[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
H.R. 4311, THE FOREIGN INVESTMENT RISK REVIEW MODERNIZATION ACT OF 2017
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HEARING
BEFORE THE
SUBCOMMITTEE ON MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
APRIL 12, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-85
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_________
U.S. GOVERNMENT PUBLISHING OFFICE
31-419 PDF WASHINGTON : 2018
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Monetary Policy and Trade
ANDY BARR, Kentucky, Chairman
ROGER WILLIAMS, Texas, Vice GWEN MOORE, Wisconsin, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan BILL FOSTER, Illinois
ROBERT PITTENGER, North Carolina BRAD SHERMAN, California
MIA LOVE, Utah AL GREEN, Texas
FRENCH HILL, Arkansas DENNY HECK, Washington
TOM EMMER, Minnesota DANIEL T. KILDEE, Michigan
ALEXANDER X. MOONEY, West Virginia JUAN VARGAS, California
WARREN DAVIDSON, Ohio CHARLIE CRIST, Florida
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
C O N T E N T S
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Page
Hearing held on:
April 12, 2018............................................... 1
Appendix:
April 12, 2018............................................... 41
WITNESSES
Thursday, April 12, 2018
Brown, Michael A., Presidential Innovation Fellow, Defense
Innovation Unit Experimental................................... 42
Cinelli, Giovanna M., Partner and Lead, International Trade and
National Security Practice, Morgan Lewis & Bockius LLP......... 48
Kallmer, Jonathan S., Senior Vice President, Global Policy,
Information Technology Industry Council........................ 56
Lowery, Hon. Clay, Managing Director, Rock Creek Global Advisors,
and former Assistant Secretary for International Affairs, U.S.
Department of the Treasury..................................... 68
Marchick, David M., Managing Director and Global Head of External
Affairs, The Carlyle Group..................................... 74
APPENDIX
Prepared statements:
Brown, Michael A............................................. 12
Cinelli, Giovanna M.......................................... 14
Kallmer, Jonathan S.......................................... 9
Lowery, Hon. Clay............................................ 7
Marchick, David M............................................ 10
Additional Material Submitted for the Record
Barr, Hon. Andy:
Written statement of the National Venture Capital Association 83
Heck, Hon. Denny:
Latest working draft of H.R. 4311............................ 89
Pittenger, Robert:
Written statement of Ericsson, Inc........................... 122
Written statement of Oracle.................................. 123
H.R. 4311, THE FOREIGN INVESTMENT RISK REVIEW MODERNIZATION ACT OF 2017
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Thursday, April 12, 2018
U.S. House of Representatives,
Subcommittee on Monetary Policy and Trade,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:03 p.m., in
room 2128, Rayburn House Office Building, Hon. Andy Barr
[chairman of the subcommittee] presiding.
Present: Representatives Barr, Williams, Lucas, Huizenga,
Pittenger, Love, Hill, Emmer, Mooney, Davidson, Hollingsworth,
Foster, Sherman, Green, Heck, Kildee, Vargas, and Crist.
Also present: Representatives Hensarling, and Royce.
Chairman Barr. The subcommittee will come to order. Without
objection, the Chair is authorized to declare a recess of the
committee at any time. All members will have 5 legislative days
within which to submit extraneous materials to the Chair for
inclusion in the record.
This legislative hearing is entitled ``H.R. 4311, the
Foreign Investment Risk Review Modernization Act of 2017.''
Without objection, the gentleman from California, Mr. Royce, is
permitted to participate in today's subcommittee hearing. Mr.
Royce is a member of the Financial Services Committee and is
Chairman of the Committee on Foreign Affairs. We appreciate his
interest in this topic.
I now recognize myself for 3 minutes to give an opening
statement.
The world today is a much more dangerous place than it was
at the turn of the century. In 2000, post-Soviet Russia seemed
fitfully to be moving toward recovery from nearly a century of
communist rule. China, while still communist-run, seemed a
useful partner, a low-cost manufacturing platform eager for
work. Terrorism had not yet become a global problem.
But today, terrorism is an ever-present threat. Russia has
undertaken a disturbing series of military and cyber
interventions against its neighbors and the United States, and
China has become a global economic powerhouse that will stop at
nothing to enhance its military muscle.
Against this backdrop, our colleague, Representative
Pittenger, more than a year ago began a thoughtful examination
of the process by which the Government screens inbound
investment to ensure it presents no threat to national
security. The interagency Committee on Foreign Investment in
the United States, or CFIUS, last was updated in 2007.
Since then, a number of deals have been broken up when
CFIUS detected threats that could not be mitigated by changes
in the proposals. Significantly, each denied proposal was
rejected because of fears it would result in Chinese control of
technology or a business that would have threatened national
security.
Not all deals from China are bad, and not all bad deals are
from China. But the dramatic increase in the number, size, and
complexity of deals CFIUS scanned last year, combined with the
notable rise in the percentage of deals that have Chinese ties,
is a clear indicator that we should examine ways to modernize
the CFIUS process as we had into the third decade of the 21st
century.
So today, after three hearings on CFIUS's operations and
challenges, we start examining legislation introduced in
November, H.R. 4311, the Foreign Investment Risk Review
Modernization Act, or FIRRMA as it is commonly known. The
Administration supports the legislation, has worked since its
introduction to develop updated language in response to
constructive feedback and suggestions from interested parties.
Additionally, the authors of FIRRMA have done the same, and
the committee is currently reviewing several proposals to
enhance the legislation further. As we proceed down this road
of much needed CFIUS modernization, my goal is that we continue
to work in a bipartisan and bicameral manner through the
regular order process, because we all know that CFIUS reform is
critical to our national security and we need to make sure we
get it right.
We must work quickly, but we must not hastily rush
something of this magnitude that could lead to unintended
consequences that jeopardize our national security and shackle
our economy. We need reforms to effectively target and focus on
real threats, rather than all joint ventures and investments.
We cannot inadvertently ensnare purely benign investments which
do not involve critical or emerging technologies and which are
wholly disconnected from U.S. national security concerns.
Together, we must stop troublesome investments by Chinese
state-controlled enterprises, bent on securing technology that
would threaten our national security, while also being careful
not to drive away unobjectionable deals that create jobs and
opportunities for Americans of all walks of life.
I am confident that together we can improve our national
security without harming our economy, but it will require hard
work, patience, and undoubtedly some give-and-take to come up
with the right solution.
The Chair now recognizes the gentleman from Washington, Mr.
Heck, for 3-1/2 minutes for an opening statement.
Mr. Heck. Thank you very much, Mr. Chairman, and for
convening this hearing.
In the 10 years since Congress last authorized CFIUS, our
strategic competitors have found gaps in the CFIUS process
which they are exploiting. Right now, if foreign intelligence
agencies want to buy land to help spy on our most sensitive
national security installation, and there is no existing
business on the site, CFIUS can't stop them.
Right now, investments that could give our strategic
competitors influence and insight into critical technology
companies go unreviewed because they fall just short of control
of the company. Right now, if a strategic competitor seizes
control of a U.S. business through a change in the legal rights
associated with an existing investment, CFIUS can't stop them.
Right now, our strategic competitors can structure
transactions to take advantage of a loophole between CFIUS's
existing authority over joint ventures involving a whole U.S.
business and the export control system's authority over
individual pieces of technology and know-how. All of this needs
to stop right now if we want to avoid a catastrophic amount of
damage to our technological edge in our military readiness.
That is why I was pleased to join with Congressman
Pittenger and Senator Feinstein and Senator Cornyn.
Fundamentally FIRRMA is about closing each of these specific
gaps I just spoke about, while making sure that the U.S.
remains welcoming to investments that do not harm our national
security.
Throughout this process, Congressman Pittenger and I and
our Senate counterparts have been working closely with
stakeholders and the CFIUS agencies to refine and perfect the
bill. I ask unanimous consent, Mr. Chairman, to enter the
latest working draft of FIRRMA into the record.
Chairman Barr. Without objection.
Mr. Heck. While our witnesses are testifying on the bill as
introduced, I would urge my colleagues to see how we have
addressed many of the issues that have been raised in our
revised text. I think my staff and I have already met with all
but one of our witnesses who are here today as a part of that
process.
Mr. Marchick, our door is open if you would also like to
come in. Your input has played an important role in this
process, notwithstanding the lack of physical presence thus
far.
I am glad we are working on this issue in a bipartisan way.
I echo the remarks of the Chair, and I extend to him once again
my gratitude for the manner in which we have undertaken this
task, this very important task. I am, for my own part, happy to
work with anyone who is willing to come to the table in good
faith, because at the end of the day, my colleagues, this
issue, our national security, is too important for anything
less.
Thank you, and I yield back.
Chairman Barr. The gentleman yields back. The Chair now
recognizes the author of FIRRMA, the gentleman from North
Carolina, Congressman Pittenger, for a 2-minute opening
statement.
Mr. Pittenger. Thank you, Mr. Chairman. Thank you for
hosting this very important hearing.
Before I begin my prepared remarks, I would like to thank
my good friend, Mr. Heck, for his leadership with me on this
bill. He has been a remarkable partner. Also, thank you for
submitting to the record the most current version of the bill,
3.0, which has the collective input of many of you. I know, Mr.
Kallmer, we have worked with you significantly on that input
for the last several months and many other people in the
industry.
I would also like to say that our office has worked with
Senator Cornyn and the Treasury Department, along with the
various members of the industry to make sure that we provide a
bill that is responsive, that gets the job done, but also makes
sure that we have open markets. These updates streamline the
bill as we have responded to the concerns raised by the
industry. It makes it even more laser-focused on national
security.
While I would have hoped that we would hear a more clear
presentation today, as I understand that perhaps these edits
are not included in the testimony, I am happy that we can share
this product of our work into the record. Mr. Chairman, I do
thank you for offering unanimous consent to enter into the
record the update of FIRRMA.
Mr. Chairman, CFIUS reform is an urgent national security
requirement. President Trump has endorsed this bill. Secretary
Mattis requested the bill and endorsed it. Secretary Mnuchin
and his team have worked closely and tirelessly on this bill
and have also endorsed it.
FIRRMA is specifically targeted to address national
security issues related to defense applicable technology
transfers to China and other countries, issues that remain
unresolved and outside the scope of existing export control.
Those who disagree with the premise of my bill should speak to
the five Department of Defense secretaries who have endorsed
this bill. Unfortunately, many who profit from modernizing the
Chinese military seek--some do to distort the narrative and
defeat this bill.
Today, we have many witnesses who will make presentations
who notwithstanding represent interests from China, Lenovo, and
other major entities. General Dunford has said that China will
be the greatest threat to the U.S. by 2025. Yet some companies
insist on accelerating that timeline and defeating FIRRMA.
Mr. Chairman, national security experts have spoken. FIRRMA
is needed, and I look forward to working with my colleagues to
get it passed in its current form. I yield back.
Chairman Barr. The gentleman yields back. The Chair now
recognizes the gentleman from California, Mr. Sherman, for a 3-
1/2 minute opening statement.
Mr. Sherman. This is an important bill. I think it needs to
be stronger. I am working with the authors on three ideas that
so far are not included, but we continue to try to persuade
them.
The first I think will eventually be included. It is a no-
brainer. It should be explicit that only under truly
extraordinary circumstances would we entertain an application
from a company based in any country that is a state sponsor of
terrorism. We may want to go further and say we don't want to
entertain an application from any company that does business in
or with any state sponsor of terrorism. National security
starts with clamping down on state sponsors of terrorism.
Second, as to critical technologies, the issue is often
that an investment is made when a company does not have
critical technologies or hasn't proven it or we don't
understand how important it is. Those transactions need to be
subject to post-transaction review when a country of special
concern is at issue. Otherwise, we can be in a circumstance
where our technological crown jewels find their way to Beijing
simply because we didn't realize the importance of the
technology at the time of the transaction or the company didn't
have the technology at the time of the transaction. It had the
elements of the technology and the scientists that would create
the technology.
Third, we should consider jobs in every decision we make in
Washington, and that includes foreign investment. Every other
country I am aware of does just that.
