As the air turns crisp, many of us above the equator will begin to think of the winter holidays. A subset of these people will think about holiday wish-lists. And the thoughts of nearly all of that subset, or at least the healthy portion, will coalesce around two questions:

1. With CFIUS making news so frequently, does the CFIUS annual report still warrant attention?
   
   And, relatedly,
    
2. How can that report be more informative?

Below we offer our thoughts on these two questions and, in so doing, submit our early holiday wish for 2025.

Ritual from a Bygone Era

Generations ago, before national security rulemaking became a monthly occurrence, when presidents from both Republican and Democratic parties talked the talk and walked the walk of an “open investment policy”—that is to say, in the pre-2016 era—there wasn’t a ton of national security regulatory activity. Notable CFIUS activity was particularly scant. The CFIUS annual report was, accordingly, big news of the day.

That is no longer the CFIUS du jour. Today, CFIUS rules require lawyers to review thousands of transactions per year, often mandating filings when a foreign investor might obtain access to “critical” technology such as … basic, non-proprietary encryption. CFIUS now sometimes imposes steep penalties on allied country investors and even threatens to block their investments. Surfing the widespread nativist zeitgeist, CFIUS has had much public success getting governments around the world to follow its lead in driving up public skepticism toward cross-border investment. CFIUS and its foreign analogues now make the news frequently, affecting a variety of businesses as well-known and diverse as U.S. Steel, Sprint, and Grindr.

Yet the CFIUS annual report has not changed. Now easily surpassed in newsworthiness, the report nonetheless continues as an annual, congressionally-mandated rite. So, too, continues the customary coverage of that report by the Ciferati. To make that report more worthy of attention, CFIUS could make an effort to produce one that tries to shed light on the relative costs and benefits of the extremely-robust-and-still-growing CFIUS machine that has been built in the name of protecting national security.

The Signal and the Noise 

Each of the recent annual reports has been long and detailed, with pages of noise but also a few noteworthy nuggets. For example, the annual report released this past summer, covering calendar year 2023, included within its 70 pages the following points:

• CFIUS imposed four monetary penalties for alleged breaches of “mitigation agreements” i.e., conditions to which parties sometimes must agree in order to obtain CFIUS clearance.
  • Subsequently, in a release outside the annual report (perhaps further evidence that significant focus on the annual report is passé), CFIUS disclosed details regarding these penalties, including identifying the parties that received a record $60 million penalty (Sprint and T-Mobile, the latter a foreign party because of its German stakeholder, Deutsche Telekom).
• The number of filings made to CFIUS declined from the previous year—233 notices and 109 declarations (a total of 342 filings) in 2023, versus 286 notices and 154 declarations (a total of 440 filings) in 2022.
  • As most filings with CFIUS are voluntary, the decline likely reflects, at least in part, parties forgoing such voluntary filings in the face of increasingly challenging CFIUS processes even for mundane transactions. Put another way, the benefit of clearance, i.e., the safe harbor against future adverse action by CFIUS, may be increasingly outweighed by the costs of obtaining that clearance.
• The overwhelming majority of CFIUS filings concern investors from allied countries. Investors from China, putatively the primary driver for the expanding CFIUS machine, did not even make the top three investor countries for 2023.
  • CFIUS did, however, cause many Chinese investors to file the same transactions repeatedly; if you count those twice-, thrice-, or more frequently refiled transactions, then lo and behold, Chinese investors top the list of filers.

Alongside these morsels of useful information also is a lot of less useful information. For example, the annual report dedicated multiple pages to lists of NAICS codes—even when CFIUS previously deemed NAICS codes unsuitable for use in CFIUS’s own rules. 

There also is some data that could provide helpful perspective on U.S. policy when contrasted with data from previous eras—e.g., the 1990s and early 2000s, when CFIUS typically cleared transactions within 30 days, a feat now attained by only a small sliver of transactions, if any (CFIUS’ practice of delaying acceptance of declarations has made the 30-day declaration timeline sometimes illusory). The time horizon of the CFIUS annual report, which generally looks back only a few years, makes it difficult to discern the signal from the noise.

One CFIUS observer, commenting on the CFIUS report covering calendar year 2022, stated that “regrettably the data routinely presented by CFIUS and the agency’s ‘analysis’ of them in its newest report provide scant economically meaningful information about CFIUS’ actions and the true nature of U.S. policy towards foreign direct investment.”

Toward a More Informative Annual Report

In fairness to CFIUS, many of the annual report details are congressionally mandated, and all of it is for congressional consumption, so asking for a serious economic policy paper may be asking for too much. But if CFIUS were aiming to make it that, what types of questions might CFIUS try to address? Here are some that we propose, mostly aimed at obtaining a better picture of the costs and benefits of the CFIUS process:

• What is the average length of time between the filing of a declaration, CFIUS acceptance, and the conclusion of the declaration process? What is the average length of time between the filing of a notice and the conclusion of the notice process (counting re-filed transactions as part of the same process)?
• How many questions, on average, does CFIUS ask per transaction i) filed as a declaration and ii) filed as a notice?
  • Is there a correlation between the country of the investor and the number of questions asked?
• What is the approximate cost of the CFIUS mandatory filing triggers, which practically require parties to thousands upon thousands of transactions annually to need a CFIUS assessment by legal counsel?
  • How many mandatory filings were made?
  • What were the investor countries for these filings?
  • How many mandatory filings yielded CFIUS blocks or forced divestment?
  • How did the disposition of mandatorily filed transactions compare with those submitted voluntarily?
• How many mitigation agreements are associated with each investor country, i.e., how many mitigation agreements concerned investors from Australia, Canada, China, India, Japan, Singapore, South Korea, etc.?
  • With respect to each such agreement, what was the general nature of the CFIUS concern necessitating that agreement?
• With respect to monetary penalties imposed by CFIUS, how did CFIUS evaluate the proper penalty amount?
  • What defenses were raised by the parties to countervail CFIUS’s assessment that a penalty was warranted?
  • What were the nationalities of the paying parties?
• How many transactions that CFIUS blocked, unwound, or which the parties abandoned because of CFIUS are associated with each investor country?
• With respect to each scuttled transaction, what was the general nature of the CFIUS concern?

These questions all could be addressed without running afoul of CFIUS’s confidentiality rules. The answers are seemingly important if some or all of the increasingly costly CFIUS machinery is to be justified.

So that is our holiday wish: a more informative CFIUS annual report in 2025. We trust we are not alone.

For more information on this rule or any related matter, please contact any member of Wilson Sonsini’s national security practice. 

The opinions expressed are those of the authors and do not necessarily reflect the view of the firm or its clients.