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Summary of House Committee on Financial Services Hearing on H.R. 556
Date: 2/21/2007

On February 7th, the House Committee on Financial Services held a hearing on H.R. 556 “National Security Foreign Investment Reform and Strengthened Transparency Act of 2007” which proposes reforms to the Committee of Foreign Investment in the United States (CFIUS) investment review process. Those at the hearing included Chairman Barney Frank (D-MA), Rep. Carolyn Maloney (D-NY) and Rep. Adam Putnam (R-FL). The witnesses testifying before the Committee included Clay Lowery, Assistant Secretary of the Treasury, David Heyman, Director of the Homeland Security Program at the Center for Strategic International Studies, Michael O’ Hanlon, Senior Fellow at the Brookings Institution and Todd Malan, President and CEO of the Organization for International Investment (OFII).

The Committee agreed that after the Dubai Port World controversy, CFIUS needed to reform the review process of investment transactions and improve the means of communication between the different branches of government.  The U.S. needs to protect national security but at the same time maintain our open market for incoming foreign investment.  When reviewing cases, CFIUS focuses its attention on the country, type of investment, and the national security implications of the transaction.  Lowry told the Committee that using these criteria should not necessarily deter investments from countries that might raise national security concerns.

The consequences of not getting this right are significant.  Todd Malan indicated that the benefits of incoming investment include foreign subsidiary company employment of 5.1 Americans in all 50 states, 31 percent of the American workforce concentration in subsidiary companies within the manufacturing sector, and subsidiaries’ reinvestment of 59 billion dollars of profit into their U.S operations. He stated, “Global companies want to invest in the United States because of the size of our market, the quality of our workforce, and the certainty and predictability of our local regime.”  In order to retain investments and attract more in the future, CFIUS must reform its reviewing process.

The bill contains a number of provisions agreed upon by the Department of Treasury with Congress; including Congressional Committee briefings on cases that fall under the Exon-Florio amendment, notification to senior policy officials within CFIUS agencies to ensure accountability, efficient communication and reviewing process, and notifying parties involved in the transactions of all procedures. Secretary Lowery discussed the importance of foreign investment to the U.S economy and noted that the controversy over DP World “coupled with some troubling signs that other countries are pursuing trade barriers to foreign investment, and increasingly negative media coverage of the U.S. investment climate, underscore the need to improve and reform the CFIUS process.”

Last year, the number of CFIUS filings increased by 73 percent, investigations increased by 350 percent, and company filing withdrawals from CFIUS by 250 percent. Mitigation agreements, conditions imposed on companies, tripled last year, led by the Department of Homeland Security which conducted “an average of 4.5 mitigation agreements per year between 2003 and 2005” and fifteen in 2006.  The heightened interest in the CFIUS process was a response to the Dubai Port World controversy and the criticism expressed by the public and elected officials over initial CFIUS approval of that transaction.  As O’Hanlon pointed out, the UAE “recognized the Taliban government of Afghanistan, [that it was] the country of origin for two 9/11 hijackers and a nexus for much of the funding needed to organize that plot. […] these concerns were at least partially counterbalanced by the fact that the UAE has become a responsible player in port security…” Because of these concerns, many members of the House and Senate were uneasy about foreign ownership of US port facilities and focused on means of improving the CFIUS process so similar cases would be less likely to recur.

The Department of Treasury, the Bush Administration and Congress view foreign investment as essential to economic growth and job creation; conversely, protecting U.S. national interests may conflict with foreign investment as did Dubai Port World. David Heyman argued that the importance of H.R. 556 rests on being able to attract foreign investment without at the same time not creating lengthy and problematic CFIUS procedures that many investors would view as a deterrent to such investment.