UPDATE 3-US Treasury rules clarify foreign security reviews

(Adds comments from Treasury assistant secretary, lawmaker)

By David Lawder

WASHINGTON, April 21 (Reuters) - The U.S. Treasury on Monday unveiled proposed new regulations to tighten security reviews of foreign investments in U.S. businesses while allowing sovereign wealth funds to make small passive investments with less scrutiny.

The rules clarify that transactions in which a foreign entity acquires less than a 10 percent stake in a U.S. business are not automatically exempt from a review by the Committee on Foreign Investment in the United States (CFIUS).

"I think the new regulations reflect a strong continued commitment by the United states to maintaining our open investment climate and to safeguarding U.S. national security," Clay Lowery, the Treasury Department's assistant secretary of international affairs, told reporters.

"We think that the clarifications made by the proposed regulations will help us run the process in a more efficient and effective manner," he said.

The proposed regulations put into effect a law passed to strengthen reviews in the wake of Dubai Ports World's controversial 2006 deal to buy U.S. port operations, which was withdrawn after congressional objections.

The new law enshrines CFIUS reviews into federal statute and requires them for transactions in which a foreign entity can gain control of a U.S. business.

The Treasury's proposed regulations define control not in terms of percentage of shares or board seats, but as "the ability to exercise certain powers over important matters affecting a business," even if the foreign entity does not exercise that power.

"We tried to make sure that was as clear as it can be," Lowery said.

The proposed regulations specifically say that the rules "do not provide and never have provided, an exemption based solely on whether an investment is 10 percent or less in a U.S. business."

However, the rules provide for passive investments in U.S. firms by sovereign wealth funds, saying that they would not exert any control if they are under 10 percent voting interest and if the interest is "held solely for the purpose of investment."

A foreign investor would fail the investment-only test if it "has the capability and an intention to control the entity, possesses or develops any purpose other than investment, or acts in a way that is inconsistent with an intent to hold the interest solely for the purpose of investment."

"These regulations are a positive step forward," said Rep. Carolyn Maloney, a Democrat from New York who authored the law to reform CFIUS. "These regulations not only strengthen the review process, but also make it more transparent."

Industry groups also reacted positively, saying the new rules would effectively screen foreign investments and address congressional concerns without blocking or deterring them.

"I think overall the direction taken here is helpful. Treasury is intent on sending a strong signal that we as a country welcome foreign investment," said Bruce Josten, executive vice president for government affairs at the U.S. Chamber of Commerce.

"I think that is important in the context of some of the very public debate in the presidential campaign as well as in Congress," he added.

The Treasury said the special rule for passive investments would apply to all types of investors equally, rather than assuming certain types of institutions are passive investors.

"It provides a lot more clarity and certainty to the process and will help companies understand when and how they need to go through CFIUS process," said Todd Malan, president of the Organization for International Investment, a trade group that represents foreign companies.

The rules do not specifically mention sovereign wealth funds, but they broaden the definition of a "foreign person" to a "foreign entity" to include deals by entities whose ownership is widely dispersed among different foreign owners, even though no single foreign person or corporation controls it.

Malan said this would cover a range of changing possibilities well into the future.

"The hope is that these regulations pertain to the next 20 years. A government owned entity covers a heck of a lot more territory that a smart lawyer can't get around. It's a broader definition with intent."

The Treasury will accept public comments on the proposed regulations for 45 days and will hold a public hearing on them on May 2 at the Treasury's Cash Room in Washington. (Additional reporting by Rachelle Younglai, editing by Walker Simon)