On January 6, 2021, the Division of Examinations (“Division”) issued a Risk Alert to notify investment advisers, broker-dealers, and other market participants of a recent action relating to investments in securities associated with Communist Chinese military companies, as well as investors transacting in such securities.

Why We are Sending this Alert:  Investment advisers, broker-dealers, and other market participants should know that effective as of January 11, 2021 at 9:30 a.m. EST, U.S. persons, which includes both individuals and entities, are prohibited from transacting in certain securities and derivatives of Communist China military companies (“CCMCs”), unless such transactions are for purposes of divestment and occur through November 11, 2021.

Details of Division’s Risk Alert:  On November 12, 2020, President Trump signed Executive Order 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies” (the “EO”).¹  The EO states that beginning on January 11, 2021 at 9:30 a.m. EST, U.S. persons, which includes both individuals and entities, will be prohibited from transacting in certain securities and derivatives of CCMCs, unless such transactions are for purposes of divestment and occur through November 11, 2021.  Examples of financial instruments covered by this provision include, but are not limited to, derivatives (e.g., futures, options, swaps), warrants, American depositary receipts (ADRs), global depositary receipts (GDRs), exchange-traded funds (ETFs), index funds, and mutual funds, to the extent such instruments also meet the definition of “security” as defined in section 4(d) of EO 13959.²

The Treasury Department’s Office Foreign Asset Control (“OFAC”) has published guidance concerning the EO on several occasions, available here.

Practice Considerations:  Investment advisers, broker-dealers, and other market participants should:

• Review and assess the impact of the EO for their own investments as well as on behalf of investors and clients.

• Review and assess the impact of the EO on their processes related to investments on their own behalf and on behalf of investors and clients.

• Continue to review OFAC’s website for additional guidance.

¹ https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-securities-investmentsfinance-communist-chinese-military-companies; 85 Fed. Reg. 73185 (Nov. 17, 2020).

² Office of Foreign Assets Control of the U.S. Department of Treasury, Frequently Asked Question 860 (Dec. 28, 2020); https://home.treasury.gov/policyissues/financial-sanctions/faqs/860.