Rule Eases Certain Requirements and Sets Limitations on Scope of Brokering

On August 26, the U.S. Department of State, Directorate of Defense Trade Controls (“DDTC”) published an interim final rule amending its rules governing brokers and brokering activities. The rule, which will take effect on October 25,  is years in the making and includes a number of revisions and clarifications from the proposed rule published on December 19, 2011. Among the changes made in the interim final rule are a number of changes in response to comments DDTC received related to the potentially broad scope of the 2011 proposed rule.

The interim final rule substantially alters the brokering rules in certain situations, as follows:

  • Limits the foreign persons covered under the definition of broker. The interim final rule specifies that foreign persons will be considered brokers when they are located in the United States or owned or controlled by a U.S. person. Foreign entities that do not meet either of these criteria will not be required to register as brokers under the interim final rule.
  • Clarifies eligibility requirements related to the receipt of licenses or other approvals from DDTC. The interim final rule clarifies that the manufacturer or source of a defense article or defense service must also meet the eligibility requirements set forth under Part 120 of the International Traffic in Arms Regulations (“ITAR”). In its comments regarding this rule, DDTC noted that it currently expects applicants to screen all parties to their transactions, including the source or manufacturer of a product. Additionally, the final rule specifies that foreign parties must meet the eligibility requirements set forth under Part 120 of the ITAR (which has been amended to clarify how it applies to foreign persons).
  • Specifies activities excluded from the definition of brokering activities. The interim final rule articulates a number of activities that are excluded from the definition of “brokering activities.” Among the activities which will be exempt from the definition under the interim final rule are: activities by regular employees acting on behalf of their employer, activities which are only administrative in nature, activities performed by an affiliate on behalf of another affiliate and activities where the person only acts as the end-user or reexporter of a defense article or defense service licensed for export by DDTC.
  • Removes notice requirements and specifies those activities for which prior approval is required. The interim final rule removes the requirement for prior notification for certain types of activities and sets forth a discrete list of defense articles and defense services for which approval from DDTC must be obtained prior to engaging in brokering activities.
  • Allows for the consolidation of manufacturer/exporter and broker registrations. The final rule allows for registrants to apply for a consolidated registration that would cover their role as all of a manufacturer, exporter and broker. This consolidated registration may also include subsidiaries and affiliates which are owned or controlled by the registrant. For those companies who currently have both manufacturer/exporter registrations and broker registrations, those registrations will be consolidated at the time of registration renewal.

Although the interim final rule sets clearer boundaries with respect to certain kinds of activities, the rule continues to cover a broad range of activities under the definition of brokering. Therefore, it will remain important for companies to carefully examine any activities in which it or its subsidiaries or affiliates are involved related to the manufacture, export, import, transfer, reexport or retransfer of U.S. or foreign-origin defense articles.

In addition, companies should be mindful that the brokering provisions apply not only to activities related to exports of U.S.- and foreign-origin defense articles on the United States Munitions List (“USML”) but also to activities related to permanent imports of items on the United States Munitions Import List (“USMIL”). While both the USML and USMIL were created under the Arms Export Control Act, the two lists are administered by separate agencies and the changes to the USML as a result of export control reform have not been made to the USMIL at this time. Therefore, it is possible that engaging in brokering activities related to the permanent import of certain products which have transitioned to the EAR as part of export control reform will remain subject to the brokering provisions under the new rule.

Although the rule takes effect on October 25, DDTC is accepting comments related to the rule and will publish a final rule incorporating any changes arising from such comments. Interested parties should submit comments by October 10, 2013.