Fourth, is an idea I have not shared with the authors yet,
and that is the critical technologies concept needs also to be
applied to soft power. Our media, the minds of Americans are
just as important as the technology. I, for example, am worried
that the Chinese control a big chunk of the movie screens in
the United States, AMC in particular.
What that means is that if you make a movie that Beijing
doesn't like, not only can't you get it shown in China, you
can't get it shown in the United States. At very minimum,
before AMC was purchased, there should been a provision where
the owners agree not to discriminate against a movie simply
because its content is disagreed with by the government of
China and a requirement that if when there is a movie made that
the Chinese government doesn't like and other movie
distributors and screens and theater owners are showing it,
that it should be available at AMC theaters.
Again, to give China control of the minds of Americans by
controlling the media of the United States was a mistake that
we can reverse, perhaps in this bill.
So I look forward to working with the authors to make this
bill stronger, and now is not the time to put profits ahead of
national security. I yield back.
Chairman Barr. Gentleman yields back. The Chair now
recognizes the Chairman of the House Foreign Affairs Committee
and a member of this committee, the gentleman from California,
Congressman Royce, for 2 minutes for an opening statement.
Mr. Royce. Thank you. Our long-term national security and
economic interests, Mr. Chairman, are directly tied to how we
protect emerging critical technologies. My view remains that
the U.S. should pursue a whole-of-government strategy that does
not rely exclusively on CFIUS or exclusively on export
controls, but builds strength on strength, reforming both
complementary approaches which together represents a
comprehensive response to a very critical national security
challenge that we are facing right now.
One specific issue that I want to raise is the fact that
export controls not only restrict the transfer of products, but
also of know-how. We should all think long and hard on this.
This is current law. Both defense trade controls managed by the
State Department and dual-use export controls at Commerce,
control the transfer of intangible ideas to foreign persons.
But this is an area where we should strengthen the law. I
agree with my good friend from North Carolina, Mr. Pittenger,
that greater scrutiny is required with respect to the transfer
of know-how, legally or otherwise, to strategic economic
competitors, such as Beijing, and that is why the Foreign
Affairs Committee export control reform bill, which we consider
next week in a markup, explicitly ensures that sensitive know-
how, which may include such items as written or oral
communication, blueprints, engineering designs and
specifications, at any stage of their development prior to
production, would be subject to controls.
Likewise that is why our bill will also make clear that
export controls apply regardless of the nature of the
underlying transaction--we need to think on this--whether
through a purchase order or other contract requirement,
voluntary decision, whether such a purchase order or other
contract or inter-company agreement or during a joint venture
or a similar collaborative arrangement exists, all that has to
be controlled, and we owe it to the American people to get it
right.
I am hopeful that we can take the best of both committees'
work and move forward with a comprehensive, whole-of-government
strategy that will counter China's efforts and other
adversarial efforts to acquire sensitive U.S. technologies. I
yield back. Thank you, Chair.
Chairman Barr. Thank you. The gentleman yields back.
Today we welcome the testimony of the Honorable Clay
Lowery, Managing Director at Rock Creek Global Advisors, where
he focuses on international financial regulation, sovereign
debt, macroeconomic policies, exchange rates, and investment
policy. Mr. Lowery served as the Assistant Secretary for
International Affairs at the U.S. Treasury Department from 2005
to 2009, where he chaired CFIUS and was instrumental in the
2007 CFIUS reform effort.
Jonathan Kallmer, Senior Vice President of Global Policy
for the Information Technology Industry Council. Before joining
ITI in February 2015, Jonathan was Counsel in the International
Trade and International Dispute Resolution Groups of Crowell &
Morings, where he helped companies overcome regulatory and
market access barriers in foreign markets. From 2007 to 2012,
Jonathan served as Deputy Assistant U.S. Trade Representative
for Investment, where he was responsible for developing and
implementing U.S. international investment policy and
negotiating with foreign governments to secure greater market
access and better treatment for U.S. companies abroad.
David Marchick is Managing Director and Global Head of
External Affairs at the Carlyle Group. Prior to joining
Carlyle, Mr. Marchick was a Partner and Vice Chair of the
International Practice Group at Covington & Burling. In the
Clinton Administration, Mr. Marchick served at the White House,
USTR as Deputy Assistant Secretary for Trade Policy and
Transportation Affairs at the Department of State, and
Principal Deputy Assistant for Trade Development at the
Department of Commerce, where he worked extensively on CFIUS
matters.
Michael Brown is a Presidential Innovation Fellow for the
Defense Innovation Unit Experimental. Through August 2016,
Michael was the CEO of Symantec Corporation. During his tenure
as CEO, which was from 2014 to 2016, he led a turnaround as the
company developed a new strategy focused on its security
business. Michael is the former Chairman and CEO of Quantum
Corporation, which specialized in computer backup and archiving
products. Michael also has served as the Chairman of EqualLogic
and Line 6, and has served on the public boards of Nektar
Therapeutics, Maxtor Corporation, and Digital Impact.
Ms. Giovanna Cinelli is a Partner at Morgan Lewis &
Bockius, where she is a leader on international trade, national
security, and economic sanctions. As a practitioner for more
than 25 years, she counsels clients in the defense and high
technology sectors on a broad range of issues affecting
national security, CFIUS, and export controls, including
complex export compliance matters, audits, cross border due
diligence, and export enforcement.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. Without objection, each of
your written statements will be made part of the record. The
Honorable Clay Lowery will begin, and you are now recognized
for 5 minutes.
STATEMENT OF THE HON. CLAY LOWERY
Mr. Lowery. Chairman Barr, members of the committee, I want
to thank you for the opportunity to testify on FIRRMA. In my
written testimony and today, I will discuss my general support
for FIRRMA while pointing out what I consider to be several key
shortcomings in the current bill, particularly from the
perspective of someone who had to implement major reform of
CFIUS in the past.
Before I discuss these issues, however, I wanted to say a
few words about the rationale behind this bill, which is
highlighted by a number of the statements we have just heard,
as well as by Michael Brown's report that he did for the DIUX,
and that is the growing threat posed by China.
China's strategy incorporates such government efforts to
fuse the military and civilian sectors, subsidize industries
and individual companies, support cyber espionage, and use
restrictions on foreign investment and licensing to coerce
technology transfers, and probably much more. The United States
must address this issue and growing challenge in a
comprehensive manner that goes well beyond the scope of this
hearing. The FIRRMA bill is one important step, and I think
this bill gets a number of things right, which I have detailed
in my written testimony. However, I worry that portions of this
bill use vague language, duplicate existing export control
authority, and will be overly burdensome for both the private
sector and government.
In my previous testimonies or speeches on CFIUS in the
past, I have always begun with a litany of statistics about the
importance of foreign direct investment (FDI) to economic
growth. I am not doing that today, and that is because FIRRMA
is only partially about foreign investment in the United
States.
Instead, there is a substantial part of the bill that
transforms CFIUS into a technology control regime in which
there isn't a merger, there isn't an acquisition, there isn't a
foreign direct investment in the United States. My concerns
stem from my experience in implementing the last CFIUS
modernization legislation in 2007, and FIRRMA's language leaves
too many terms to be defined and interpreted, such that there
is a distinct possibility of unintended changes or unforeseen
consequences.
This committee is all too familiar with what that can mean.
Let me give you an example. The Volcker rule, which may be a
sound idea, but has led to an overly complex rule that is
vague, burdensome, and essentially a regulatory nightmare for
both the regulators and for the financial institutions they
regulate. As members of this committee, I presume that you have
heard from your constituents about these consequences.
I see a similar lesson being learned about FIRRMA. Similar
transactions create anomalous results, and we should worry
about creating a guessing game for U.S. companies that require
hours of legal analysis of complex transactions and structures
when their non-U.S. competitors are not burdened with anything
even remotely similar.
The FIRRMA bill has left many terms to be undefined or ill-
defined. For instance, what is the sector of critical
technologies, emerging technologies we should worry about? What
are the subsectors? Do we need a list?
This leads to my second concern with FIRRMA, which is it
duplicates our export control regime. This bill seems to
suggest that CFIUS, a group of roughly 100 people who don't
have subject matter expertise, will be able to identify
emerging technologies better than the roughly 500 people we
have at Defense, Commerce, and State that are already working
on these export control issues every day.
Which leads to my final concern I would like to highlight,
which is the burden. Today, CFIUS reviews approximately 200
transactions a year. Over the preceding few months, I don't
think there has been a single government witness, CFIUS
practitioner, or CFIUS expert who has testified before this
committee or the Senate Banking Committee who has not said that
significantly more resources are needed for CFIUS.
With FIRRMA, however, the number of transactions under
review will go from 200 a year to several thousand. If this
expansion is truly necessary for our national security and cost
is the only issue, as Congressman Sherman mentioned, then by
all means, let's find a way to pay for it. But this expansion
is not driven by national security. Instead, it is the needless
result of a bill that is too vague and too duplicative,
rendering it practically impossible for CFIUS to accomplish the
work it has been tasked to do and that is so vital to our
economic and national security.
To conclude, let me reiterate that I am broadly supportive
of the CFIUS modernization effort, but I think more work is
needed to ensure that the outcome does not have the unintended
consequences of chilling investment in the United States and
harming our competitiveness around the world, both of which are
important to our economic strength, the backbone of President
Trump's national security strategy.
In addition, adding the implementation risk, I have tried
to identify in my written testimony, could destabilize the
excellent and so far targeted work that CFIUS currently
performs. In other words, I would humbly suggest that without
fixing this bill we could harm our national security, not
enhance it. Thank you.
[The prepared statement of Mr. Lowery can be found on page
68 of the appendix.]
Chairman Barr. Thank you. Mr. Kallmer, you are recognized
now for 5 minutes.
STATEMENT OF JONATHAN KALLMER
Mr. Kallmer. Thank you. Chairman Barr, members of the
subcommittee, thank you for inviting me to discuss this
critically important piece of legislation. My name is Josh
Kallmer, and I am Senior Vice President for Global Policy at
the Information Technology Industry Council, or ITI.
ITI is a collection of 63 of the world's most innovative
companies, representing every part of the technology sector.
Our companies do business across borders on a daily basis and
therefore have a keen interest in this legislation.
Chairman Barr. Sir, can you pull the microphone a little
closer to you? Thank you.
Mr. Kallmer. Is that better? I also have a personal
perspective on this bill. As you mentioned, several years ago,
I served as deputy assistant U.S. trade representative for
investment and represented USTR on CFIUS. In that role, I was
involved in the review of hundreds of transactions, regularly
participated in political-level meetings regarding sensitive
deals, and helped draft regulations during the last
modernization of CFIUS a decade ago.
Before discussing the bill, let me first say how much we
have appreciated the open and constructive spirit in which you
and your colleagues, as well as your staffs, have worked during
this process. I would particularly like to recognize
Representatives Pittenger and Heck for your leadership, as well
as that of Senators Cornyn and Feinstein.
While this hearing focuses on the bill as introduced, I
would be happy also to discuss the additional ideas that we and
others have offered to improve the bill.
I can reduce our position on the bill, as introduced, to
three main points. The first is that the national security
concerns are real, and FIRRMA is a critical part of the
solution. The United States has benefited greatly from its
longstanding openness to foreign investment, yet the U.S.
Government has no more solemn and important responsibility than
to protect the Nation's security. So we have to pursue our
commitment to open investment consistent with that imperative.
Our organization and every single one of our companies
agree with the national security objectives of this bill. We
also agree that the bill's advocates have identified a
compelling set of emerging national security risks that the
U.S. Government must immediately address. FIRRMA would do that
in many important ways, including by enabling CFIUS to review
certain real estate transactions near military facilities,
expanding the list of national security factors that CFIUS can
consider, improving compliance with mitigation agreements, and
ensuring that CFIUS is fully resourced.
My second point is that there are nevertheless important
differences of view about how to deal with emerging critical
technologies. I think we all share the goal of strengthening
national security. But we have some healthy disagreements about
how best to do so, and we offer our views in a spirit of open
and respectful debate.
