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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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On November 12, 2020, President Trump issued <a href="https://home.treasury.gov/system/files/126/13959.pdf" target="_blank" rel="noopener">Executive Order 13959</a>, prohibiting U.S. persons from transacting in publicly traded securities or derivatives or similar securities of publicly traded Chinese companies designated by the U.S. Department of Defense as enabling Chinese military aims (“Chinese Communist military company” or “CCMC”). (See our November 24, 2020 International Trade Update, <a href="https://www.thompsonhine.com/publications/executive-order-prohibits-us-investment-in-communist-chinese-military-companies" target="_blank" rel="noopener">“Executive Order Prohibits U.S. Investment in ‘Communist Chinese Military Companies,’”</a> for additional details.) The ban is effective January 11, 2021. Since issuance of the E.O., the DoD and the U.S. Department of the Treasury have added a number of companies to the <a href="https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information/chinese-military-companies-sanctions" target="_blank" rel="noopener">list of designated entities</a> released by the Office of Foreign Assets Control.

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OFAC has prepared guidance in the form of a series of Frequently Asked Questions (FAQs), some of which are summarized below. However, aspects of the E.O.’s implementation remain unclear.

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<a href="https://home.treasury.gov/policy-issues/financial-sanctions/faqs/857" target="_blank" rel="noopener">FAQ 857</a> confirms that the prohibition applies to transactions in any securities (or derivatives) of subsidiaries of a CCMC, only after the subsidiary is publicly listed by OFAC. OFAC intends to publicly list as subsidiaries “any entity that issues publicly traded securities and that is (1) 50 percent or more owned by one or more Communist Chinese military company(ies) identified in or pursuant to [the E.O.], consistent with OFAC’s <a href="https://home.treasury.gov/system/files/126/licensing_guidance.pdf" target="_blank" rel="noopener">50 Percent Rule Guidance</a>; or (2) determined to be controlled by one or more Communist Chinese military company(ies) identified in or pursuant to [the E.O.].” Although the prohibitions do not apply to unlisted entities, investors should be mindful that the list will likely be regularly updated.

FAQ 858 clarifies that the prohibition applies to entities “with a name that exactly or closely matches the name of an entity identified” and listed by OFAC.

FAQ 864 further confirms that the prohibitions in the E.O. apply to entities “with a name that exactly or closely matches” the name of an entity identified in the E.O. annex. It also confirms that “[t]ransactions in the securities of any Communist Chinese military company subsidiary (whether expressly listed or not) are prohibited if the subsidiary’s name exactly or closely matches the name of these or any other entities identified in the Annex to E.O. 13959 or the name of any Communist Chinese military company listed by the Departments of the Treasury or Defense.”

U.S. persons are expected to also rely on additional identifying information where possible and in general not to rely only on an exact name match. OFAC’s listing of the entities provides some AKAs and ticker number identifying information.

Scope of “Publicly Traded Securities”

<a href="https://home.treasury.gov/policy-issues/financial-sanctions/faqs/859" target="_blank" rel="noopener">FAQ 859</a> states that OFAC will interpret the term “publicly traded securities” to include securities denominated in any currency that trade on a securities exchange or through the method of trading that is commonly referred to as “over-the-counter,” in any jurisdiction.

Scope of Coverage: Derivatives, Mutual Funds and Other Instruments

<a href="https://home.treasury.gov/policy-issues/financial-sanctions/faqs/860" target="_blank" rel="noopener">FAQ 860</a> more clearly defines how OFAC intends to interpret the term “financial instruments” to include, without limitation, derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (ADRs), global depositary receipts (GDRs), exchange-traded funds (ETFs), index funds and mutual funds, to the extent such instruments also meet the definition of securities as set forth in the E.O.

<a href="https://home.treasury.gov/policy-issues/financial-sanctions/faqs/861" target="_blank" rel="noopener">FAQ 861</a> confirms that transactions in U.S. or foreign funds, such as ETFs or other mutual funds, that hold publicly traded securities of a CCMC are prohibited. The State Department has further indicated that the ban includes direct, indirect or other passive investments, including “those linked to educational, ETFs, venture funds, private equity, Real Estate Investment Trusts, commodities, endowments, pensions, or any other investment funds tracking bonds, loans, lease lines, debt or equity indices.” OFAC’s guidance does not specify any “de minimis” amount; therefore, a mutual fund for which only a small percentage of its holdings are in a CCMC would still be the subject of the E.O. prohibitions.

<a href="https://home.treasury.gov/policy-issues/financial-sanctions/faqs/863" target="_blank" rel="noopener">FAQ 863</a> instructs that activity by U.S. persons related to the following services is considered permissible, to the extent that such support services are not provided to U.S. persons in connection with prohibited transactions: clearing, execution, settlement, custody, transfer agency, back-end services and other such support services.

The E.O. authorizes transactions necessary for the divestiture of securities issued by the prohibited entities until November 11, 2021 or 60 days after the listing of the entity, whichever is later. The E.O. does not expressly mandate divestiture, and “transaction” is defined as “the purchase for value of any publicly traded security.” FAQ 862 confirms that the E.O. does not require U.S. persons to divest their holdings in publicly traded securities by January&nbsp;11, 2021.

Edited January 14, 2021: On January 13, 2021, President Trump amended his previously issued executive order to address confusion regarding whether U.S. persons must divest in any securities in a Communist Chinese military company. Under the amended executive order, U.S. persons that on January 11, 2021, held any securities in a Communist Chinese military company must divest such holding by November 11, 2021: “Effective at 11:59 p.m. eastern standard time on November 11, 2021, possession of any such securities by a United States person is prohibited.” Further, should the Department of Defense designate additional Chinese companies as CCMCs, U.S. persons will have 365 days from the date of any such designation to divest any securities held in the designated companies.

Our International Trade group has extensive experience advising on compliance with sanctions and investment restrictions. For more information, please contact:

Francesca M.S. Guerrero Partner, International Trade 202.973.2774 <a href="mailto:Francesca.Guerrero@ThompsonHine.com">Francesca.Guerrero@ThompsonHine.com</a>

Samir D. Varma Partner, International Trade 202.263.4136 <a href="mailto:Samir.Varma@ThompsonHine.com">Samir.Varma@ThompsonHine.com</a>

Brent Connor Senior Counsel, International Trade 202.263.4188 <a href="mailto:Brent.Connor@ThompsonHine.com">Brent.Connor@ThompsonHine.com</a>

Joyce Rodriguez Associate, International Trade 202.973.2724 <a href="mailto:Joyce.Rodriguez@ThompsonHine.com">Joyce.Rodriguez@ThompsonHine.com</a>

Scott E. Diamond* Senior Legislative &amp; Regulatory Policy Advisor, International Trade 202.263.4197 <a href="mailto:Scott.Diamond@ThompsonHine.com">lang="EN"&gt;Scott.Diamond@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

<a title="" name="_edn1" href="#_ednref1">[1]</a> A <a href="https://2017-2021.state.gov//index.html" target="_blank" rel="noopener">press statement</a> issued December 28, 2020, by Secretary of State Mike Pompeo has produced some uncertainty about the scope of the E.O.

https://admin.thompsonhine.com/wp-content/uploads/2022/04/International_Trade_Update_-_OFAC_Issues_Guidance_Regarding_Ban_on_Transacting_in_Securities_of_CCMCs.pdf

OFAC Issues Guidance Regarding Ban on Transacting in Securities of “Communist Chinese Military Companies”

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