Rules Target Foreign Investment

Administration Proposes Law Tightening Security Reviews

The Bush administration, pledging a "strong and continued commitment" to safeguarding national security, issued 90 pages of regulations yesterday to implement a new law tightening security reviews of foreign investments.

Congress passed the law last year after an uproar in 2006 over a plan by Dubai-owned DP World to manage six of the largest ports in the United States. The deal fell through after lawmakers from both parties contended that the administration and the agency responsible for reviewing security issues had not fully considered all of the security concerns that had been raised.

The proposed regulations, issued for a 45-day period of public comment, will overhaul current rules to make them conform to the new Foreign Investment and National Security Act that Congress passed in July.

"These regulations reflect America's strong and continued commitment to safeguarding U.S. national security in a manner that reinforces the long-standing U.S. policy of welcoming foreign investment," Clay Lowery, the Treasury's assistant secretary for international affairs, said in a statement.

The new law is intended to ensure that high-level officials, including the director of national intelligence, participate in decisions concerning the security implications of direct foreign investment. It extends the scope of national security reviews to cover deals involving critical infrastructure and energy and requires a second-stage review investigation of most proposed acquisitions by state-owned companies.

It gives legal status to the little-known Committee on Foreign Investment in the United States, or CFIUS, a multi-agency group formed in 1975 to monitor U.S. policy on foreign investment. A 1988 law gave the president the authority to stop foreign acquisitions that pose a security threat, and the president delegated to CFIUS the authority to investigate the deals.

The regulations address an issue raised by the billions of dollars invested in U.S. banks in recent months by foreign government-run investment funds, also known as sovereign wealth funds. Sovereign funds from Asia and the Middle East have invested more than $30 billion in companies such as Citigroup and Merrill Lynch in recent months as financial services firms sought to raise cash in response to the credit crisis.

After the investments were structured to result in ownership stakes of less than 10 percent, some members of Congress raised concerns about the funds' ability to avoid scrutiny. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, asked the Treasury last month to clarify in the new rules that investments of less than 10 percent aren't automatically exempt from scrutiny.

In the proposed regulations, Treasury officials wrote that "the regulations do not provide, and never have provided, an exemption based solely on whether an investment is 10 percent or less in a U.S. business."

Business groups representing both U.S. and foreign companies praised the new rules.

"The regulations provide necessary guidance on which transactions involve both control and a relationship to national security and therefore require a . . . review," said a joint statement from four groups: the U.S. Chamber of Commerce, the Business Roundtable, the Financial Services Forum and the Organization for International Investment.