Our response to the proposed implementation of the US Outbound Investment Programme

28 September 2023


  • On 9 August, President Biden issued an Executive Order directing the Secretary of the Treasury to establish an Outward Investment Program to prohibit or require notification of certain types of outbound investments by United States entities/persons into certain entities located in or controlled by the People’s Republic of China, including the Special Administrative Regions of Hong Kong and Macau. The Order identifies three strategic sectors: semiconductors, AI, and quantum technologies. The US Treasury is consulting on how to implement the Order with a view to publishing a draft regulatory text, and subsequently final regulations.
  • Previously, the Prime Minister and President Biden set out in the UK-US Atlantic Declaration their shared objective “in preventing our companies’ capital and expertise from fuelling technological advances that will enhance the military and intelligence capabilities of countries of concern.” The UK has committed to “complement” the US’ approach and the government is now working to assess how potential national security risks could be addressed in the UK but has not yet developed its policy position.

TheCityUK submission to the US consultation

  • The submission itself is technical and intended to seek clarification and guidance on, rather than criticise, the US approach.

The key message regarding the US proposal is that:

  • The UK is a significant host to several US financial institutions and many UK-based non-US firms employ US staff in senior roles – and the US proposals are explicitly designed to have an extra-territorial effect. The consultation states that: “The Treasury Department expects the regulations to apply to U.S. persons wherever they are located.” The US is considering rules that would prohibit U.S. persons from “knowingly directing” transactions if such transactions would be prohibited transactions if engaged in by a U.S. person. I.e. the proposals would include transactions by non-U.S. persons or entities when there is U.S. person involvement, in certain circumstances.
  • Therefore, we are seeking clarification that the obligation to comply with any prohibition or notification requirement under the EO – and liability for non-compliance – resides solely with the U.S. person undertaking a covered transaction, or knowingly directing a prohibited transaction. And that the obligation should not extend to other parties involved in the transaction, such as the person selling an equity interest or a third party otherwise involved in the transaction, for example, as an advisor, underwriter, issuer, or in any other capacity as a financial institution acting in an intermediary or other capacity. If the regulations are drawn too widely, by requiring U.S. person employees of foreign financial institutions, to identify, prevent, or notify the U.S. Government of potentially covered transactions in which they may be involved as issuers of equity, or debt, or as providers of other financial services, it could discourage foreign/UK-based financial institutions from employing U.S. persons.
  • More broadly, we are highlighting the importance of providing clarity on the scope of such a regime – this is relevant to the wider context of the UK developing and potentially enacting its own “complementary” outward investment screening regime:
    • For example, we note that the US’ suggested definition of “AI system” is a broad one, which could encompass many varieties of software.
    • We are also seeking clarity on how many “degrees of separation” along the investment chain investors will be considered liable for the potential involvement of a “covered foreign person”. For example, an asset manager may have an investment in a private entity via an SPV structure which is domiciled in one country, held via a fund domiciled in another country. The fund is then managed by an individual in a separate country and could have investors from a number of jurisdictions globally, including the U.S. Equally, an investor may be comfortable that the investee they are dealing with directly is not a “covered foreign person” but remains uncertain about what level of due diligence will be required on their counterparty’s supply chain to meet the knowledge threshold established by the regulations.
    • These are examples of the issues that any future UK regime will need to consider carefully in order to avoid unintended consequences.
  • Not included in the submission, but, in the context of the potential UK scheme, we would stress the different nature of the UK and US as financial centres. The UK’s comparative advantage is as an international hub. For example, nearly two-thirds (62%) of the shares traded on the London Stock Exchange are held by non-domestic institutional investors, compared with only 18% in the US.

You can read our full comment here.