Our main misgiving with the bill as introduced, relates to
the proposed expansion of CFIUS jurisdiction to cover outbound
transfers of U.S. intellectual property (IP). As we read it,
the language would capture the constant motion of companies'
everyday business, putting them in a position of perpetual
uncertainty over whether they are obliged to file with CFIUS
simply to go about their daily work. This uncertainty would not
only impact companies; it would overwhelm CFIUS with cases,
chill the U.S. business environment, and potentially deplete
our industrial base.
The core problem is that the risks we are talking about
have to do with technology, not transactions. It is true that
unfriendly countries could use certain technologies to harm
U.S. national security, but that is the case regardless of
business arrangement. If the disclosure of technologies would
raise national security concerns, we need to address those
concerns, full stop.
I will say that on this point in particular, the bill's
advocates in both Congress and the Administration have
responded meaningfully and in good faith to our proposed
improvements. While important distance remains, we are grateful
for their responsiveness and we feel good about the trajectory
of the discussion.
My final point is that we already have the legal tools we
need, but we have to reinforce them with additional commitment,
creativity, and resources. We believe that U.S. export control
laws already address virtually all, if not all of the national
security risks associated with emerging critical technologies.
We also recognize that it doesn't matter if export controls can
address the risks legally if they can't do so practically.
So our shared objective, in our view, ought to be to
bolster our export control system, politically,
institutionally, and financially, to ensure that it can meet
the challenges we now face.
We think about the challenge here as one of creating
connective tissue between FIRRMA and the export control system,
so that our export control laws can aggressively and
proactively address risks coming over the horizon. I have
discussed two possible ideas for doing this in my written
testimony, and I would be pleased to discuss them further here.
What matters from our perspective is that the export control
authorities do the heavy lifting to identify, describe and list
critical emerging technologies of concern, while ensuring that
CFIUS has visibility into the process and the opportunity to
weigh in, as well.
I will conclude my remarks there, but let me thank you
again for having me and reiterate our commitment both to the
success of FIRRMA and to working constructively with this
subcommittee and the Congress as a whole to achieve it. I would
be happy to answer any of your questions.
[The prepared statement of Mr. Kallmer can be found on page
56 of the appendix.]
Chairman Barr. Thank you, Mr. Kallmer. Mr. Marchick, you
are recognized for 5 minutes.
STATEMENT OF DAVID MARCHICK
Mr. Marchick. Thank you, Mr. Chairman, members of the
committee. I also want to thank you, Congressman Pittenger, for
your good work on this and that of your staff, Congressman
Heck, as well. Thank you very much.
I was here in 2006 testifying before this committee on the
previous update. I had a little more hair and a smaller
waistline at that point, but otherwise the issues are pretty
much the same.
So I am going to talk about four principles which I hope
you will consider. I haven't read version 3.0, but I do
understand that some of these issues were addressed, and I
thank you for that.
First point is that CFIUS absolutely needs the tools to
block or mitigate investments that have a national security
impact. To my knowledge, CFIUS has already been using that
authority to great effect. The number of transactions that have
been effectively blocked in the last few years has increased
significantly. In 2016, there were 27 deals blocked which is a
record. I would also understand then that in 2017, according to
the Rhodium Group, that more than $8 billion of investments
from China were blocked, also a record.
So I am not familiar with the specifics of these cases that
were blocked, but I would just point out that CFIUS is a very
powerful tool and they have not been shy in using it.
Second is that CFIUS should be tailored to scrutinize those
transactions that raise national security risks, but allow all
the rest of the deals that don't raise concerns to go through
quickly. I think this is an issue that many members of the
committee would agree with in terms of efficiency in government
and the efficiency in approval processes.
I have frequently analogized CFIUS to triage in the
emergency room. In an emergency room, where you are overwhelmed
with patients, a good emergency room will focus intensively on
those patients that need the most help, but get the kids out
that have a nick or a cut quickly. CFIUS should do the same,
and your legislation should allow and direct CFIUS to do this.
In other words, focus on those transactions that matter. In
the M&A world, time is money. The uncertainty associated with
lengthy regulatory reviews reduces investment. Hopefully your
legislation will enable CFIUS to focus on those transactions
that matter and push the others through quickly.
Third, casting too wide a net will actually hurt national
security rather than help, because the system will be
overwhelmed. When I testified in 2006 before this committee, I
noted that CFIUS at that point was then overwhelmed with cases
and then non-controversial transactions, ones from the U.K.,
Canada, other allies, were being slowed down. In that year,
they reviewed 113, and seven went to a second phase
investigation, only seven. Last year, CFIUS reviewed 240 and
more than 70 percent went to a second phase. More than half of
the transactions were from countries that were NATO allies, the
U.K., Canada, and others.
So the question is, how can you design legislation that
encourages CFIUS to focus on the cases that matter but allow
the others to go quickly through?
Finally, I would encourage the committee to look at the
passive investment provisions that are crafted. Passive
investment is just that: It is passive. So when you and I
invest in a 401(k) or you invest in TSP, or an investor invests
with a private equity venture capital real estate firm, they
are entrusting money to the managers, and those managers can
invest, manage, operate, hire, fire, sell how they want. The
investors don't tell them what to do.
As long as those investors are truly passive, then CFIUS
should not subject those transactions to its jurisdiction. I
think that the language is a little broad. I understand that in
the next version you have addressed some of these issues, and I
am grateful for that.
I will stop there. Those are the four points I would like
to offer. I am grateful for the opportunity to be here.
[The prepared statement of Mr. Marchick can be found on
page 74 of the appendix.]
Chairman Barr. Thank you. Mr. Brown, you are now recognized
for 5 minutes.
STATEMENT OF MICHAEL BROWN
Mr. Brown. Thank you, Chairman Barr, and members of the
committee. I am pleased to be with you to share findings of
work I have led in understanding the role that Chinese
investment has in a systematic plan to transfer technology.
Because of this work, I am a strong supporter of FIRRMA.
I came to this work as a former CEO of two large Silicon
Valley companies, Quantum and Symantec, but in my career, I
have also worked as an investor, board member, and chairman of
several early stage companies, both in Silicon Valley and in
the Boston area. I am here today in my personal capacity as a
Presidential Innovation Fellow and not as a spokesperson for
the Defense Department.
In the fall of 2016 at the request of then-Defense
Secretary Carter and Vice Chairman of the Joint Chiefs General
Selva, I began researching along with Pavneet Singh whether and
how China is transferring technology through investments in
early stage firms. In summary, what we learned was that China's
participation in venture deal financing was at a record level
of 16 percent of all venture deals financed in 2015 and
remained at 11 percent in the first 10 months of 2017. This is
concerning for several reasons.
First, the growth of these investments is up substantially
from a level of 1 percent to 6 percent in the period of 2010 to
2014. We identified more than 500 Chinese-based or affiliated
entities investing in U.S. early stage companies.
Second, the technologies where Chinese firms are investing
are the same dual-use technologies where U.S. venture firms are
investing, those that will be foundational to future
innovations, such as AI, autonomous vehicles, augmented
reality, block chain, and genetic engineering.
Third, since venture capital investing depends on deal
flow, investors see many more deals than they invest in. As a
result, it is likely that Chinese investors in aggregate have
seen upwards of half of recent U.S. venture financings. In
other words, Chinese investors have a broad view of U.S.
innovation across a range of technologies.
Fourth, by investing in early stage companies, Chinese
investors are learning about these technologies at the same
time and at the same rate that we do, which precludes any time-
based advantage for the U.S. Historically, the U.S. military
has had exclusive use of critical technology for some period,
which could be called overmatch. However, we are not likely to
have overmatch in the future if China learns about leading-edge
technology from U.S. startups at the same time we do.
Fifth, without FIRRMA, there is no monitoring, reporting,
or control of China's investments in technologies important for
national security. Last, the Defense Department, In-Q-Tel, or
other parts of the U.S. Government will tend to avoid contact
with an early stage technology company that has a significant
level of foreign ownership, even if the company is developing
critical technology.
To mitigate technology transfer from the U.S., there are
two primary tools the Government has, CFIUS and export
controls. FIRRMA makes CFIUS more effective by expanding its
jurisdiction to cover more transaction types that could include
technology transfer. As I see it, the goal of FIRRMA is not to
ensure that more venture capital investments undergo CFIUS
review, but to ensure that foreign investments are truly
passive.
Some have argued in Congressional testimony that export
controls are sufficient without FIRRMA to deter technology
transfer. There are five reasons why I do not believe export
controls are a substitute for CFIUS reform. First, export
controls have typically been used for products, not critical
emerging technologies. In fact, I am not aware of any critical
emerging technologies such as AI, quantum computing, or
genomics-based engineering which are on the export control
list.
Second, because export controls typically focus on
products, in general they would be more backward looking.
Third, export controls require coordination with allies to
be effective, and this typically takes 2 to 3 years through the
Wassenaar arrangement.
Fourth, export controls are ineffective in deterring tech
transfer that occurs when China forces companies to form joint
ventures in exchange for Chinese market access.
And, fifth, enforcement is voluntary. I am skeptical that a
Silicon Valley early stage company is aware of the need for or
is dedicating the resources to comply.
Let me conclude with two important points. First,
cooperation of allies. Any steps we take to deter tech transfer
which include both CFIUS reform and changes to export controls
needs to be coordinated with allies to be effective. Otherwise,
we create an incentive for talent and companies to move
offshore.
Second, investment in science and technology. While
defensive measures like CFIUS reform, better export controls
are important, they are not the key to winning a technology
race with China. The more concerned we are about the national
security threat China represents, the more important it is to
invest in science and technology, encourage Americans to pursue
STEM education, and increase federally funded R&D.
To enable the U.S. to win the last technology race with the
Soviet Union, federally funded R&D was 2 percent of GDP in the
1960's. While China increasingly invests a higher percentage of
its GDP in R&D, and its economy grows faster than ours, U.S.
federally funded R&D has declined today to 0.7 percent of GDP.
We must be proactive to improve our technology base and
innovation capability, because our future economic prosperity
will be the principal determinant of our national security.
Thank you.
[The prepared statement of Mr. Brown can be found on page
42 of the appendix.]
Chairman Barr. Thank you. Ms. Cinelli, you are now
recognized.
STATEMENT OF GIOVANNA CINELLI
Ms. Cinelli. Thank you, Mr. Chairman, distinguished members
of the subcommittee. I appreciate the invitation to appear
before you today, and I am honored to join my fellow panel
members as the subcommittee continues to evaluate the changes
needed for CFIUS. Your leadership and that of Congressman
Pittenger and Congressman Heck, as well as the bipartisan co-
sponsors of FIRRMA, demonstrates the foresight needed to manage
the challenges we face today and the ones we will face in the
future.
I appear today in my personal capacity--this is my
disclaimer, I apologize here--not on behalf of my firm or on
any client. The views presented in my written testimony and
before you are solely my own. Again, I am grateful for the
opportunity to share some observations and to respond to any
questions you have.
As part of my background, I had the privilege of serving in
the United States Navy as a special duty intelligence officer
for a number of years. I had the opportunity to see the overlay
between the legal issues that arise, as well as those that
appear when you are boots on the ground in various situations.
That particular perspective coupled with my legal career helps
me believe that FIRRMA is essential to what this country needs.
In that light, I would like to focus my comments beyond
what I have put in my written testimony to two key areas:
First, the manner in which technology transfers occur in the
cross-border environment and, second, certain gaps in CFIUS's
underlying authorities that affect the committee's flexibility
to consider cross-border transactions as they shift and change.
This is regardless of the construct that we see.
At the outset, it is important to recognize that since 1975
the statute has been amended reactively and generally to
address a direct or perceived threat. In at least two of the
three amendments, both 1988 and 2007, Congress responded to
what it believed to be critical situations--one, related
threats affecting U.S. semiconductor leadership and the other
involving gaps in the types of the transactions the committee
could review and how.
We find ourselves in similar circumstances today. The
United States is at an inflection point. Technology leadership,
the cornerstone of our U.S. economy, innovation, and security,
is under siege. Many have focused the threat posed by China's
assertive policies that are designed to close the gap or
overtake U.S. leadership in a number of technology fields. But
China is not alone in pursuing these objectives, although it is
more organized and utilizes among the broadest set of tools to
achieve these objectives, including acquisitions or investments
in technology assets.
