On November 2, 2011, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the “Councils”) issued a final rule amending the Federal Acquisition Regulations (the “FAR”) by requiring contractors to identify and prevent personal conflicts of interest (“PCIs”) for contractor employees. Contracting officers are instructed to include the clause found at FAR 52.203-16 in all contracts, task orders and delivery orders issued after the effective date of December 2, 2011. Overall, the rule retains the general requirements established in the proposed rule for contractors to develop procedures identifying PCIs in their workforce and to prevent these conflicts of interest by not assigning or allowing employees with PCIs to work under a contract. The rule still requires contractor employees to execute non-disclosure agreements.

The final rule, however, clarifies the type of financial interests that the Councils are concerned about, but leaves ambiguous what procedures contractors must employ to elicit that information. For example, the final rule defines both a “PCI” and a “covered employee.” A PCI is defined 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.

FAR 52.203-16(a). Notably, a de minimis interest is not a PCI if it does not “impair the employee’s ability to act impartially and in the best interest of the Government.” PCIs can arise out of financial interests of the covered employee, family and household members, other employment or prospective employment, financial relationships or gifts. Financial interests include:

  1. Compensation, including wages, salaries, commissions, professional fees or fees for business referrals;
  2. Consulting relationships, including commercial and professional consulting and service arrangements, scientific and technical advisory board memberships, or serving as an expert witness in litigation;
  3. Services provided in exchange for honorariums or travel expense reimbursements;
  4. Research funding or other forms of research support;
  5. Investment in the form of stock or bond ownership or partnership interest (excluding diversified mutual fund investments);
  6. Real estate investments;
  7. Patents, copyrights and other intellectual property interests; or
  8. Business ownership and investment interests.

FAR 52.203-16(a)(2)(i) – (viii). However, the Councils are clear that this is not an exhaustive list and declined to further define a PCI as “neither a contractor nor its employees can apply the impartiality standard if it cannot yet be known what interests may be affected by a particular acquisition.” Federal Acquisition Regulation; Preventing Personal Conflicts of Interest for Contractor Employees Performing Acquisition Functions, 76 Fed. Reg. 68,017, 68,019 (Nov. 2, 2011).

Interestingly, no particular method of gathering PCI information is required. Rather, contractors retain flexibility to devise solutions that will effectively gather information but maintain employee confidentiality of often-sensitive information. Therefore, contractors must proactively develop their own, industry-specific, contract-specific internal disclosure forms.

As the Councils affirmed that disclosures are limited to PCIs that “might be affected by the task to which the employee has been assigned,” 76 Fed. Reg. at 68,020, contractors may wish to use broad information-gathering techniques but then exercise discretion as to what must be disclosed—i.e., if the disclosure reveals that a PCI is not related to the task that the specific employee has been assigned, it may not require disclosure, depending on the circumstances. Further, if an employee is reassigned, disclosure is not required, because “[t]he Government only needs to be informed if violations occur, or if the contractor needs approval for a mitigation plan or requests a waiver.” 76 Fed. Reg. at 68,020. One sensible example that the Councils approved, includes requiring “each covered employee to review a list of entities affected by the upcoming work and to disclose any conflict or confirm that he or she has none.” 76 Fed. Reg. at 68,021. Importantly, the Councils clarified that “nothing in the rule requires a report of an ‘appearance of conflicts.’” 76 Fed. Reg. at 68,021.

The final rule defines a “covered employee” as an employee “who performs an acquisition function closely associated with inherently governmental functions.” FAR 52.203-16(a). The Councils clarified that prime contractors are only responsible for the prime contractors’ employees and not for a subcontractor’s employees. 76 Fed. Reg. at 68,018. Contractors will need to work closely with subcontractors to determine which employees each contractor is responsible for, and these lists must be continuously updated throughout the life of the contract.

As an initial step, government contractors and those seeking to do business with the federal government may wish to review their current Codes of Business Ethics, ethics awareness and compliance programs, and internal controls to determine what changes may be necessary to comply with the detailed requirements of the final rule.