Memo #
32931

Executive Order on Securities Investments in China Military Companies - PPT from Member Call and Notice of Second Member Call on Tuesday, November 24, 1:00 p.m. ET
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[32931]

November 20, 2020 TO: AML Compliance Working Group
Chief Compliance Officer Committee
Chief Risk Officer Committee
Compliance Advisory Committee
ICI Global Investing Subcommittee
ICI Global Regulated Funds Committee
Operations Committee
Public Communications Committee
SEC Rules Committee RE: Executive Order on Securities Investments in China Military Companies - PPT from Member Call and Notice of Second Member Call on Tuesday, November 24, 1:00 p.m. ET

 

On November 19, we held an ICI member call on Executive Order (EO) 13959 issued by President Trump entitled “Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.”[1] The PPT used during that meeting, prepared by guest speaker Darshak Dholakia, Partner at Dechert LLP, is attached. 

We understand that a number of members were unable to join the call because we had exceeded our Zoom license capacity. We know your time is valuable and apologize for this inconvenience. To provide interested members another opportunity to hear about this important topic, we will hold another member call on Tuesday, November 24, at 1:00 p.m. ET, with Darshak Dholakia once again as our guest speaker. Darshak will discuss the anticipated scope of the order and address member questions. The Zoom details for the meeting are found below. 

Please email jean.zadeh@ici.org if you would like to receive a calendar invite for this call. 

Second ICI Member Call – Tuesday, November 24, 1:00 p.m. ET Join Zoom Meeting: https://ici-org.zoom.us/j/98857252324?pwd=WklKVDBzWVUzbFVaQm9sdldyNW9Hdz09 Meeting ID: 988 5725 2324 Passcode: 933437 Dial by your location: +1 646 558 8656 US (New York)
+1 301 715 8592 US (Washington D.C)
+1 312 626 6799 US (Chicago) Find your local number: https://ici-org.zoom.us/u/abDb34IzHf

Summary of the EO 

The EO prohibits by any US person “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities” of certain identified Chinese companies that have been tied to the People’s Liberation Army (PLA). The ban on such transactions takes effect at 9:30 a.m. on January 11, 2021. US persons, however, have until 11:59 a.m. on November 11, 2021, to divest any holdings in the identified companies that were held as of 9:30 a.m. on January 11, 2021. Any sales of those holdings would need to be to non-US persons, as US persons generally would be prohibited from purchasing such securities as of January 11. The EO does not explicitly require divestment but suggests that any US person continuing to hold securities after November 11, 2021, would subsequently be unable to divest those securities or conduct any new transactions involving those securities, effectively freezing the holding.  

The first set of Chinese companies affected by this EO are 31 companies previously identified by the Department of Defense (DOD) as having ties to the PLA.[2] The list is found at the bottom of this memorandum. 

Additional companies may be determined by the Secretary of Defense and the Secretary of the Treasury to be Communist Chinese military companies and added to the list. Restrictions on transactions for newly added companies will come into force 60 days after their designation, and divestments will be permitted for up to 365 days. The Secretary of the Treasury may issue rules or regulations pursuant to the EO establishing procedures to license transactions otherwise prohibited under the EO.  

We have the following initial observations. We will continue to follow developments related to this EO and China sanctions more broadly.  

  • Many of the DOD-listed Chinese companies issue publicly traded securities that are held by US investors, including US regulated funds. Some of these securities may be included in indices tracked by US regulated funds and/or may be widely held by US regulated funds. 
  • Non-US regulated funds, such as UCITS, may also be impacted as the EO may prohibit US broker-dealers from engaging in transactions on US exchanges on behalf of both US and non-US investors. 
  • As noted above, the EO contemplates the addition of companies to the list. The Trump Administration over the past few months has attempted to restrict or sanction a number of Chinese companies, including ZTE, China Unicom Americas, and the Semiconductor Manufacturing International Company (SMIC). It is unclear whether the Trump Administration will find that these companies and/or others have ties to the PLA.
  • President elect Biden’s transition team declined to comment on the EO and it is unclear what his Administration will do with the EO after he becomes President on January 20. On Capitol Hill, various efforts to restrict Chinese companies’ access to the US capital markets have received bipartisan support. As consensus develops in Washington that China poses a national security threat to the United States and its allies, it may prove difficult to substantially alter this EO.

The Chinese companies identified by DOD as linked to the PLA are the following: 

  1. Aviation Industry Corporation of China
  2. China Aerospace Science and Technology Corporation
  3. China Aerospace Science and Industry Corporation
  4. China Electronics Technology Group Corporation
  5. China South Industries Group Corporation
  6. China Shipbuilding Industry Corporation
  7. China State Shipbuilding Corporation
  8. China North Industries Group Corporation (Norinco Group)
  9. Hangzhou Hikvision Digital Technology Co., Ltd. (Hikvision)
  10. Huawei
  11. Inspur Group
  12. Aero Engine Corporation of China
  13. China Railway Construction Corporation
  14. CRRC Corp.
  15. Panda Electronics Group
  16. Dawning Information Industry Co. (Sugon)
  17. China Mobile Communications Group
  18. China General Nuclear Power Corp.
  19. China National Nuclear Corp.
  20. China Telecommunications Corp.
  21. China Communications Construction Company
  22. China Academy of Launch Vehicle Technology
  23. China Spacesat
  24. China United Network Communications Group Co Ltd
  25. China Electronics Corporation
  26. China National Chemical Engineering Group Co., Ltd.
  27. China National Chemical Corporation (ChemChina)
  28. Sinochem Group Co Ltd
  29. China State Construction Group Co., Ltd.
  30. China Three Gorges Corporation Limited
  31. China Nuclear Engineering & Construction Corporation

 

Eva M. Mykolenko
Associate Chief Counsel - Securities Regulation

 

Attachment

endnotes

[1] The Executive Order is available at https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-securities-investments-finance-communist-chinese-military-companies/. See ICI Memorandum No. 32912, dated November 13, 2020, available at https://www.ici.org/my_ici/memorandum/memo32912.

[2] On June 24, 2020, DOD published a list of 20 Chinese companies with ties to the PLA. The list was originally requested in the 1999 National Defense Authorization Act, which requires the Secretary of Defense to create a list of “Communist Chinese military companies” operating “directly or indirectly” in the United States. On August 28, 2020, DOD updated its list of Chinese companies with ties to the PLA operating directly or indirectly in the United States, adding 11 more.