[Federal Register Volume 79, Number 68 (Wednesday, April 9, 2014)]
[Rules and Regulations]
[Pages 19467-19478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07826]


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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 117

[Docket ID: DOD-2011-OS-0063]
RIN 0790-AI71


National Industrial Security Program

AGENCY: Department of Defense (DoD).

ACTION: Interim final rule.

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SUMMARY: This DoD interim final rule (rule) assigns responsibilities 
and establishes requirements related to the National Industrial 
Security Program (NISP) to ensure maximum uniformity and effectiveness 
for both DoD and non-DoD Components, as defined in this rule, for which 
the Department serves as the Cognizant Security Agency (CSA) and 
provides industrial security services in accordance with Executive 
Order (EO) 12829, ``National Industrial Security Program.'' The rule 
provides guidance on the procedures used to ensure classified 
information will be properly safeguarded if a contractor has reported 
foreign ownership, control or

[[Page 19468]]

influence (FOCI) information which DoD must evaluate, mitigate, or 
negate as appropriate. The rule also provides guidance for the 
evaluation, mitigation, and/or negation of FOCI information reported by 
a company, as defined in the rule, which is in process for a facility 
security clearance (FCL).

DATES: Effective Date: This rule is effective April 9, 2014. Comments 
must be received by June 9, 2014.

ADDRESSES: You may submit comments, identified by 32 CFR part 117, 
Docket No. DoD-2011-OS-0063 or Regulatory Information Number (RIN) 
0790-AI71 by any of the following methods:
     Federal Rulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Federal Docket Management System Office, 4800 Mark 
Center Drive, 2nd floor, East Tower, Suite 02G09, Alexandria, VA 22350-
3100.
    Instructions: All submissions received must include the agency name 
and docket number or RIN for this Federal Register document. The 
general policy for comments and other submissions from members of the 
public is to make these submissions available for public viewing on the 
Internet at http://www.regulations.gov as they are received without 
change, including any personal identifiers or contact information.

FOR FURTHER INFORMATION CONTACT: Valerie Heil, (703) 604-1112.

SUPPLEMENTARY INFORMATION:

Executive Summary

    The purpose of this part 117, subpart C is to set forth industrial 
security procedures and practices related to FOCI for the Components to 
ensure maximum uniformity and effectiveness in the DoD implementation 
of E.O. 12829.
    In accordance with the authority in DoD Directive (DoDD) 5143.01, 
the purpose of the rule is to implement policy, assign 
responsibilities, establish requirements and provide procedures, 
consistent with E.O. 12829, DoD Instruction (DoDI) 5220.22, and E.O. 
10865, ``Safeguarding Classified Information within Industry,'' for the 
protection of classified information that is disclosed to, or developed 
by contractors.
    This rule provides NISP policy to the Components and establishes 
procedures concerning the initial FCL eligibility of U.S. companies 
that may be subject to FOCI or continued FCL eligibility for 
contractors subject to FOCI; provides criteria for determining whether 
contractors are under FOCI; prescribes responsibilities in FOCI 
matters; and outlines security measures that may be considered to 
negate or mitigate the effects of FOCI to an acceptable level. This 
rule does not levy requirements on U.S. contractors.
    Depending upon the nature and extent of FOCI, DoD mitigates FOCI by 
putting into place mechanisms such as a voting trust agreement (VTA), 
proxy agreement (PA), special security agreement (SSA) or security 
control agreement (SCA). These arrangements require trustees, proxy 
holders or outside directors to oversee and provide business management 
of the U.S. contractor.
    For calendar year (CY) 11, five contractors cleared by DoD were 
subject to a SCA, of which three required access to SECRET information 
and two required access to TOP SECRET information. The average number 
of outside directors for a SCA is two. For CY11, 16 contractors were 
subject to a SSA, of which 12 required access to SECRET information and 
four required access to TS information. The average number of outside 
directors for a SSA is three. In CY 11, there were no VTAs and nine PAs 
that required access to TS information. The average number of proxy 
holders for a PA is three. The proxy holders, voting trustees, or 
outside directors must be eligible for access at the level of the FCL.
    CY 11 total estimated costs for personnel security investigations 
of trustees, proxy holders and outside director are as follows:

    (1) The unit cost for a SECRET clearance (National Agency Check 
with Law and Credit NACLC) is $228.
3 SCA x 2 outside directors x $228/NACLC = $1,368
12 SSA x 3 outside directors x $4005/NACLC = $8,208
(2) The unit cost for a TS (Single Scope Background Investigation--
SSBI) is $4,005
2 SCAs x 3 outside directors x $4,005 = $16,020
4 SSAs x 3 outside directors x $4,005 = $48,060
9 PAs x 3 proxy holders x $4,005 = $108,135

    Therefore, the total estimated investigation cost for outside 
directors and proxy holders under SCAs, SSAs and PAs for CY 11 is 
$181,791. These costs are government costs and not levied on 
contractors.
    FOCI measures provide protection from unauthorized transfer of 
classified information to foreign interests, thus saving billions of 
dollars.
    At the same time, the procedures in this rule allow companies 
determined to be under FOCI to be cleared through a FOCI mitigation or 
negation agreement and thus realize billions of dollars in classified 
contracts.
    By maintaining the capability for foreign-owned U.S. contractors to 
compete for classified contracts with FOCI mitigation, DoD, through the 
NISP, enhances competition and realizes cost savings through that 
competition.

Background

    DoD, as one of the four NISP CSAs, provides oversight of more than 
10,000 U.S. contractors as well as another 3,000 divisions and branch 
offices of those contractors on behalf of the DoD Components and the 
non-DoD Components. Non-DoD Components issuing contracts requiring 
access to classified information who are not one of the four designated 
NISP CSAs (i.e., the Department of Energy, the Office of the Director 
of National Intelligence, the Nuclear Regulatory Commission and the 
DoD) must enter into agreements with DOD to establish the terms of 
oversight on their behalf. Currently, the procedures for assessing 
initial FCL eligibility for U.S. companies and continued FCL 
eligibility for U.S. contractors which may be subject to FOCI are not 
uniform or consistent since these procedures do not apply to the non-
DoD Components. Currently, DoD does not have uniform procedures to 
assess the risks and the potential adverse impact on the performance of 
contracts requiring access to classified information due to any FOCI 
information reported by U.S. contractors or U.S. companies in process 
for an FCL. The rule will provide uniform and effective procedures for 
DoD to assess the risks associated with reports of material changes to 
FOCI information which are submitted annually by U.S. contractors.
    The rule also establishes procedures and criteria for appropriate 
actions to mitigate or negate any existing FOCI factors when DoD 
determines a U.S. company in process for an FCL or a U.S. contractor is 
under FOCI and is thus ineligible for access to classified information. 
The rule also prescribes responsibilities for FOCI matters, to include 
assessment of risks which may result from a contractor's FOCI 
information. Finally, it outlines security measures DoD may consider, 
implement, and oversee to mitigate or negate the effects of FOCI to an 
acceptable level for classified contract performance.
    The addition of this rule is part of DoD's retrospective plan, 
completed in August 2011, under Executive Order 13563, ``Improving 
Regulation and

[[Page 19469]]

Regulatory Review.'' Executive Order 13563 emphasizes the importance of 
retrospective analysis of rules with its ``look back'' requirement, 
which states that ``within 120 days of the date of this order, each 
agency shall develop . . . a preliminary plan.'' The plans should 
``facilitate the periodic review of rules that may be outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned.'' This rule updates policy and procedures for industry that 
are more than 20 years old. DoD's full plan and updates can be accessed 
at: http://exchange.regulations.gov/exchange/topic/eo-13563.

