Following issuance of a much-anticipated proposed rule regulating contractor employee personal conflicts of interest (PCIs), both the Council of Defense and Space Industry Associations (CODSIA) and the Section of Public Contract Law of the American Bar Association (ABA) have submitted comments urging the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (FAR Councils) to make significant changes to the proposed rule. How, or if, the FAR Councils ultimately decide to address the issues raised by CODSIA and the ABA could have significant consequences for contractors and contractor employees.
As we have previously discussed in detail here, on November 13, 2009, the FAR Councils issued a proposed rule that would create a new FAR subpart 3.11, Preventing Personal Conflicts of Interest for Contractor Employees Performing Acquisition Functions, which would set forth policies and procedures for identifying and preventing contractor employee PCIs. See 74 Fed. Reg. 58, 584 (Nov. 13, 2009. The proposed rule would also include a new FAR clause 52.203-16, Preventing Conflicts of Interest, for contracting officers to insert into contracts involving the performance of acquisition functions closely associated with inherently governmental functions. The proposed rule implements section 841(a) of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 (NDAA FY 2009). See Pub. L. No. 110-417.
Although the comments of CODSIA and the ABA applauded the FAR Councils' effort to manage the potential impact of PCIs and to ensure that contractor employees act impartially in performing their work for the Government, both organizations sharply criticized various aspects of the proposed rule as overly broad, ambiguous and potentially unworkable. By and large, their comments focused on the following seven aspects of the proposed rule:
Definition of "Acquisition Function Closely Associated with Inherently Governmental Functions"
The proposed rule would apply to any contractor employee "who performs an acquisition function closely associated with inherently governmental functions." It defines "inherently governmental functions" as "supporting or providing advice or recommendations with regard to" eight specific categories of activities of Federal agencies, including planning acquisitions, determining what supplies or services are to be acquired by the Government, developing or approving contractual documents, evaluating proposals, and awarding, administering or terminating contracts. See 74 Fed. Reg. 58587 (proposed FAR 3.1101).
Both CODSIA and the ABA criticized the proposed definition as overly broad and vague. CODSIA focused on the use of the term "supporting" in the introductory clause of the definition, arguing that "defining what activities conclusively constitute a 'supporting' work function or service would require an exhaustive amount of technical knowledge not often available to Contracting Officers (COs) on a transactional or even a programmatic basis." CODSIA also criticized the descriptions of the eight listed service categories as "unduly and unmanageably broad and vague," and asked that the FAR Councils provide more clarity regarding the type of work these categories include. The ABA's comments focused on the reference to "[d]eveloping or approving any contractual documents" as one of the eight listed categories of acquisition functions closely associated with inherently governmental functions. The ABA asked that the FAR Councils revise this provision to acknowledge that the Government often seeks input on contractual provisions from prospective offerors and from awardees of sole-source contracts, and to make clear that only contractor employees preparing contract documents on behalf of the Government are covered by the rule.
Definition of "Personal Conflict of Interest"
The proposed rule defined the term "Personal Conflict of Interest" as a situation in which a "covered employee" has a financial interest, personal activity or relationship that could impair the employee's ability to act impartially and in the best interest of the government when performing under the contract. The proposed rule explains that among the sources of PCIs are (1) financial interests of the covered employee, close family members or other members of the household, (2) other employment or financial relationships, including seeking or negotiating for prospective employment or business and (3) gifts, including travel. The proposed rule also includes a list of eight specific activities in which financial interests may arise. See 74 Fed. Reg. 58587-88 (proposed FAR 3.1101).
CODSIA and the ABA expressed several concerns with the proposed rule's definition of PCIs. CODSIA stated that, while the proposed definition of PCI covers a "financial interest, personal activity, or relationship," all of the cited examples of PCIs relate to the financial interests of the employee, including close family and other household members. CODSIA asked that the FAR Councils provide "further explication of the many varied elements and circumstances involved in the terms 'financial interests, personal activity and relationships.'" The ABA expressed concern that the proposed rule does not define the scope of the "relationships" that can trigger PCI concerns, nor clearly define who would be encompassed by the terms "close family members" and "other members of the household."
Employee Financial Disclosure Statements
Among other requirements and procedures, the proposed rule would mandate that contractors with employees performing acquisition functions closely associated with inherently Governmental functions obtain and maintain a financial disclosure statement from each covered employee when the employee is initially assigned to the task under the contract. The proposed rule would also require each employee to update his or her disclosure statement at least annually and to disclose changes in personal financial circumstances and the occurrence of new PCIs. See 74 Fed. Reg. 58588 (proposed FAR 3.1103(a)(1) & (2)).