Now, several factors contribute to the crisis, which I
believe calls for Congressional action. First, we face a
diffusion in access to technology that continues to evolve and
expand, and that is unlikely to change.
Second, the concept of dual-use, or as China refers to it,
civil military fusion, may be rapidly losing its relevance and
viability. The application of a specific technology may be just
as critical as the performance characteristics and therefore,
as you examine, for example, as my co-panel members have
discussed, the export laws may be important to look at exactly
how those controls are utilized and how they affect CFIUS
reviews.
So, for example, the same technology used to manage data
for tailoring product offerings to customers may also be used
to identify trends that reflect terrorist activity. How that
technology is discovered, managed, and accounted for remains a
critical concern.
Last, extensive cross-border investment occurs each year,
much of it outside the purview of CFIUS and other regulatory
environments. By some calculations, parties participate in
20,000 to 40,000 cross-border activities a year that result in
some form of technology transfer. CFIUS receives and analyzes
under these statistics a statistically insignificant number,
leaving the majority of cross-border technology transfer
activity potentially unreviewed. This lack of visibility
affects Government decisionmaking.
FIRRMA elegantly balances the twin goals of encouraging an
open investment policy and protecting national security. Yes,
it calls for foundational changes because, yes, we have
foundational, almost cataclysmic threats and vulnerabilities.
The legislation expands CFIUS authorities in a measured way and
acknowledges the importance of managing a strong industrial
base, employment base, and scientific leadership, as the United
States ensures that it has access to that which is essential to
protecting its national interests.
The proposed expansion of CFIUS's jurisdiction is a direct
result of the threats and vulnerabilities that we face, not an
attempt to create an overburdened regulatory environment.
I think it is also important to identify and recognize what
FIRRMA does not do. FIRRMA does not limit the ability of the
parties to independently assess whether a filing would benefit
their transaction, nor does it preclude any specific
transaction or establish any blanket presumptions of denials.
It does not actually itemize the technologies of concerns, but
it does establish a framework through which such technological
can be identified, especially in circumstances where in the
past to do so has been inadequate.
With that, thank you.
[The prepared statement of Ms. Cinelli can be found on page
48 of the appendix.]
Chairman Barr. Thank you very much. Before we proceed to
questions, the Chair wishes to ask unanimous consent to enter
into the record a letter sent to the committee by the National
Venture Capital Association, which lays out its recommendations
to improve FIRRMA. The NVCA is concerned, among other things,
with the impact of the bill's passive investment language,
writing, quote, ``unfortunately, the passive investment
exemption is narrowly drafted and will cause harmless
investment into U.S. companies to be picked up by FIRRMA, thus
causing delay for the company raising capital, needless cost
and burden to the investor, and distraction for CFIUS from the
true security concerns,'' unquote. Without objection, this
letter will be made part of the record.
Chairman Barr. The Chair now recognizes himself for 5
minutes for questioning. I will start with you, Mr. Lowery. In
your testimony, you expressed concern that FIRRMA could perhaps
unwittingly repeat the regulatory nightmare that is the Volcker
rule. Why do you believe that this comparison is warranted?
Mr. Lowery. Well, my main rationale is for a couple
reasons. One, there is a lot of language that is going to have
to be defined in a rulemaking process. That rulemaking process
is going to be difficult. I went through this back in 2007-2008
when we went through CFIUS. It took us about a year-and-a-half
to do that. It is going to take a lot longer to put these rules
in place and to define these terms.
It actually leads toward anomalous results. In my
testimony, I actually pointed out an example where if an
American company was working in a foreign country and they
basically transferred their technology and associated support
to that country, that would not necessarily go through CFIUS.
However, if that same American company was doing the exact same
deal and doing the exact same technology and associated
support, but it was in a joint venture where the American
company actually had some percentage of the deal, that would go
through CFIUS.
Now, just metastasize that, and you are going to have an
understanding of how difficult this is going to become. I just
heard Giovanna say there are 20,000 to 40,000 transactions that
are going on with technology cross-border all the time. How
many of those are going to be captured under this bill? How
many are the ones that shouldn't be captured because the
corporate structure happens to be a different corporate
structure? To me, at least, that is going to lead toward
complications that you see in the Volcker rule.
Chairman Barr. Mr. Marchick, as currently drafted, I think
you testified that the FIRRMA bill could cast too wide of a net
that would overwhelm CFIUS. How would that perhaps compromise
national security?
Mr. Marchick. Well, thank you very much for the question. I
think as Clay said, the issue is, how can you design a strategy
legislation that allows CFIUS to focus on the transactions that
matter? I will give you the commercial real estate example. The
bill--and I think Congressman Pittenger has addressed this in
the latest draft. In the commercial real estate sector, there
are about 2,000 foreign investments in commercial real estate a
year. Those transactions alone, if they were filed, would
increase the number of reviews tenfold.
Therefore, it would overwhelm the system. Most of those
transactions are not going to be sensitive at all. It would
force CFIUS to focus on non-sensitive transactions, instead of
taking the most powerful microscope and focusing on the
transactions that truly threaten national security.
Chairman Barr. Let me ask anyone--and, Mr. Brown, I would
love to invite you to chime in on this, too--there has been an
expression of concern from some of your fellow panelists here
that there could be some unnecessary duplication or conflict
between the export control system and CFIUS. You addressed that
a little bit about why you think export control alone doesn't
do the job.
Are you concerned about potential unnecessary duplication
or conflict? How do we need to structure this bill to make sure
that there is coordination between CFIUS and the export control
system?
Mr. Brown. Yes, thank you. I think that they are both two
sides of the same coin and they both need to be looked at
together. So to the point earlier, I think Clay might have said
it, that we need a comprehensive look at this problem. I think
that is exactly right.
It is not only, what do we do on the defense side, which we
talked about, CFIUS and export controls, but what are we doing
proactively, because we are in a technology. But to your
specific question, I don't think either one of these is a
substitute for another, and I think some people are trying to
say export controls can do the job alone. We already see that
is not working.
So I would say, yes, we need to look at both, reform both.
Let's go with FIRRMA, because that is right in front of us.
Then let's look at export controls. The most important thing
that needs to be coordinated is, what are these critical
technologies? So, beyond the Government, we need Government
experts, as well as folks from academia and the private sector
to help us with what those technologies are, to narrow the
scope of what we are trying to look at.
Chairman Barr. Mr. Lowery, in the remaining time--or, Mr.
Kallmer, Marchick, any one of you--how can we avoid conflict or
duplication between CFIUS and the Bureau of Industry and
Security?
Mr. Kallmer. Thanks, Mr. Chairman. I think the short answer
is by building connective tissue, by building a bridge and by
ensuring that it is not two separate regimes working in
parallel without communication, but in essence a conjoined
whole, where each side is doing what it does best in a way that
together enhances national security.
Chairman Barr. OK, my time is expired. The Chair now
recognizes the gentleman from California, Mr. Sherman.
Mr. Sherman. Mr. Marchick, you talk about most of these
investments being made by companies based in allies of the
United States. Did your analysis look behind to ultimate
ownership? That is to say, the most controversial investment
was American Uranium, which was purchased by a Canadian
company. Just so happened the Canadian company was owned by
Russian interests. Did you do the second-tier analysis in
preparing your report?
Mr. Marchick. It is a very good question, because CFIUS and
any other regulatory authority should ultimately look to the
ultimate owner.
Mr. Sherman. Does it do that now?
Mr. Marchick. It does. I used the data from the CFIUS
annual report.
Mr. Sherman. So your report did, as well?
Mr. Marchick. I believe that they look at the ultimate
owner. So if there is an intermediate company in the U.K. or
Canada, but it is owned by the Russians, that should be a
Russian transaction, not a Canadian transaction.
Mr. Sherman. Got you. Does--and I will ask this to any
witness--does CFIUS include expertise in protecting American
jobs or does it confer regularly with leaders of organized
labor? Mr. Lowery?
Mr. Lowery. In the last bill that was passed on CFIUS
reform in 2007, the Department of Labor--
Mr. Sherman. The Department of Labor. Very different from
organized labor. Go on.
Mr. Lowery. I understand. The Department of Labor--
Mr. Sherman. Especially in this Administration.
Mr. Lowery. The Department of Labor obviously connects with
organized labor every now and then, and so they have an ex
officio membership on CFIUS. They don't bring national security
expertise. What they bring is to think about some of the issues
I think that you are trying to get at. But in terms of, is
there someone there who is worried about the economic security
or job loss type of issues, that is not part of CFIUS
currently.
Mr. Sherman. It would be interesting to go and campaign to
our constituents and say, I stood firm in the Financial
Services Committee against considering American jobs when we
make American financial decisions.
China walls off whole parts of their economy from our
investment. Should we do something equally? Or does the fact
that they wall off parts of their economy have no effect on our
CFIUS decisions? I will ask for Mr. Marchick. Or Mr. Brown.
Mr. Brown. I don't think we should be blanket cutting off a
sector of our economy. I think we need to--
Mr. Sherman. So China can do whatever they want to us and
we don't respond?
Mr. Brown. Well, I don't feel that way. I think what we
need--
Mr. Sherman. Well, then how do we respond to them walling
off whole areas of their economy from U.S. investment?
Mr. Brown. I think the work that we did on early stage
investment says that we need to look at what we think are the
critical technologies and ask ourselves whether we should allow
China to invest in our startups. So I wouldn't take an entire
sector away.
Mr. Sherman. We obviously limit, for national security
reasons, a very small portion of our economy. They limit a huge
swath of their economy. Should we not limit a huge swath of our
economy in response? Or does the fact that they take such
extreme action not affect us?
Mr. Brown. I think the answer there is to work with our
allies to get China to change.
Mr. Sherman. Yes, we have been working on that for 20
years, and the effect is huge profits for those who don't want
China to change.
Mr. Brown. I would disagree. Getting out of the TPP is an
example of not working with allies to effect--
Mr. Sherman. Well, look, we have been doing this for--I am
going to move on. Now, should we explicitly state in this law
that any Chinese company is viewed as an investment by the
Chinese government? Or should we engage in the fiction that
Chinese companies are independent of their government? Mr.
Lowery?
Mr. Lowery. Well, my own view is that CFIUS is about
looking at transactions in foreign direct investment in the
American on a transaction-by-transaction basis. So I think that
we should actually look in--
Mr. Sherman. But should we have a basic rule that if a
company is under the control of the Chinese government or is
situated in China, we evaluate that transaction as if it is an
investment by the Chinese Army and party?
Mr. Lowery. No, I don't think we should.
Mr. Sherman. Or should we engage with China in the fiction
that their companies are independent?
Mr. Lowery. No, I don't believe we should. But however, I
will say this--
Mr. Sherman. We shouldn't? We should allow--
Mr. Lowery. I just said it--I just said no. So I--but let
me explain. Right now, the way that CFIUS works is there is an
analysis done, it is called a threat analysis. The threat
analysis is done by our intelligence community. The
intelligence--
Mr. Sherman. Should the threat analysis be directed by
statute to regard Chinese companies as arms of the Chinese
government? I would say it should. I will ask any witness, can
you mention a single time when a Chinese-based company has
refused to do the work of the Chinese intelligence service of
the Chinese government? Yes, do you have an answer?
Ms. Cinelli. If I could just answer that, just 2 seconds.
Mr. Sherman. Since they always do the work of the Chinese
government, why shouldn't they be regarded as arms of the
Chinese government?
Ms. Cinelli. I think perhaps if the perspective--we might
be imposing the U.S. concept of corporate law on the Chinese.
We have distinctions between state-owned enterprises and
corporate constructs. The Chinese do not. So perhaps if you are
examining it from a statutory perspective, looking at whether
it is a state-owned enterprise or part of the PLA--
Mr. Sherman. We should regard them all as arms of the
Chinese government. I yield back.
Chairman Barr. The time is expired. The Chair now
recognizes the vice chairman of the subcommittee, Mr. Williams
from Texas.
Mr. Williams. Thank you, Chairman Barr, and thank you for
holding this hearing today and for your leadership on the
important issue of CFIUS. This is the fourth hearing this
subcommittee has held about this important tool, and I look
forward to continuing to work with you and other members of
this committee to discuss the legislation before us.