Justification for Interim Final Rule

    Without this rule, the Components face an elevated risk of 
unauthorized disclosure of classified information to foreign interests 
resulting in potential economic losses or damage to U.S. national 
security. There is such an increased probability of unauthorized 
disclosure of classified information because the owner of a U.S. 
company has direct authority over all aspects of his company (e.g., who 
gets paid, what contracts, including classified contracts are pursued, 
and access to information/programs that those contracts include. If the 
U.S. company has a foreign owner and is awarded a contract requiring 
access to classified information, these procedures provide actions for 
the USG to take to keep that foreign owner from having direct authority 
over the disclosure of and access to classified information. If there 
are no procedures as set forth in this rule to evaluate and determine 
how to negate or mitigate the foreign ownership, there will be nothing 
to prevent unauthorized disclosures of classified information since the 
foreign owner will have unfettered control of the U.S. company. This 
proposed rule provides the baseline requirements for the USG to 
evaluate the foreign owner's rights and determine whether those rights 
can be mitigated to effectively protect classified information and 
preclude its unauthorized disclosure. Depending upon what a foreign-
owned U.S. company is working on, unauthorized disclosure of classified 
information could have an adverse impact on national security.
    This rule allows fair and open competition among U.S. companies, 
including foreign-owned U.S. companies, who are vying for the 
opportunity to provide products and services to the Components when 
access to classified information is required. Also, without this rule, 
Components will not have the ability to consider innovative 
technologies developed by foreign-owned U.S. companies due to concerns 
with awarding a classified contract without a uniform process to assess 
and effectively mitigate or negate existing FOCI. Finally, the lack of 
a formal, uniform process has created significant delay in the 
completion of National Interest Determinations (NIDs) for foreign-owned 
U.S. contractors. These delays increase the costs to Components by 
preventing contract performance when access to classified information 
is required.
    This rule provides a baseline for protection of classified 
information through analysis, evaluation and, if needed, protective 
measures to mitigate or FOCI information at U.S. companies performing 
on contracts requiring access to classified information. Government 
Contracting Activities (GCAs) don't know if there are risks, such as 
foreign ownership or control of a U.S. company before awarding a 
contract requiring access to classified information or when a U.S. 
company is acquired by a foreign interest while performing on any 
contracts requiring access to classified information without these 
procedures. The uniform procedures in this rule provide the GCAs with 
analysis of potential adverse impact and mitigation or negation of FOCI 
information to allow foreign-owned U.S. companies to compete to perform 
on classified contracts. DoD and non-DoD Components face an increased 
probability of the loss or compromise of classified information and 
subsequent harm to the national security, as a result of the award of 
classified contracts to foreign-owned U.S. companies without this rule 
in place for the proper mitigation of FOCI information.

Definitions

    For the definitions without a cited source in this rule, upon 
approval of this rule, those terms and their definitions will be 
proposed for inclusion in the next edition of the Joint Publication 1-
02, ``DoD Dictionary of Military and Associated Terms'' (available at 
http://www.dtic.mil/doctrine/new_pubs/jp1_02.pdf).

Regulatory Procedures

E.O. 12866, ``Regulatory Planning and Review'' and E.O. 13563, 
``Improving Regulation and Regulatory Review''

    It has been certified that 32 CFR part 117 does not:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy; a section of the 
economy; productivity; competition; jobs; the environment; public 
health or safety; or State, local, or tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs, or the rights and obligations of 
recipients thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
these Executive Orders.

Section 202, Public Law 104-4, ``Unfunded Mandates Reform Act''

    It has been certified that 32 CFR part 117 does not contain a 
Federal mandate that may result in expenditure by State, local and 
tribal governments, in aggregate, or by the private sector, of $100 
million or more in any one year.

Public Law 96-354, ``Regulatory Flexibility Act'' (5 U.S.C. 601)

    It has been certified that 32 CFR part 117 is not subject to the 
Regulatory Flexibility Act (5 U.S.C. 601) because it would not, if 
promulgated, have a significant economic impact on a substantial number 
of small entities.

Public Law 96-511, ``Paperwork Reduction Act'' (44 U.S.C. Chapter 35)

    It has been certified that 32 CFR part 117 does not impose 
additional reporting or recordkeeping requirements under the Paperwork 
Reduction Act of 1995. Standard Form (SF) 328, ``Certificate Pertaining 
to Foreign Interests'' has been assigned OMB Control Number 0704-0194.

E.O. 13132, ``Federalism''

    It has been certified that 32 CFR part 117 does not have federalism 
implications, as set forth in E.O. 13132. This rule does not have 
substantial direct effects on:
    (1) The States;
    (2) The relationship between the National Government and the 
States; or
    (3) The distribution of power and responsibilities among the 
various levels of Government.

List of Subjects in 32 CFR Part 117

    Classified information, Facility security clearances, Foreign 
ownership, control or influence procedures, Security measures.


0
Accordingly, 32 CFR part 117 is added to read as follows:

[[Page 19470]]

PART 117--NATIONAL INDUSTRIAL SECURITY PROGRAM

Subpart A--[Reserved]

Subpart B--[Reserved]

Subpart C--Procedures for Government Activities Relating to Foreign 
Ownership, Control or Influence (FOCI)

Sec.
117.51 Purpose.
117.52 Applicability.
117.53 Definitions.
117.54 Policy.
117.55 Responsibilities.
117.56 Foreign ownership, control or influence (FOCI).