The ABA urged the FAR Councils to reconsider whether financial disclosures should be required in all cases, and to consider alternatives to the proposed regime that would provide more discretion to contractors to determine how best to screen covered employees. Alternatively, in the event the FAR Councils retain the financial disclosure requirement, the ABA requested additional guidance as to what will be expected of contractors and covered employees under the rule, including what information the contractor must obtain from covered employees and what types of changes in an employee's financial circumstances would require an update to his or her financial disclosure statement. For example, the ABA commented, "requiring employees to provide disclosures every time their 401 K investment portfolios or those of their spouses may include potential contractors would be onerous and unproductive." Similarly, CODSIA urged the FAR Councils to introduce separately for public comment a definitive type of financial disclosure statement that would meet the requirements of the proposed rule. CODSIA also asked the FAR Councils to delete the requirement for covered employees to update their financial disclosure statements to reflect changes in personal finances or whenever a new PCI occurs because the requirement goes beyond the standards of conduct applicable to Government employees. Finally, because PCI screening is dependent to a significant extent on information provided by employees, CODSIA requested that the final rule specify that contractors acting in good faith may rely on the information submitted by employees on the financial disclosure statement.
Reporting of Violations
The proposed rule would require contractors to report to the contracting officer any PCI violation by a covered employee "as soon as identified." The rule also mandates that the report include "a description of the violation and the actions taken by the contractor in response to the violation." 74 Fed. Reg. 58588 (proposed FAR 3.1103(a)(6)).
Both CODSIA and the ABA criticized the reporting requirements in the rule as being internally inconsistent. As set forth in the ABA's comments, "[a] contractor cannot disclose the actions it has taken to address a PCI violation as soon as the violation is identified. Such a disclosure would be impossible, because the contractor can take action only after it has identified the violation." Both CODSIA and the ABA urged the FAR Councils to revise the rule to require "timely" reporting of PCI violations so that contractors have a reasonable time to investigate the matter before disclosing it to the Government. In addition, CODSIA and the ABA criticized the rule for failing to provide any guidance regarding how the obligation to report PCI violations relates to contractors' obligations to disclose certain crimes and civil False Claims Act violations under the mandatory disclosure provisions of FAR Subpart 9.4 and 52.203-13.
Mitigation or Waiver
The proposed rule provides that in "exceptional circumstances" where a contractor cannot satisfactorily prevent a PCI, the contractor may submit a request through the contracting officer for the head of the contracting activity (HCA) to agree to a plan to mitigate or waive the PCI. The proposed rule further provides that if the HCA determines in writing that such action is in the best interest of the Government, he or she may impose conditions that provide mitigation of a PCI or grant a waiver. See 74 Fed. Reg. 58588 (proposed FAR 3.1104 and 52.203-16(c)).
Both CODSIA and the ABA expressed concern with this provision. Although CODSIA agreed with the concept of allowing the HCA to mitigate or waive a PCI, it noted that the timing of such a process during the acquisition cycle is unclear, and urged the FAR Councils to develop a solicitation provision to allow offerors to seek mitigation or a waiver at the time of proposal submittal and to clarify the standard for what constitutes an acceptable PCI mitigation plan. The ABA expressed concern that requiring the HCA to approve all waivers or mitigation plans would be unworkable in practice and recommended that the rule be revised to allow the contracting officer, in consultation with the chief of the contracting office, to agree to mitigate PCIs where appropriate.
The proposed rule includes several "remedies" in the event the contracting officer determines there is sufficient evidence of a violation, including suspending contract payments, loss of award fee, termination for cause, and suspension and debarment. See 74 Fed. Reg. 58588 (proposed FAR 52.203-16(d)).
CODSIA criticized each of the remedies included in the proposed rule, largely on the basis that the remedies are unnecessary because they are adequately addressed in other areas of the FAR. In addition, CODSIA expressed concern that the proposed rule imposes "absolute liability" on contractors for the wrongful acts of their employees without a need to prove that the contractor breached its responsibilities under the rule. CODSIA urged the FAR Councils to delete the "remedies" section of the rule in its entirety.
The proposed rule requires prime contractors to include the substance of the new clause 52.203-16 in subcontracts that exceed $100,000, and in which the subcontractor employees may perform acquisition functions closely associated with inherently governmental functions. See Fed. Reg. 58589 (FAR 52.203-16(e)).
Both CODSIA and the ABA criticized this provision as being potentially inconsistent with the definition of "covered employee," which would include not only the contractor's employees but also employees of subcontractors, consultants and partners. CODSIA and the ABA urged the FAR Councils to align these two provisions.
How, or if, the FAR Councils ultimately decide to address these issues and others raised by CODSIA and the ABA could have significant implications for contractors and their employees. There is no current timetable for the FAR Councils to issue a revised or final rule.