To all the witnesses before us today, thank you for your
testimony. Foreign investment in the United States greatly
improves the outcomes of millions of Americans by creating jobs
and developing ground-breaking technologies. However, nations
such as China continue to grow their influence through
investment in the U.S. and other forex tactics.
In this discussion, my goal is to find a solution that
protects our national security, which is paramount, while at
the same time allows the American economy to continue to reap
the benefits of foreign investment. So my first question is to
you, Mr. Lowery. Everyone in this room wants to update CFIUS to
bolster our national security without harming foreign direct
investment that strengthens both our economy and ultimately our
military.
That being said, many CFIUS experts, including you, are
concerned about the unintended consequences of FIRRMA. In
particular, you write that duplication of other Government
national security programs may hamper the effectiveness of this
legislation. So can you expound upon these concerns?
Mr. Lowery. Thank you, Congressman. Let me just state very
clearly, I have the exact same objectives that you do, that
Congressman Pittenger does, that Congressman Heck has, which is
to bolster our national security, especially from any type of
investments that could create a problem.
The concerns I have are largely--not solely, but largely--
about the outward bound provisions within the bill because we,
one, it will overwhelm the system that is currently in process.
Thousands of transactions will have to be looked at as opposed
to hundreds. These are transactions that are in lots of
different areas.
You are from Texas. There are energy companies that do
joint venture operations around the world. That is considered
critical technology. Critical technology transactions. So all
of those transactions would now need to go through a CFIUS
process. Their competitors, who come from companies like
France, by the way, from China and from other countries will
not have to go through that process. That to me strikes me as
anti-competitive, and I don't think that it necessarily gets us
to where we want to get to, which is to try to actually
address, as Mr. Marchick said earlier, the focused problems
that are real national security concerns, not the everyday
transactions from multinational companies.
Mr. Williams. Thank you. Mr. Brown, our troops should never
go into a fair fight and should always be able to overmatch
their opponents in the field of battle. You have learned about
this during your time at the DOD and refer to it in your
testimony. I represent Fort Hood, and one of the largest
military bases we have in the world.
The soldiers I represent rely in part on policymakers like
me to make sure they are not barely winning their fights, but
instead have the tools necessary to dominate their opponents.
The military needs to be able to turn out innovation and
technology faster than its enemies to maintain overmatch.
So with that being said, to what extent is China already
encroaching on our military superiority?
Mr. Brown. I think to a large extent, many of the officials
from DOD have already talked about that, Secretary Mattis,
Chairman Dunford, et cetera.
The answer to me is twofold, one on the defensive side.
Let's make sure we spend the time to identify what critical
technologies we care about, whether it is AI, quantum
computing, so that we can narrow the scope of what the CFIUS
transactions would be, to the critical ones, and then
proactively we have to invest more to make sure that we are
leading this race. We want China to be looking to us as the
source of future technology, not us chasing them, but that
requires us to be much more proactive in terms of what we are
investing in.
Mr. Williams. Next question. Is CFIUS currently equipped to
stop important American military technology from being acquired
by the Chinese and other bad actors? You might be as detailed
as you can on that.
Mr. Brown. CFIUS needs to be strengthened so that it covers
more of these transaction types, because today, CFIUS is
largely looking at transactions that involve majority control.
But if the Chinese are making investments in a critical
technology, a quantum computing startup, say, today CFIUS would
not cover that unless there is majority control. So I think
that is a huge strategic gap that was talked about before, that
we have to close with FIRRMA.
Mr. Williams. OK, thank you, and I yield my time back.
Chairman Barr. The gentleman yields back. The Chair now
recognizes the gentleman from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman. I thank the Ranking
Member, as well, witnesses for appearing. I especially thank my
colleagues, Mr. Pittenger and Mr. Heck, for the time and energy
and effort that they have put into this piece of legislation.
Mr. Lowery, you indicated that this legislation would cover
a circumstance wherein there is no merger, there is no foreign
investment. Would you explain, please?
Mr. Lowery. Yes, sir. This is the provision that is
sometimes referred to as the JV provision, but it is basically
about capturing outward-bound transactions. So there is no
investment into the United States in any way. Instead, it is a
United States company doing business in a foreign country. They
are doing that business and it is going to be in a technology
field or in an infrastructure-related field.
Under the legislation, CFIUS would now need to review it
and look through it and do an evaluation as to whether or not
that should go forward. That is happening all the time.
Thousands of transactions are happening like that from
companies all over the map within the United States.
My concern is that if there is technology that is of
concern to the United States, we should define it and then
control it. That is what the export control regime is for.
CFIUS is about inward bound investment into the United
States. So that is why I am supportive of those provisions,
largely, within the FIRRMA bill put forward, but not this
specific provision where it is about outward bound
transactions.
Mr. Green. Does someone else have some additional
intelligence on the point?
Mr. Brown. Well, I think just that the outbound
transactions are another source of tech transfer. So if, even
though it may not involve inbound technology, or investment, we
want to have some say on whether critical technology is being
transferred through a force joint venture. So I think we have
to define, what are those technologies? We need to define, what
are the countries we are concerned about? I will just name it.
It is China. It is not all countries.
So in the CFIUS process we have to give some credit for the
folks running that process to streamline it once they are
dealing with thousands of transactions versus hundreds. But I
think the joint venture or outbound technology flow is a
critical gap we need to fix.
Mr. Green. Mr. Kallmer.
Mr. Kallmer. Thank you, Mr. Green. The more we discuss
this, the clearer it is to us, I think, that we are all in
almost total agreement about the diagnosis here. It is the
concern about emerging critical technologies going to China and
potentially other places.
I think about David's analogy to the ER, which also seems
appropriate in thinking about how one might address that issue
in legislation. A patient comes to the ER complaining of chest
pain, you don't bring in an orthopedic surgeon. You go to the
cardiologist.
This is about finding the right tool. It just seems to us,
we have that tool. It is the export control system. As
Representative Royce said in the opening comments, export
controls aren't just about physical products. They can cover
technology. They can cover information. They can cover
services. They can even potentially cover transactions through
the sanctions law.
They can do so by identifying the destination that people
are concerned about, the end use that people are concerned
about, the end user that people are concerned about. The
infrastructure is there. It is true as a practical matter the
infrastructure isn't working the way we need it to, to address
this threat. But we have the tool.
In fact, there is authority tomorrow if somebody were to
identify an emerging critical technology of concern that was on
the verge of being exported, say, to China to actually impose a
unilateral control on it. That is not ideal. Ideally we would
do that in a multilateral fashion. But as a short-term measure,
we have the tools. That is our perspective on this.
Mr. Green. I have 22 seconds left. Anyone else? Thank you,
Mr. Chairman. I will yield back the balance of my time.
Chairman Barr. The gentleman yields back. In the remaining
time of the gentleman, I would invite Mr. Brown to respond to
that, if you would.
Mr. Brown. The adequacy of export controls?
Chairman Barr. Yes.
Mr. Brown. Yes, I agree that theoretically export controls
could be covering a lot more, but I think practically they
don't. Let's just think about the voluntary nature of export
controls. That means that companies that are quite aware of
their obligation and the defense industrial base, for example,
devote a lot of resources to making sure they comply.
But I am particularly concerned about emerging technologies
and small company development of those technologies. Those
companies are not aware and not spending the resources to
ensure they comply. How many convictions do we have for
violations of export controls? We don't have anywhere near the
number of resources looking at what is happening there in
critical technology. So I think it is a huge flow of outward
technology that theoretically could be covered, is not.
Chairman Barr. OK. The Chair now recognizes the author of
the legislation, Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman. Mr. Chairman, for
the record, with unanimous consent, I would like to enter two
letters, one from Oracle and one from Ericsson, in support of
FIRRMA. Oracle stating, ``Critically, FIRRMA strikes a balance
of protecting national security while not chilling the benefits
of foreign investments in the United States. We appreciate that
the language is narrowly tailored to focus on specific national
security concerns, distinguishing between investments that are
financially motivated and investments that are strategically
motivated, such as improving foreign military capabilities or
other strategic objectives.''
Ericsson states, in short, FIRRMA helps provide the
assurance by arming CFIUS with the tools necessary to preserve
our national security interest while not discouraging
investment in the United States. It is an important effort in
the regulatory effort that requires modernization, without
which will result in the potential compromise of technology
developed by companies like Ericsson and, in turn, our national
security.
Chairman Barr. Without objection, those letters are entered
into the record.
Mr. Pittenger. Thank you, sir. Mr. Kallmer, thank you for
your testimony. I was correct to say that you do have various
entities that are a part of your group. I know that these two
are a part of your group, but Lenovo is part of your group, as
well. Is that not correct?
Mr. Kallmer. That is right.
Mr. Pittenger. Does that in any way affect your testimony,
do you believe?
Mr. Kallmer. No.
Mr. Pittenger. Mr. Marchick, you--Carlyle has many
investments, probably billions of dollars, in China, maybe 50-
plus companies. Do you believe in any way that affects your
testimony?
Mr. Marchick. No, sir. In fact, my testimony is very
similar to my testimony in 2006.
Mr. Pittenger. Well, we have Asia Satellite Telecom
Holdings. We have Caribbean Investment Holdings currently, East
River Biochemical, GDC Technological Limited. These are major
interests in terms of technology and services. I would just
want that for the record.
I think it is important and material that it be known. Mr.
Lowery, do you have representation of foreign investments in
China?
Mr. Lowery. No, I do not.
Mr. Pittenger. Thank you. Mr. Brown, I would like you to
elaborate on outbound investments. That seems to be the real
sticking point here. The shortcoming, in essence, of what would
happen without the CFIUS review and outbound investments--and,
frankly, to the reason why we have five secretaries of defense,
ministers, secretary of defense, and the current secretary,
both parties, stating that we had to reform CFIUS to address
these joint ventures and these foreign countries, particularly
China?
Mr. Brown. Yes, happy to. I think the issue is if you have
a critical emerging technology which is not yet covered under
export controls and a U.S. company wants to enter the Chinese
market, and China forces you to have a joint venture, that is a
tremendous opportunity not only for IP to leak out, but also
know-how, and also an opportunity for China to recruit talent.
Mr. Pittenger. Could you give us some examples?
Mr. Brown. Well, there would be lots of examples that would
cover some of the military technology we have talked about. So
imagine if it was Boeing or GE with jet engines. I can
understand why a company might want to enter a joint venture,
to have access to the Chinese market, but I think we need to
have a say in whether that makes sense from a national security
standpoint.
The closer you get to emerging technologies, where we don't
even understand yet where they are all going, artificial
intelligence, quantum computing and sensors, areas like that,
we need to be hypersensitive that technology is inadvertently
leaking--
Mr. Pittenger. Once it begins as a commercial venture, and
with the dual technology objective, it can morph into a
military interest. Does export control have the capability to
give purview over that?
Mr. Brown. My understanding is export controls
theoretically do, if we were smart enough to put on the export
control lists critical emerging technologies. But I would ask
us whether that has happened. So I don't think practically we
are looking forward enough with export controls. It tends to be
more backward looking.
Mr. Pittenger. CFIUS has a dozen agencies involved, whether
it be Commerce, Justice, the intel community, DOD. Do these
same eyes look over the shoulder of export control? Or do we
have the same type of purview?
Mr. Brown. Clay might be in a better position to answer
that. I don't think it is as broad as CFIUS is.
Mr. Pittenger. Well, I think that is the concern that many
of us have, is that CFIUS by structure, not just Commerce
leading the way, but Treasury with multiple agencies has a
direct interest in the outcome.
Mr. Lowery. I will just--in the export control, the Defense
Department, the Commerce Department, and the State Department
take the lead on export control matters.
Mr. Pittenger. I would like to say we have addressed oil
and gas. They are happy with our bill.
Chairman Barr. The gentleman's time has expired. The Chair
now recognizes the gentleman from Washington, Mr. Heck.
