The Department of Defense (“DoD”) has now issued an interim final rule codifying and, in some cases, substantially changing, the policies and procedures for the evaluation and mitigation of Foreign Ownership, Control or Influence (“FOCI”) over government contractors. The interim rule adds to Title 32 of the Code of Federal Regulations (32 C.F.R. Part 117. National Industrial Security Program) a new Subpart C titled, “Procedures for Government Activities Relating to Foreign Ownership, Control or Influence.”

The interim rule is intended to create uniformity in DoD’s implementation of the National Industrial Security Program (“NISP”) by stating the procedures that DoD will use to ensure classified information is properly safeguarded when a government contractor is subject to FOCI. FOCI concerns most commonly arise when non-U.S. entities or persons acquire control of U.S. companies, which are required, under contract, to have Facility Security Clearances (“FCLs”) allowing cleared employees to have access to classified information. The Defense Security Service (“DSS”) may identify FOCI concerns in numerous other situations as well. Notably, the interim rule claims it does not “levy requirements on contractors,” as they are subject to the requirements of the NISP Operating Manual (the “NISPOM”; DoD 5220.22-M). Nonetheless, the policies and procedures it sets forth with respect to facility clearances will likely have practical implications for DoD contractors subject to FOCI.

FOCI Determinations. A company under FOCI is ineligible for a facility clearance until an approved action plan has been put in place to mitigate or negate FOCI. Under the interim rule, DSS will continue to make a determination as to whether a company is under FOCI, and, if so, will assess the extent to which FOCI may result in unauthorized access to classified information with regard to the foreign interest that is the source of FOCI. The rule now makes clear that DSS will conduct this evaluation on a 

country-specific basis, evaluating the potential for espionage by the foreign interest of that country against U.S. targets. It may become necessary, in dealing with DSS on FOCI matters, to present evidence about the likelihood of economic espionage arising from the citizens or corporate entities of a particular country, as is now necessary when adjudicating individual personnel security clearances under foreign country-related Guidelines B (Foreign Influence) and C (Foreign Preference).

New Timelines. The interim rule imposes strict timelines on the relevant federal agencies, including DSS, to encourage prompt FOCI determinations. When DSS determines that a contractor is subject to FOCI, DSS will notify the company and require it to submit a proposed FOCI action plan to DSS within 30 days. DSS must provide written feedback on the action plan within 30 days of receipt. Once DSS and the contractor have agreed on a FOCI action plan, DSS will provide a copy of the action plan and any associated risk assessments to the relevant government customer (referred to as the Government Contracting Activity (“GCA”)), which then will have 30 days to provide written objections to the action plan. If these deadlines are observed, they should result in generally faster processing of FOCI mitigation plans than may have occurred previously.

FCL Invalidation. If a contractor engages in a merger, sale, or acquisition involving a foreign interest prior to having a FOCI mitigation agreement in place, the interim rule makes clear that DSS may invalidate the contractor’s existing facility clearance until the contractor submits an acceptable FOCI action plan and agrees to interim mitigation measures pending the execution of a mitigation or negation agreement. Invalidation renders the contractor ineligible to receive new classified information or to bid on classified contracts, and withdraws from the contractor and its employees a right of access to classified information, effectively making it impossible for the contractor to perform on contracts requiring such access until FOCI concerns have been resolved. This provision of the rule is a further codification of the DSS’s existing authority to suspend or invalidate a clearance at any time.

Limited Facility Clearances. In a new development, the interim rule authorizes DSS to grant “Limited FCLs” in four narrowly-defined circumstances where contractors are “unable or unwilling” to mitigate FOCI. Three of the four circumstances involve activities that necessitate the participation of foreign governments. The fourth permits a senior GCA official to sponsor a company for a Limited FCL if there is a “compelling need” for the facility clearance.

Coordination with CFIUS. The interim rule institutes procedures for structured coordination between DSS and the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS review and the DSS industrial security review for FOCI will continue to be separate processes, but the rule directs DSS to provide certain information to the Manufacturing and Industrial Base Policy (“MIBP”) CFIUS Team pertaining to the FOCI review. If DSS is notified of a transaction implicating FOCI for which a CFIUS notice has not been filed, DSS will alert the MIBP CFIUS Team to the transaction. If DSS has not begun or completed its review prior to the submission of a CFIUS notice, DSS will conduct the review on a 

priority basis for the purpose of reporting to CFIUS. CFIUS approval is unlikely to be issued until the parties reach agreement on the material terms of a FOCI action plan.

The interim final rule took immediate effect upon publication, but DoD will receive public comments on the interim rule before it is published in its final form. The period for public comment is scheduled to close on June 9, 2014. Comments may be submitted online, or by mail to the Federal Docket Management System Office, 4800 Mark Center Drive, 2nd Floor, East Tower, Suite 02G09, Alexandria, VA 22350-3100. Comments sent by mail should be identified as pertaining to Department of Defense Docket ID DOD-2011-OS-0063.