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Bars index-tracking funds from holding any company that meets the Act’s definition of a "Chinese company." Funds that already hold such investments when the law takes effect would have 180 days to sell them. The SEC is given authority to write implementing rules and to apply the definitions in practice. Violations carry civil penalties equal to the greater of $250,000 or twice the transaction amount that caused the violation.
"Amount of the transaction" means (A) for a purchase that violates this Act, the purchase price; and (B) for the holding of an investment that violates this Act, the fair market value of the investment at the time of the violation.
"Chinese company" means a company that meets one or more of the following: (A) incorporated or otherwise organized in the People’s Republic of China; (B) has a majority of its assets or employees located in the People’s Republic of China; (C) is owned by, controlled by, or subject to the jurisdiction or direction of the government of the People’s Republic of China; (D) where a majority of the value of the company depends on revenues, profits, market capitalization, assets, or the value of a security (including options) of a company described in (A), (B), or (C), as determined by the Securities and Exchange Commission; or (E) where a company described in (A), (B), or (C) has control (as defined in 17 C.F.R. § 230.405) of the company, as determined by the Securities and Exchange Commission.
"Hedge fund" means an issuer that would be an investment company but for paragraph (1) or (7) of section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)).
"Index fund" means an investment company or hedge fund that is designed to track an index of securities or a portion of such an index.
"Investment company" has the meaning given the term in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3).
Who is affected and how:
Index fund managers and registered investment companies: Directly required to prevent future purchases of, and to divest existing holdings in, companies that meet the bill’s "Chinese company" definition. They will need to change index methodologies, fund prospectuses, trading systems, and compliance programs. Operational costs and legal work are likely to increase.
Asset managers and financial firms: Broader asset managers that offer index-tracking products (ETFs and mutual funds) will deal with forced rebalancing and potential outflows, and may face conflicts between fiduciary duties, client mandates, and the statutory prohibition.
Retail and institutional investors in index funds: May experience tracking error, reduced liquidity, higher costs, or altered returns as funds divest prohibited holdings. Some investors may be forced into actively managed or non-index vehicles if index choices are restricted.
Chinese companies meeting the statutory criteria: Could see reduced passive capital inflows from U.S. index funds, which may depress liquidity and valuations for affected securities in U.S. and global markets.
Securities markets and index providers: Index providers will have to change index rules and methodologies (e.g., excluding certain issuers), which may fragment benchmark universes and create alternative index products. Secondary market liquidity for excluded securities may decline.
SEC and regulators: Will need to draft implementing rules, monitor compliance, and enforce penalties; the Act gives the SEC substantial discretion over technical definitions and measurement methods, which means much of the practical impact depends on forthcoming rulemaking.
Legal and international relations risks: The provision targets companies based on nationality/affiliation criteria and may prompt litigation (preemption, securities law arguments) and diplomatic or market responses from affected foreign markets and issuers.
Net effect: The bill imposes direct compliance obligations and divestment requirements on index-tracking funds, shifts passive capital away from covered Chinese companies, raises operational and compliance costs for fund managers, and could produce broader market and geopolitical consequences depending on SEC rule choices and enforcement.
Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.
Last progress June 12, 2025 (8 months ago)
Introduced on June 12, 2025 by John Peter Ricketts