CFIUS Stresses Scrutiny of Limited Partners, Enforcement at Annual Conference, Law Firms Say

In a client alert, Hughes Hubbard said panelists during the conference stressed the “need for such funds to provide the Committee with the identities of all” limited partners with more than a 5% interest in the fund, along with all limited partners located in a “country of concern” and copies of any agreements or side letters that grant those limited partners control or special access rights. Although panelists acknowledged that fund agreements often include confidentiality provisions that block the disclosure of limited partners, they also said those agreements “usually contain exceptions for disclosures required by government agencies,” according to Hughes Hubbard.

“CFIUS takes the view that its requests, even in the context of a voluntary declaration, trigger such disclosure exceptions,” the firm said.

Committee staff also “emphasized the difficulty they have in recommending approval of a transaction and preparing clearance memoranda” if the parties to the transaction don’t disclose to CFIUS the identity of their limited partners, the alert said. But the staff also said CFIUS has ways of finding out who investors are even if they’re not disclosed.

“Fund managers must ensure that they know their investors because, with the help of the intelligence community, CFIUS almost certainly will,” panelists said, according to Hughes Hubbard.

Barnes & Thornburg made similar points, saying CFIUS officials during the conference suggested the committee has "taken a more assertive stance in requiring private investment funds to be as transparent as possible" about the identities of their limited partners. The firm said this could be translating into "more reviews" of private fund transactions and more "scrutiny" of limited partners.

The firm also said former CFIUS officials spoke about possible changes investors might see under the incoming Trump administration, including whether CFIUS may consider economic security matters, such as American jobs, as "part of its national security analysis."

"As we saw during this election cycle, American economic security could certainly influence the CFIUS outcome in certain high-profile transactions," the firm said. Some policy observers said the committee's review of Japan-based Nippon Steel’s acquisition of Pennsylvania-based U.S. Steel was being used as a tool by the Biden administration to possibly sway more Pennsylvania voters to vote Democrat during the close presidential race (see 2409060040 and 2410110036).

CFIUS staff also used the conference to encourage transaction parties to communicate “early, often and openly,” Hughes Hubbard said. The committee specifically said companies should “include descriptions of their overall investment strategy” to CFIUS if they expect to be repeat filers so that the Committee can “understand the aggregate national security risks, if any, of the strategy.”

Barnes & Thornburg said a recent rise in enforcement activity means "the stakes for conducting thorough CFIUS due diligence in the early stages of a transaction and anticipating the concerns of CFIUS remain as high as ever."

Other topics discussed during the conference included the Treasury Department’s recent final rule that will allow CFIUS to impose higher maximum penalties and issue subpoenas in a wider set of circumstances, among other things (see 2411180048). Venable said those changes, including one that will give CFIUS more power to scrutinize non-notified deals, could lead to an uptick in voluntary filings.

"[T]he new rules put a thumb on the scale toward filing," the firm said, and "serve as a powerful reminder of CFIUS's ability to increase its jurisdiction and enforcement capabilities without the cumbersome requirements of a major legislative proposal." Venable added that this "won't be the last time we see the Committee deal itself a better hand in order to support its national security mission."