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Regulatory Update

US Ban on Chinese Military Investments: What this means for Managers?

Posted on 17 Feb 2021

shot of New York from across the Hudson

The Office of Foreign Assets Control (OFAC) in the United States has issued the deadline for US investors to divest themselves of a number of Chinese companies designated as having links to the Chinese military. The list now includes a total of 44 Chinese companies, including the state-owned oil company CNOOC as well as telecoms companies such as China Mobile and Huawei. The ban will take effect on 27 May 2021 prohibiting US investors from purchasing any new holdings in these companies and US investors must have fully divested themselves of any holdings by 11 November 2021.

The ban was initiated through an Executive Order issued by President Trump under the National Defence Authorization Act for fiscal year 1999, and since reaffirmed by President Biden albeit with the deadline now delayed until November.

Several of the entities caught by the ban were listed on NYSE, which has resulted in the American Depository Shares of these entities being delisted on January 8 after NYSE had reversed its decision several times after the initial announcement on 1 January.

The incoming ban has resulted in considerably increased trading volume in the relevant companies, not just as US investors sell, but as these companies are being removed from many global benchmarks, many index funds have been forced to sell their holdings in these companies at short notice, contributing to the increased volatility.

The executive order does make clear that it applies to both direct holdings by US persons in such companies and also to holdings through an investment fund. US investors have been advised to seek confirmation from the fund manager as to whether they face any exposure to this executive order. This means that even if an asset manager is outside of the US, and is not themselves subject to the ban on holding shares in these companies, they should take steps to assess if their US investors will have any exposure once the ban takes effect. If there is exposure found then the asset manager should notify all US investors of this. The result of this could be the fund divesting itself from the relevant entities or the US investor divesting themselves from the fund.

Need more support?

At Laven, our consultants are on hand to help identify the actions your firm needs to take to ensure you are compliant with new regulations and aware of all the risks outlined in this report. Whether this is through assisting with new policies and procedures that need to be put in place or providing online/in-person training for staff to make them fully aware of the regulatory obligations.

Laven has also built Laven Tech, a unique Regulatory Technology (RegTech) solution that leverages advanced technology combined with our vast subject matter expertise. Our RegTech solution is designed to assist fund managers, service providers and investors to meet today’s growing demands.

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