possible behaviors in the 
design of the program?

Paul M. Rosen,
Assistant Secretary for Investment Security.
[FR Doc. 2023-17164 Filed 8-9-23; 4:15 pm]
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