Foreign Direct Investment And U.S. National Security: CFIUS Under The Obama Administration

There was considerable public scrutiny of the Obama Administration's performance in its inaugural year, but comparatively little focus on one of the Administration's key processes governing the flow of investment into the United States _ namely, the Committee on Foreign Investment in the United States (CFIUS). Yet, this is a frequent question we receive from foreign investors -- has the change in the administration affected CFIUS?

The good news for investors and U.S. transaction parties alike is that the overall CFIUS process continues to function well under the Obama Administration and has been faithful to the principles of open investment. At the same time, there have been several notable developments in the volume and pace of CFIUS reviews over the past year that should be of interest to those who watch the cross-border M&A market closely.

The slowdown in overall M&A activity contributed to a reduction in filings with CFIUS.1 In 2008, CFIUS reviewed 155 cases; CFIUS reviewed fewer than half as many transactions in 2009.2 This is the lowest number of notices since 2005 and the first reversal of an upward trend in nearly a decade.

Perhaps the most significant development for investors was that CFIUS's pace for completing its reviews also slowed materially in 2009. While official figures have not been released, CFIUS escalated a much higher percentage of matters under review to a second-stage 45-day "investigation" to the point that, by percentage, investigation nearly became the rule rather than the exception in 2009. By contrast, through 2007, fewer than two percent of all cases reviewed by CFIUS had proceeded to the investigation phase and, in 2008 (a year in which CFIUS received the most filings in nearly two decades), the number of investigations still was fewer than 15 percent of all cases.

The slower pace of CFIUS reviews and corresponding increase in investigations may be attributed to several factors. First, there was a natural bureaucratic lag that results from any change in Administration and turnover in senior positions in key agencies. The Treasury Department and other CFIUS agencies worked valiantly to move CFIUS cases along for review but often the necessary policy-level approvals were slow in coming.

Second, the Foreign Investment and National Security Act of 2007 (FINSA), which "reformed" CFIUS and codified its review authority, established a presumption of investigation for foreign government transactions and transactions...

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