Mr. Heck. Thank you, Mr. Chairman. I would like to also
note for the record that I personally believe that some, if not
many of the comments made here earlier with respect to outward
bound relate more appropriately to 2.0, not the latest version
of the bill that we have been developing. I know many of you
are familiar with it, because many of you are involved in the
improvement of 2.0, and I thank you again for that.
Mr. Kallmer, I frankly want to particularly cite the
constructive role that ITI played and thank you for that.
We don't really have time to go into a really technical
discussion of some of those things, but I would like to ask if
you would be willing to respond to some questions for the
record about the revised version of the bill that we did enter
into the record earlier.
Mr. Kallmer. Happy to do that. There may be some confusion
about which version is 2.0 and 3.0.
Mr. Heck. We are going to help you with that.
Mr. Kallmer. OK, that would be great. Dates would help.
Mr. Heck. Trust me, we are going to help you with that.
Mr. Kallmer. Great.
Mr. Heck. Mr. Brown, I have often referred to your work,
the report that you co-authored at DIUX about Chinese
investment in early stage companies and wider technology
transfer. It is an honor to have you here today. Thank you so
very much.
Mr. Brown. Thank you.
Mr. Heck. I actually came to Congress from the private
sector. I have been involved in startups. I have grown
companies. I have served on board of directors. I acted as an
angel investor. I think I am well aware, frankly, of how it is
that somebody who makes a less than 50 percent-plus-one
investment in a company might gain access to emerging
technology or other technologies that would be of interest to
us.
So I want to ask you, how does simply making an investment
even potentially result in damage?
Mr. Brown. That is a great question, because I think it
takes the next step to see, what are the tools China uses for
technology transfer? Some legal, some illegal. So the
investment, per se, you could argue--as I think you are
suggesting--there is not really a problem with that. But if you
use the investment as a view of the landscape--and we talked
before about China in aggregate having a view to upwards of
half of all the venture activity, which is a lot of innovation
happening in the U.S., that gives you a vantage point to then
deploy other tools, for example, cyber theft, or placing a
foreign national at companies.
There are examples--some classified, some not classified--
which are examples of that. A perfect one is the Sinovel-
American Superconductor case. ``60 Minutes'' did a report on
that 2 years ago. National Public Radio covered it again just
this month. You have a wind turbine manufacturer in China, and
you have the controls of the key software coming from a U.S.
company, and then that was effectively stolen using industrial
espionage. They converted one of the employees to provide the
software control tools and put the American company out of
business.
John Carlin, assistant attorney general, was asked in the
``60 Minutes'' report, how often is this happening? Thousands
of companies experiencing this. FBI did a survey of 165
companies a couple of years ago, half said they had suffered
some form of theft, IP theft. And 95 percent of those cases
attributed to China.
So this is a rampant problem happening around us. It is
because China has a very systematic, well-funded plan to
transfer technology. It is critical for transformation of their
economy. It is happening through those illegal means we just
talked about, but also through very aggressive recruiting, such
as the Spring Light or Thousands Talents programs. It is
happening through professional associations, where they do
recruiting, joint ventures, research with U.S. academic
institutions and with U.S. companies. So they are doing it in a
variety of different ways.
Mr. Heck. Well, even, frankly, short of theft, fast rewind.
Imagining that the last company I was involved in, which had a
couple of modest software proprietary products, if we had an
investor that did not have a seat on the board but had 40
percent of equity--hard to imagine they wouldn't have a seat on
the board, but conceivably--it just would be prohibitively
impossible to deny the flow of that information to them in one
way or another. That is just straightforward fact of the
matter.
Mr. Brown. That is exactly right.
Mr. Heck. You make some recommendations on how to deal with
technologies transfer strategy in the report that you co-
authored. But like any good report, you included no action
alternative. What happens if we do nothing?
Mr. Brown. We are in a technology race with China. Our
economic security is at stake. So the longer we leave the barn
door wide open without taking the appropriate defensive
actions, it is as if we are saying we are wide open, please
come steal whatever you would like. I think that has to be
balanced, as we have already talked about, with what are we
doing in the U.S. to proactively invest and make sure we are on
the leading edge of technology and innovation. So I think we
have to do both.
Mr. Heck. Thank you. I yield back, Mr. Chairman.
Chairman Barr. The gentleman yields back. The Chair
recognizes the gentleman from Minnesota, Mr. Emmer.
Mr. Emmer. Thank you, Mr. Chair. Mr. Kallmer, in testimony
before the Financial Services Committee and the Senate Banking
Committee, officials representing the Department of Commerce in
the Trump, Obama, and George W. Bush Administrations have all
testified that export controls not only restrict the transfer
of products, but even ideas.
According to Commerce Assistant Secretary Richard Ashooh,
export controls can make fine distinctions between countries
and even end users. Former Commerce Assistant Secretary Kevin
Wolf has noted that in contrast to CFIUS reviews, a transaction
isn't even necessary. A phone call or an e-mail can be covered
through export controls.
Can you explain your member companies' interaction with the
export control regime and elaborate on why you believe export
controls are more appropriate than CFIUS to protect national
security when it comes to outbound transfer of technologies?
Mr. Kallmer. Sure, we would be happy to do so,
Representative Emmer. I say this all with humility, because I
am not personally an export control expert, but have been
fortunate to work with our member companies' experts, as well
as some others.
Our companies are on the front lines, as are companies in
other sectors, of doing business across borders, of moving
things and ideas and services and so forth. All of our 63
members are global sophisticated companies. They have
significant departments of people thinking about these things.
I would say uniformly in the discussions that we have had
on this issue, people have agreed this is where the solution
set lies. In complete agreement with Mr. Brown, actually, we
are not there yet practically. The system is not working with
the necessary aggressiveness and creativity and resources to
help control and discipline the things that we are all worried
about.
People from our companies know from personal experience
from transactions and exports that their companies rely on that
as the tool. That is the tool that is going to get us there.
Mr. Emmer. Thank you. Mr. Lowery, the medical device
industry, which is a major driver of my State, Minnesota's
economy, has expressed concerns with the proposed expansion of
CFIUS oversight and how it could impact technologies that may
not have been initially thought of when this effort began. Of
particular concern is the broad application of the term
critical technology and the term emerging technologies.
While it's possible that implementing regulations will help
define the scope based on the bill's definition, we don't see
any guarantees. Based on your experience, is it your sense that
medical devices would or would not be covered under the
umbrella definition of a critical or emerging technology as
proposed in the current legislation?
Mr. Lowery. Congressman, I don't know.
Mr. Emmer. Should they be?
Mr. Lowery. My view is probably almost assuredly not,
unless there is some way you can relate that back to our
national security, which I am not sure if you can.
That is part of my concern is that there are a lot of
definitional issues that have to be clarified through a
rulemaking process, which will be difficult. We have tried to
do lots of different definitions on critical technology in the
past, but it is also linking that critical technology, because
there is lots of critical technology that has very little to do
with national security. How do you link those together? So my
unfortunate answer for you is I don't know.
Mr. Marchick. May I try, sir?
Mr. Emmer. Absolutely.
Mr. Marchick. To me, this goes back to my testimony. Clay
is right. The answer is, I don't know. If there is a medical
device technology that helps our troops, that is unique, that
is something that is in our comparative advantage, that helps
our military, the Government should focus on whether we want to
let that technology go.
Mr. Emmer. Well, if I can interrupt you, everything that
you just said, if there is a medical technology and advance
that not only helps our troops, it will help every citizen in
the United States, it could help people around the world, why
should that be included in critical emerging technologies and
denied to other people that may actually survive because of it?
Mr. Marchick. I think the point is that the Government,
through the export control system or some other--should decide
with whom do we want to share this technology. If it is some
type of technology that protects troops against chemical
weapons, for example, I would think we would want to control
that, where it goes, who we want to share it with, and of
course it would benefit everybody, but we need to look out for
our own troops.
Mr. Emmer. True. We also have to be interested in
innovating, and in order to innovate, we may not have all the
ideas. We need to bring others in. So I guess my concern is
still my concern, that the definitions are not defined. They
are too broad. We need to make sure that we are not having
unnecessary impacts on industries such as this.
I know that all of you feel the same way, but somehow that
has to be addressed. Thank you, Mr. Chair.
Chairman Barr. The Chair recognizes the gentleman from
Ohio, Mr. Davidson.
Mr. Davidson. Thank you, Chairman. Thank you all for your
expertise. I thank Mr. Pittenger for trying to address this. I
share some concerns about how broad the language is and some of
the implications that have been already discussed.
To pick up where Mr. Emmer left off, and I guess to
continue with you, Mr. Marchick, if I have, as an entrepreneur,
an idea that is innovative, perhaps it is critical, how do I
know it is critical? Let's say it is deemed critical by you or
some other decider on behalf of the United States of America,
who owns the idea? Is it my idea? Or is it America's idea?
Mr. Marchick. It is certainly your idea, sir.
Mr. Davidson. So I own my intellectual property.
Mr. Marchick. Correct.
Mr. Davidson. I decide to--I don't even necessarily want to
patent it. I just have it as a trade secret. Somehow somebody
discerns that what I am doing might be critical or sensitive,
it is not even sold to the military, but it is important to
somebody, when can the Government come in and take possession
of my intellectual property and decide that I no longer have
control of that intellectual property?
Mr. Marchick. They should never do that. It is your
intellectual property.
Mr. Davidson. So, Mr. Lowery, how does the language in this
bill--what implications does that have? We have I think tighter
language on the export control protocols. It is already very
critical. We have seen problems and gaps, to be sure, with
export controls. One of the notable ones to me is when it first
moved to Commerce release authority, when Hughes basically gave
away the farm on multiple launch vehicles for rockets, to put
communication satellites out, because it also has launched
warheads with great precision.
So where does that line happen between the tight language
of export control and where we are headed with CFIUS?
Mr. Lowery. So, I think it is a great question. If it was
CFIUS the way it currently exists, if your technology and your
intellectual property, you decide to sell it to a foreigner,
and that foreigner comes in and gets control of it, and that
technology or what you have created, your intellectual
property, is considered to be something that is of a national
security interest, then the Government has a say in allowing
that transaction to happen. It may allow it. It may not allow
it. But it has a say.
If you take it and you want to provide it overseas, and it
is technology that has not been controlled by our Government,
whether it is the Defense Department, which has the ability to
do this, the Commerce Department or the State Department, then
that is something that you are allowed to do.
Under this bill, you would basically--that would be
expanded to something so that you would now have to go through
another investigation to look at that, even though all you are
doing is selling it to somebody in Brazil. That concern is--
instead of identifying that your technology is a concern to us
from an export control basis or national security basis--we are
now basically just saying it because it is a critical
technology and we have created something where the people that
have no experience at this are now going to have to look at it,
as opposed to the people that did have experience at this.
Mr. Davidson. So do you have any suggestions on how we
could tighten that language and make it clear? Because, if you
think about it, some of the most innovative minds--a lot of
these are like grad students. They are in a PhD program. They
are thinking, how do I commercialize this? They don't know that
some bureaucrat in Washington, DC, is thinking this might be
critical technology. They are just looking at how do I
commercialize my idea?
They start talking to somebody. They may not even have a
clue what the beneficial ownership of the company is. We
criminalized some of this behavior, is the concern. So how
could we get that language tighter, in your opinion?
Mr. Lowery. So I think that Mr. Brown made some really
excellent points about this. The export control language right
now is not understood very well in the startups type of thing.
If you think that is not understood, can you imagine what CFIUS
is like?
My own view is that if you are going to tighten that up,
then we need to identify those technologies, and we will
probably have to do some marketing about that. Right now at
least our export control regime tries to do some of that, but
probably not as well--and Michael Brown has pointed this out--
as they should.
In CFIUS, we have done no marketing practically. You would
have to do a ton of it if this bill becomes a law.
Mr. Davidson. Thank you. My concern is, America is the land
of innovation. We create all kinds of innovative technologies.
I would hate to see the most brilliant minds on the planet find
that they should create their intellectual property somewhere
else because we have put a regime in place that discourages
innovation and capital formation.
Mr. Chairman, I yield.
Chairman Barr. The gentleman yields. The Chair now
recognizes the gentleman from Indiana, Mr. Hollingsworth.