    Authority: Executive Order (E.O.) 12829, January 6, 1993, 58 FR 
3479.

Subpart A--[Reserved]

Subpart B--[Reserved]

Subpart C--Procedures for Government Activities Relating to Foreign 
Ownership, Control or Influence (FOCI)


Sec.  117.51  Purpose.

    This part sets forth industrial security procedures and practices 
related to Foreign Ownership, Control or Influence (FOCI) for the 
Department of Defense (DoD) Components, as defined in this part and 
non-DoD Components, as defined in this part, to ensure maximum 
uniformity and effectiveness in DoD implementation of the National 
Industrial Security Program (NISP) established by Executive Order 
(E.O.) 12829 ``National Industrial Security Program,'' (available at 
http://www.archives.gov/isoo/policy-documents/eo-12829.html).


Sec.  117.52  Applicability.

    (a) This part applies to:
    (1) The DoD Components.
    (2) The non-DoD Components. When the term Government Contracting 
Activities (GCAs) is used, it applies to both DoD Components and non-
DoD Components.
    (b) This part does not:
    (1) Limit in any manner the authority of the Secretary of Defense, 
the Secretaries of the Army, Navy and Air Force; or the Heads of the 
Components, as defined in this part, to grant access to classified 
information under the cognizance of their respective department or 
agency to any individual or entity designated by them. The granting of 
such access is outside the scope of the NISP and is governed by 
Executive Order (E.O.) 13526, ``Classified National Security 
Information,'' (available at http://www.archives.gov/isoo/pdf/cnsi-eo.pdf) and applicable disclosure policies.
    (2) Limit the authority of a GCA to limit, deny, or revoke access 
to classified information under its statutory, regulatory, or 
contractual jurisdiction.
    (3) Levy requirements on contractors and companies currently in 
process for facility security clearances (FCLs) as they are subject to 
the requirements of DoD 5220.22-M, ``National Industrial Security 
Program Operating Manual (NISPOM)'' (available at http://www.dtic.mil/whs/directives/corres/pdf/522022m.pdf) and the security requirements of 
their contracts.


Sec.  117.53  Definitions.

    Unless otherwise noted, these terms and their definitions are for 
the purposes of this part only.
    Access. As defined in DoD 5220.22-M.
    Affiliate. As defined in DoD 5220.22-M.
    Board resolution. A formal, written decision of a company's board 
of directors, used to draw attention to a single act or board decision, 
e.g., to approve or adopt a change to a set of rules, a new program or 
contract.
    Carve-out. As defined in DoD Directive 5205.07, ``Special Access 
Program (SAP) Policy,'' (available at http://www.dtic.mil/whs/directives/corres/pdf/520507p.pdf).
    Classified contract. As defined in DoD 5220.22-M.
    Classified information. As defined in Joint Publication 1-02 ``DoD 
Dictionary of Military and Associated Terms'' (available at http://www.dtic.mil/doctrine/new_pubs/jp1_02.pdf).
    Company. As defined in DoD 5220.22-M.
    Components. DoD Components and non-DoD Components for which DoD 
provides industrial security services in accordance with E.O. 12829.
    COMSEC. As defined in Joint Publication 6-0, ``Joint Communication 
System'' (available at http://www.dtic.mil/doctrine/new_pubs/jp6_0.pdf).
    Contractor. As defined in DoD 5220.22-M.
    Counterintelligence. As defined in Joint Publication 1-02.
    Covered transaction. As defined in DoD Instruction 2000.25, ``DoD 
Procedures for Reviewing and Monitoring Transactions Filed with the 
Committee on Foreign Investment in the United States (CFIUS)''. 
(available at http://www.dtic.mil/whs/directives/corres/pdf/200025p.pdf).
    CSA. As defined in DoD 5220.22-M.
    Defense articles. As defined in DoD 5220.22-M.
    Defense Industrial Base. As defined in Joint Publication 1-02.
    Document. As defined in E.O. 13526.
    DoD Components. Office of the Secretary of Defense (OSD), the 
Military Departments, the Office of the Chairman of the Joint Chiefs of 
Staff and the Joint Staff, the Combatant Commands, the Office of the 
Inspector General of the Department of Defense, the Defense Agencies, 
the DoD Field Activities, and all other organizational entities within 
DoD.
    Facility. As defined in DoD 5220.22-M.
    Facility security clearance (FCL). As defined in DoD 5220.22-M.
    Facility Security Officer (FSO). A U.S. citizen contractor 
employee, who is cleared as one of the Key Management Personnel 
required for the FCL, to supervise and direct security measures 
necessary for implementing applicable requirements set forth in DoD 
5220.22-M.
    FOCI action plan. For purposes of this part, the methods or 
agreements that can be applied to mitigate or negate the risk of 
foreign ownership or control to allow a U.S. contractor to maintain or 
a U.S. company to be granted an FCL.
    FOCI mitigation agreement. For purposes of this part, a signed 
agreement between a foreign interest and a U.S. contractor or a company 
in process for an FCL which, based on an assessment of FOCI 
information, imposes various security measures within an 
institutionalized set of company practices and procedures. Examples 
include board resolutions, security control agreements (SCAs) and 
special security agreements.
    FOCI negation agreement. For purposes of this part, a signed 
agreement between a foreign interest and U.S. contractor or a company 
in process for an FCL under which the foreign owner relinquishes most 
ownership rights to U.S. citizens who are approved by the U.S. 
Government and have been favorably adjudicated for access to classified 
information based on the results of a personnel security clearance 
investigation. Examples include voting trust agreements (VTAs) and 
proxy agreements (PAs).
    Foreign government information (FGI). As defined in E.O. 13526.
    Foreign interest. As defined in DoD 5220.22-M.
    GCA. As defined in DoD 5220.22-M.
    Industrial security. As defined in DoD 5220.22-M.
    Information. As defined in E.O. 13526.

[[Page 19471]]

    Limited Access Authorization (LAA). As defined in DoD 5220.22-M.
    National interest determination (NID). As defined in 32 CFR part 
2004, ``National Industrial Security Program Directive No. 1.''
    Non-DoD Components. Those USG executive branch departments and 
agencies identified in DoD 5220.22-M that have entered into agreements 
with the Secretary of Defense to act as the NISP Cognizant Security 
Agency (CSA) for, and on their behalf, in rendering security services 
for the protection of classified information disclosed to or generated 
by industry pursuant to Section 202 of E.O. 12829.
    Personnel security clearance (PCL). As defined in DoD 5220.22-M.
    Personnel security clearance assurance (PCLSA). A written 
certification by USG or applicable foreign government industrial 
security authorities, which certifies the PCL level or eligibility for 
a PCL at a specified level for their citizens. The assurance is used, 
in the case of the United States, to give an LAA to a non-U.S. citizen, 
provided all other investigative requirements are met.
    Prime contract. As defined in DoD 5220.22-M.
    Proscribed information. TOP SECRET (TS) information, COMSEC 
information excluding controlled cryptographic items when unkeyed and 
utilized with unclassified keys, restricted data (RD), special access 
program (SAP) information, or sensitive compartmented information 
(SCI).
    Restricted Data (RD). As defined in DoD 5220.22-M.
    Sensitive compartmented information (SCI). As defined in Joint 
Publication 1-02.
    Security assurance. A written confirmation, requested by and 
exchanged between governments, that contains the following elements: 
Verification of the personnel security clearance (PCL) level of the 
sponsoring foreign government's citizens or nationals; a statement by a 
responsible official of the sponsoring foreign government that the 
recipient of the information is approved by the sponsoring foreign 
government for access to information of the security classification 
involved on behalf of the sponsoring government; and an obligation that 
the sponsoring foreign government will ensure compliance with any 
security agreement or other use, transfer and security requirements 
specified by the components. The security assurance usually will be in 
a request for visit authorization or with courier orders or a 
transportation plan; but is not related to the PCL security assurance.
    Special Access Program (SAP). As defined in E.O. 13526.
    Subcontract. As defined in DoD 5220.22-M.


Sec.  117.54  Policy.

    It is DoD policy that DoD FOCI procedures will be used to protect 
against foreign interests:
    (a) Gaining unauthorized access to classified, export-controlled, 
or all communications security (COMSEC) (classified or unclassified) 
information in accordance with E.O. 12829 and DoD Instruction 8523.01, 
``Communications Security'' (available at http://www.dtic.mil/whs/directives/corres/pdf/852301p.pdf). DoD FOCI procedures for access to 
unclassified COMSEC are set forth in National Security Agency Central 
Security Service (NSA/CSS) Policy Manual 3-16, ``Control of 
Communications Security Material'' (available to authorized users of 
SIPRNET at www.iad.nsa.smil.mil/resources/library/nsa_office_of_policy_section/pdf/NSA_CSS_MAN-3-16_080505.pdf).
    (b) Adversely affecting the performance of classified contracts, in 
accordance with E.O. 12829.
    (c) Undermining U.S. security and export controls, in accordance 
with E.O. 12829.