Mr. Hollingsworth. Happy Thursday. I appreciate everybody
being here. I will try not to reiterate what everybody else has
said, because much of what I wanted to talk about has already
been said. But I do want to make a couple of points.
First, my disclaimers. Number one, I think we should do
something. The status quo is unacceptable. Number two, the work
that Mr. Pittenger and Mr. Heck have put in is really, really
great work and much of it I absolutely agree with. But like we
have discussed earlier, there are some aspects that I really do
disagree with and worry about the chilling effects it may have
on U.S. investment abroad, or investment here in the U.S.
I don't think this is--you are either pro-China or pro-
America. I am pro-America. I am pro-American business. I am
pro-American innovation. I want us to continue to be a leader
around the world, and I think we do that because of--as Mr.
Davidson said--those trying to develop intellectual property
here because they have control of that intellectual property
here. I want to make sure that we continue to do that.
I want to empower American business to be able to compete
around the world and generate resources around the world that
they can invest in R&D right here. But I do want to find a
solution to this problem, like I said. I want to make sure that
we get to an answer that works for CFIUS and an answer that
works for export controls and ultimately works to keep the
American people safe.
I think that is a really important step that we need to
take. I do worry--I share many of your concerns that by making
CFIUS overly broad we have taken what was working and now we
have spread those resources over so much more ground, we are
going to do everything with mediocrity instead of doing the
things we need to do extremely well, extremely well. I worry
about that in many aspects of government. I feel like we are
headed in that same direction.
What I have heard from Mr. Brown and others in testimony
is, there are some gaps between what we should be doing and
what we are doing with export controls. That to me doesn't say,
hey, we need a whole new structure that we have to build on top
of everything. That says, we need to address those gaps and
let's put the things on export controls that need to be on
export controls. Let's take the steps we need to take with
export controls. But let's not build a new super-structure that
catches so many more transactions, that takes valuable
resources and spreads them over more and more territory, more
and more transactions.
So I wanted to ask Mr. Kallmer specifically, in your
testimony, one of things you talked about is my area of exact
concern. Section 3(a)(5)(b)(v), and how we might be able to add
Section 109 language to the existing bill in order to really
narrow that to transactions that could pose a national security
threat, rather than having the broad language, the broad net
that we are using now. I would hope that you would address that
a little bit more than the few sentences that you have in your
testimony.
Mr. Kallmer. Sure. Happy to do that, Representative
Hollingsworth. I should first say, I appreciate the comments,
Representative Heck, about working together. This portion of
the bill is the portion that we have been most concerned about,
but where I think in recent months we have seen the most good-
faith responsiveness to those concerns. Now whether it is 2.0
or 3.0, we are talking about language that--from our vantage
point, recognizing we are not in Congress, is moving very much
in the right direction.
Mr. Hollingsworth. Good.
Mr. Kallmer. What we, in my testimony and we have done it
more broadly in our proposed edits, envision is in addition to
the possible idea of incorporating Section 109 actually putting
into FIRRMA--and establishing under CFIUS--a subcommittee, what
we call a subcommittee on export controls, to perform the
function of being this connective tissue.
One of the beauties of CFIUS as it is today is that I think
it has all the export control agencies in it already. I
certainly remember--and I am sure Clay does--that there are
many transactions where you get in the room, you are looking at
the transaction like, wow, can this be dealt with by export
controls? You have the experts from the Bureau of Industry and
Security sitting right there.
The idea is to essentially turbocharge that process, ensure
the two sides are talking to each other, and to the extent that
the subcommittee can be a vehicle for increasing funding,
political commitment, and institutional expansion of export
controls, we believe that over time it can actually do the hard
work that we think we need to do upfront of identifying,
describing, and listing emerging critical technologies.
Mr. Hollingsworth. Well, I want to do that work upfront. I
want companies to be able to know the vast majority of
technologies that exist out there, the vast majority of
transactions that exist out there, the vast majority of
countries we are not concerned about. We want you to go about
your ordinary course of business and transact as you see fit
and do things. It is a narrow band that we are concerned about,
and focusing on that narrow band so that we do that well is
really, really important, because I am pro-American business. I
am pro-American employment. I am pro-American national
security.
I think that really means we have to be careful here that
we don't dampen U.S. investment or alternatively inhibit our
companies from being able to compete around the world to do
transactions around the world so they can bring back that money
to invest in R&D, so they can bring back technologies from the
world right here and make our lives as Americans better off. So
I thank you.
I yield back, Mr. Chairman.
Chairman Barr. The gentleman yields back. With the
indulgence of the witnesses, there is an interest in a brief
second round of questions. I will start that second round of
questions.
I think Mr. Brown makes an interesting and important point
that I would like the other witnesses to addresses. That point
being his view that the export control system is deficient and
that FIRRMA and an expansion of the CFIUS jurisdiction is
necessary to the extent that the export control system remains
deficient.
I also would like Mr. Brown to address the very interesting
and I think important point that Mr. Lowery makes that the
FIRRMA bill as currently drafted runs the risk of, quote,
``overwhelming the system.'' So let's start with the first
point that Mr. Brown makes. Mr. Lowery, Mr. Kallmer, Mr.
Marchick, would you like to address Mr. Brown's point that the
export control system is deficient to achieve the objectives we
want?
Mr. Lowery. So Mr. Brown makes, and I know Giovanna has
also made some of those points. My own view is that if there
are deficiencies, then let's work on them and let's fix them. I
think that Congressman Royce's bill has made a very good effort
at that, what I just--the dialog we just heard is about, how do
we improve the FIRRMA bill and link it toward the improvement
on export controls?
If our concern is that export controls are not covering
enough particularly toward specific countries such as China,
then let's address that, instead of creating basically a bill
in CFIUS which addresses all countries outside of a few, but
mainly all countries, and addresses all technologies even
though they are not necessarily ones that are of concern to us.
So I think that there is--so I agree with Mr. Brown. If
that is--I think it sounds like he is right, which is we need
to work on it. But then work on, as Mr. Kallmer said earlier,
the right tool for the right problem.
Chairman Barr. If I could shift back to Mr. Brown, so in
response to that, I don't know if you have had an opportunity
to look at Chairman Royce's legislation updating the export
control system. Would that solve the problem primarily? If it
doesn't, why not? Then if you could also address the argue that
the FIRRMA bill as currently drafted could potentially
overwhelm the system and spread resources too thin, I think Mr.
Hollingsworth's concern?
Mr. Brown. Sure. So my perspective, as I already said, is
we need to reform both. Neither is a substitute for the other.
Given the scope of the problem and how critical it is for our
future, why wouldn't you want more tools in the hands of the
U.S. Government? So I am all for improving export controls. I
am not an expert on Mr. Royce's bill.
But I very much favor updating export controls and making
sure a list of critical technologies that are forward-looking
would be included in what we do to update export controls. But
I don't think that is a substitute for CFIUS reform and the
ability to look at investments that are incoming in the U.S. in
these technologies that we might want to be concerned about.
To your question about overwhelming the system, I think we
handle that by two things. Number one is to the extent we can
define a process to name these critical technologies--and I
agree, it is overly broad right now--that process needs to
include not just government input, but, again, academia and
some private-sector input. Let's make sure we are getting a
broad view. And of course, that will have to be dynamic. Once
the list is there, it is out of date immediately, so we have to
frequently update that list.
Then narrow the list of countries. I think we have used
some examples here, was it--some selling to Brazil, let's be
very clear about the countries we care about. I don't think the
bill is so politically incorrect to name those countries, but I
don't mind naming them, China, Russia, Iran, North Korea,
Syria. Most of those are irrelevant because they are not
investing in our economy, with the exception of Russia and
China, and China's investments are an order of magnitude bigger
than Russia's investments. So I think getting very specific is
a big plus.
Then, second, we need to give credit to the very smart
people working on CFIUS. If they have to deal with thousands of
transactions and they get the resources from Congress, they are
going to figure out how to sort the wheat from the chaff and
focus on what are the transactions that we care about. I know
they are not going to look at every transaction with equal
time. I have met those folks working on CFIUS, and it is a very
smart group, and they would adapt.
Chairman Barr. I appreciate the deeper dive on those
issues. The Chair now recognizes the gentleman from Washington,
Mr. Heck, for a second round.
Mr. Heck. Thank you, Mr. Chairman. Some of my colleagues on
committee know I am a movie buff and love to quote lines from
movies. I am thinking today about a line the Kevin Costner
character in ``The Postman'' used, which is, ``Things are
getting better.'' I think things are getting better in this
bill as a consequence of this really incredibly healthy
conversation from all points of view.
Again, I want to thank the Chair, and I want to thank my
partner, Congressman Pittenger, in his advocacy, but all the
people who are bringing their heartfelt concerns to this table.
I cannot help, however--and I am sorry that my friend and
colleague from Ohio, Mr. Davidson, left--comment on his concern
about placing in law a regime that would thwart innovation--and
my words, not his--effectively dilute, demean, appropriate
someone's intellectual property, because it is important to
note here what it is that requires a society of innovation. It
requires investment in research and development. As Mr. Brown
pointed out, we are way down from where we used to be, but that
previous Federal investment is part of what got us where we
are.
It includes the finest post-secondary education system on
the face of the planet. That helps create our society of
innovation. It includes most importantly--and germane to the
subject--freedom of expression. Because you know what? They
don't have that in China or North Korea or Russia or Syria or
Iran, as a matter of fact.
Last, it requires the rule of law. Indeed, the very concept
of intellectual property is a product of Western law,
originally Great Britain, but developed through law and case
law in America. Intellectual property is the rule of law. It is
that which enables innovation and it is, in fact, that which we
are trying to protect with CFIUS, as a matter of fact.
So I wanted to make that point, because I don't think it
should be overlooked, how we got to where we are at and what is
at stake here.
Ms. Cinelli, you haven't been called on in a long time. I
think you have a lot to offer. So if I may, ma'am--
Ms. Cinelli. I am feeling left out.
Mr. Heck. No more.
Ms. Cinelli. Thank you.
Mr. Heck. You noted in your testimony that one of the
factors that makes it particularly urgent that we act now is
the loss of visibility into the technology transfers that are
occurring. I want you to elaborate on that. I want you to say a
bit more about what you mean by it. How can modernizing CFIUS
help solve that problem?
Ms. Cinelli. Happy to do so. I thank my co-panelists here
for providing all the background. So if you look at the export
control regime and then you look at CFIUS, each is voluntary in
a certain sense. If someone does not make a filing to CFIUS,
there is no visibility by the Government into the activity.
Yes, the committee can reach out and invite a submission, but
even in those circumstances it is voluntary.
So governments make decisions on what is critical to needs,
what the next generation is, sometimes on the information that
they obtain through these processes. Without the filings and
without an understanding of how the constructs work, the
Government is missing some information.
On the export control side, I must express a little bit of
frustration as people were talking about the system, because as
a general matter, the export control system is structured to
handle some of the outgoing and even incoming exchanges that
occur. The challenge arises in that you can control something,
but if you do not require an authorization from the Government
in order to address the exchange, to have the exchange occur,
then you still have no visibility. In essence, something is put
on a list, but there is no need to go to the Government to let
them know. You invoke what are called license exceptions or
license exemptions.
I know this is not an export hearing, but there is built
into especially the Commerce regime at least 18 authorizations
that are self-executing, that if a company looks and says I
meet these elements, they may proceed with a range of
technology transfers without any notice to the Government.
There is no filing with customs. There is no filing with
census. There is no filing of anything, reporting of any sort
to the Government.
So the activity occurs lawfully because the exemption or
exception permits it, but the Government is unaware of it. It
then proceeds to make decisions, as Mr. Brown was mentioning,
you have published a list, and by the time you publish it, it
is outdated. This is today's technology and we put it on the
list, it takes 6 months to get it on there, and it has already
been overcome by events.
So as you look to fix the system, and examine H.R. 5040,
one of the things to look at is, how are these exception and
exemption processes working? CFIUS in the modernization, what
it does is it allows even more visibility into all these
different types of activities, and that agencies that are
involved in CFIUS are also the ones engaged in the licensing
part.
There is a section in the existing bill--I have not seen
3.0--it is I believe 5(c)(iii), which actually says that
certain transactions are not covered if there are other laws
and regulations that can address it. Again, I am not quite sure
what happened in 3.0, but that provision, in and of itself,
opens the door to put the contours and framework on preventing
the deluge that has been discussed here.
I think perhaps that provision should be looked at a little
bit more closely to see how it can be used to cabin in some of
these issues. So, thank you.
Chairman Barr. Thank you. Thank you very much. The Chair
recognizes the vice chairman of the subcommittee, Mr. Williams.
Mr. Williams. Mr. Marchick, in your testimony, you advocate
for a carefully tailored approach to determine which
transactions actually need national security review and allow
for speedier review for the rest. So my question would be, how
would you effectively determine which transactions do and do
not need national security review?
Mr. Marchick. It is a very good question. I think that
there are criteria in the existing statute. I think FIRRMA
expands those criteria. Those criteria give companies guidance
on which transactions are the type of transaction that CFIUS
needs to review.
Then going back to something that Mr. Brown said, you want
to make sure that CFIUS captures those transactions where there
is something greater than passive investment. You could have an
investment where there is an 80 percent ownership stake and
they are completely passive. They just say, give me the
financial statements, do a good job. If you do a good job, we
will give you more money. If you don't do a good job, that is
our last investment with you.
You can also have an investment that is 10 percent or 20
percent, which includes licensing of technology, sharing
secrets, being on boards, access to supply chain information.
If that is in there, CFIUS should review it. So I think you
look at indicia of control, the type of transaction it
involves, whether there is sensitive technology, and that gives
you the guideposts for which type of transactions need to be
reviewed.
Going back to Mr. Hollingsworth's point, which I think was
very well taken, the system has slowed down so much because
they are overwhelmed that, frankly, non-sensitive, non-
significant transactions are getting slowed down. I will give
you one example. We had a transaction of a medium-sized
company--it wasn't particularly sensitive--we loved it--it was
a good investment that we sold to a NATO ally. It flied through
CFIUS.
On the 29th day, we got a call. There were no concerns at
all. The 29th day, we got a call that said one of the agencies
can't get the signature because this person is traveling around
the world. So that added another 30 days to the process.
As Mr. Hollingsworth said, that chills investment. If I am
selling my house, and Mr. Lowery bids X and Josh bids X plus 10
percent, and Mr. Brown bids X plus 50 percent, but he is going
to take 6 months to close and may not close, I am selling to
one of these two, because time is money and that uncertainty
and the slowing down of the process is what hurts finance, what
hurts investment, and chills the type of innovation that Mr.
Hollingsworth has talked about.
Mr. Williams. OK. Mr. Lowery, let me ask you and Mr.
Marchick this. When we consider the option of dividing
countries into more concerning and less concerning, is it
accurate to say that risky actors may come from friendly
countries and still warrant a review by CFIUS?
Mr. Lowery. Yes, it is. So the way the system works now is
that--and I think it should remain this--is that a foreign
investment comes into the United States, it comes from a
different country, because it is foreign, and the intelligence
agencies try to basically figure out how much of a threat is
it.
So if the threat is going to be a lighter threat, if it
comes from the United Kingdom and happens to be a purely
private company, but it may be a much heavier threat if it
comes from China, and it is whether it is private--to Mr.
Sherman's point earlier--or it is a government-controlled
company, the threat level is going to go dramatically up.
That is how CFIUS is actually doing its calculation. They
are looking at that threat, and then they look at the
vulnerability of the asset that is being purchased. I was
involved in a transaction that was coming from a NATO ally,
where they were purchasing something in the United States, and
we didn't allow that transaction to occur under CFIUS, and it
was because the asset that was being purchased was so
sensitive. The purchaser wasn't sensitive. It wasn't a problem.
It was what they were buying was a problem, and so we didn't
allow it to happen.
Now, that had nothing to do with China. I promise you. It
was a NATO country. But it just suggests sometimes it is not as
clear cut as deciding which countries and what--but that is why
there is a process.
Mr. Williams. I have 16 seconds, Mr. Marchick.
Mr. Marchick. I agree with Clay. There is a balancing
between the country of origin, the buyer, and the sensitivity
of the asset, and CFIUS needs to weigh those factors.
Mr. Williams. Thank you. I yield my time.
Chairman Barr. Mr. Pittenger is recognized.
Mr. Pittenger. I would like to thank each of you for being
here today. I value your input. We have the last several months
and we will continue to modify it. I hope that all the members
will take a hard look at version 3.0 and see the modifications
we have already made to industry, because I am a free and fair-
market guy, and I believe in capital investments. I have the
largest Chinese owned hog processing plant in the world in my
district. So I welcome those investments. Those are 5,000
people who have good jobs there. I don't want to discourage
that whatsoever. So don't hear my interest in this in any other
realm.
I would say that we are not alone in our concern. Japan has
real concerns in this regard, Germany, the U.K., European
Union, Australia. We are all about addressing a major
exploitation of our IP. To that end, it is important that we
try to lead the way and to get it done right.
I would like to say that one part of our bill that is
included as an exemption that really makes it more marketable,
more accessible for companies when we have other countries who
have the same standards that we have. It is incentive for them
to address these issues, and as such, they have a minor form
they have to fill out, in essence, and don't have to go through
the process.
I would ask you, Mr. Lowery, is the CFIUS process voluntary
or mandated?
Mr. Lowery. It is currently a voluntary process, but there
are ways to bring companies into it.
Mr. Pittenger. Yes, sir. If after the fact that there is
some opportunity to review, if a question is raised, but it is
really a voluntary process. So we are really not talking about
20,000 applications or concerns that would necessarily come in
Treasury. From my discussions, it doesn't expect anything close
to that, because it is a voluntary process. It isn't mandated.
So I would say to each of us, let's continue to work
together. I would, Ms. Cinelli, you wanted to make a comment
earlier I could tell, and I just want to give you a moment to
do that.
Ms. Cinelli. Thank you very much, sir. It is a very
interesting comment on the transaction that you were talking
about. Just from a very practical perspective, when people put
deals together and there are CFIUS closing conditions, which
some do get inserted, there are usually also provisions for
what we call closing over the condition.
So from a very practical perspective, if you were to get
the information that Mr. Marchick was talking about where it
was a more administrative process that was impeding the
finalization, just as a practical matter, the parties believe
the risk would be appropriate in that sense, and they would
close over the condition, in the sense it would not impede the
investment, they would stay to the schedule.
Where some challenges may arise sometimes is if there isn't
a particular view from CFIUS, and maybe they haven't been as
clear that it is an administrative matter, then the parties may
hesitate. But even in those circumstances, in my experience, a
large number of transactions move forward even if there is a
CFIUS closing condition. It is considered part of a business
calculation, just like tax and any other consideration. Thank
you.
Mr. Marchick. I would just add, I agree with that. But in
our experience, we are a firm that doesn't like to close unless
the Government says you can close.
Mr. Pittenger. Mr. Brown, would you like to make a closing
comment?
Mr. Brown. I am glad that this committee has taken this
issue so seriously, so my thanks to Representative Heck,
Chairman Barr, you for taking the leadership on this issue to
make sure that we do something. Because the fact that the bill
has some areas that we may want to improve is certainly no
reason not to move forward and strengthen national security. So
I am excited about what I am--
Mr. Pittenger. Do you have any concerns in terms of outcome
of what may or may not happen in a bill that would allow
further exploitation?
Mr. Brown. As several of you have already commented, no
single action we take is comprehensive. So I think we need to
move forward with improving this bill, and then we need to say
what else do we need to do to take care of the threat, export
controls we have covered here in depth, but then as I became a
broken record, we have also have to look at what are we doing
to invest to make sure we are the source of innovation in this
country.
Mr. Pittenger. I think we all agree that export control and
CFIUS play a vital role, and they both need to be enhanced.
Frankly, export control is the front line defense, from my
point of view.
Thank you. I yield back.
Chairman Barr. Thank you, Mr. Pittenger. And Mr.
Hollingsworth, you are recognized for a second round.
Mr. Hollingsworth. Well, as I said before, much has been
said, so I will be the once more with enthusiasm here at the
very end. I really appreciate everybody's expertise. A couple
of things I wanted to say. I wanted to reiterate exactly what
Mr. Heck has been a vocal advocate for and I, as well, in
increasing R&D spending, both on the public side and whatever
we can do to engender more on the private side. The source of
our innovation in the long run are truly those investments.
I wanted to comment on what Ms. Cinelli said, as well.
Let's be fair to our friends over at Commerce. The goal is not
to have everybody submit a letter to the Government when they
seek to do a transaction that is across a border. The goal is
to make sure that we limit it to those specific instances and
not have everybody suddenly submitting forms just because they
happen to go across a random geographic border.
I think it is really important to say there are exemptions
in place, but there are exemptions in place for good reason.
Again, I think we come back to this point which all of us have
talked about in narrowing down the focus so that we capture
every single transaction that could be a problem, but not one
more transaction than that. That is the goal.
I wanted to reiterate what Mr. Marchick said. I have bought
and sold a lot of companies. Nowhere near what Carlyle has, by
the way. Trying to--
Mr. Marchick. We have a few more you can look at.
Mr. Hollingsworth. Right, and really healthy valuations, I
am sure. Trying to convince a buyer to close over conditions is
just one more hurdle in a transaction, and not always an easy
proposition, especially with something as big and onerous as
Federal Government standing at the side of that.
So I wanted to just come back to this very central thing.
One, I don't believe we should do nothing. I think we should
take steps to enhance national security. Two, I do think that
we should address the gaps in export control and utilize that,
as Mr. Pittenger said, front-line measure and have a robust
list, a clear list of these are the things that are really
important to us to hold onto.
But, three, I want to come back to this underlying point,
and I think it was touched on a few minutes ago, which is, what
we are really concerned about is technology transfer. CFIUS
uses corporate transactions as a proxy to understand what might
be happening underneath that, underneath the hood in terms of
technology transfer. I think export controls, in a very real
way, gets at the actual underlying transaction we are worried
about.
I want to make sure that we fully utilize those resources
and don't build an extra super-structure over top of that and
use a proxy, when we could just use the underlying problem that
we want to deal with.
I think the last point--and we have all talked about it--is
making sure that we stay very, very focused here, because I did
worry--and, Mr. Brown, I agree with so much of what you said
and so many great points, but when you started to list the
things that could be on an actual export control list, there is
so much pure academic research that theoretically sometime in
the future could have a military application. I don't want to
start putting everything on the list because it might end up in
the hands of a military use later on.
I want to make sure that we are really focused on the
things that we think are proximate or near-term or could be,
because I don't want to end up with a list that just basically
says everything. Then we get to the point where everybody is
submitting a letter, where everybody feels like they have to go
through a process, where everybody pays the $300,000 fee to
enter CFIUS. I want to make sure that we get through and allow
American businesses to succeed here, allow them to succeed
around the world, so that we can reinvest in all these
important things that we talk about in R&D.
Private companies have to pick up the slack from a Federal
Government that is not investing in R&D the same way they were
20 or 30 years ago. I don't want to put them at a disadvantage
to be able to do that because of the work that we do here. We
already fail to fund in the full, robust way I think we should.
I don't want to then tie up companies' hands, paying more--and
forgive me, for those of you that are lawyers--but paying more
legal fees instead of paying more researchers and R&D and more
facilities and employing more Hoosiers back home.
I think these are all really important points. As Mr. Brown
well said, everybody is taking this very seriously. As Mr. Heck
and Mr. Pittenger have both said, they have made tremendous
strides, invested unbelievable diligence in making sure we get
to the right outcomes here.
I think we are very close. I think Section 109 language is
really important to making sure that we narrow the Section 3.5
issue that I have. I just look forward to continuing to work
with everybody and appreciate the testimony today.
Chairman Barr. Thank you. Gentleman yields back. I want to
thank all of my colleagues for their valuable contributions and
important, insightful questions that helped us understand this
a little bit better. Thank our witnesses for their excellent
testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned.
[Whereupon, at 4:04 p.m., the subcommittee was adjourned.]
A P P E N D I X
April 12, 2018
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