Sec.  117.55  Responsibilities.

    (a) The Under Secretary of Defense for Intelligence (USD(I)) will, 
in accordance with DoD Directive 5143.01, ``Under Secretary of Defense 
for Intelligence (USD(I))'' (available at http://www.dtic.mil/whs/directives/corres/pdf/514301p.pdf) and DoD Instruction 5220.22, 
``National Industrial Security Program'' (see http://www.dtic.mil/whs/directives/corres/pdf/522022p.pdf):
    (1) Oversee policy and management of the NISP, to include FOCI 
matters.
    (2) Direct, administer, and oversee the FOCI provisions of the NISP 
to ensure that the program is efficient and consistently implemented.
    (3) Provide additional guidance regarding FOCI matters by 
memorandum as needed.
    (4) Coordinate with the Under Secretary of Defense for Policy 
(USD(P)) and the Under Secretary of Defense for Acquisition, Technology 
and Logistics (USD(AT&L)) on matters under their cognizance that affect 
the NISP consistent with paragraphs (c) and (d) of this section.
    (b) The Director, Defense Security Service (DSS), in addition to 
the responsibilities in paragraph (d) of this section, under the 
authority, direction, and control of the USD(I) will in accordance with 
DoD Instruction 5220.22, ``National Industrial Security Program'' 
(available at http://www.dtic.mil/whs/directives/corres/pdf/522022p.pdf).
    (1) Make FOCI determinations on a case-by-case basis for U.S. 
contractors or companies under consideration for an FCL under the NISP.
    (2) Collect information necessary to examine the source, nature, 
and extent of a company's ownership, control, or influence by foreign 
interests.
    (3) Determine, on behalf of the GCAs, whether a U.S. company is 
under FOCI to such a degree that the granting of an FCL would be 
inconsistent with the U.S. national security interests.
    (4) Determine the security measures necessary to negate or mitigate 
FOCI and make recommendations to the U.S. company and to those GCAs 
with a contractual interest or other equity in the matter.
    (5) Provide GCAs a guide to clarify their roles and 
responsibilities with respect to the FOCI process and to national 
interest determinations (NIDs), in particular. Update the guide, as 
needed, in coordination with the Office of the Under Secretary of 
Defense for Intelligence (OUSD(I)) Security Directorate.
    (6) Determine a U.S. company's eligibility for an FCL on an initial 
and continuing basis depending on recurring security reviews and other 
interactions.
    (7) Develop proposed changes to maintain the currency and 
effectiveness of this part. Forward proposed changes and associated 
justification to the OUSD(I) Security Directorate for consideration as 
future changes to this part.
    (8) Consider and, as warranted, approve requests for exception to 
DoD 5220.22-M in consultation with affected GCAs for specific 
contractors and for specific periods of time (such as, to the 
completion date of a contract) when a contractor is unable to comply 
with the requirements of DoD 5220.22-M. Consideration of such requests 
will include an evaluation of any proposed alternative procedures with 
supporting justification and coordination as applicable, consistent 
with paragraph (a)(4) of this section.
    (9) Coordinate and receive the concurrence of the OUSD(I) Security 
Directorate on requests for exception to DoD 5220.22-M and consistent 
with paragraph (a)(4) of this section when any of the following 
provisions apply:
    (i) The request exceeds the authority of the Director, DSS as 
defined in this section;

[[Page 19472]]

    (ii) The proposed exception applies to more than one contractor 
location; or,
    (iii) The exception would be contrary to U.S. national policy or 
international agreements, including those relating to foreign 
government information (FGI) and international issues under the 
cognizance of the USD(P) with coordination as applicable, consistent 
with paragraph (a)(4) of this section.
    (c) The USD(P) will, in accordance with DoD Directive 5111.1, 
``Under Secretary of Defense for Policy (USD(P))'' (available at http://www.dtic.mil/whs/directives/corres/pdf/511101p.pdf), advise the USD(I) 
and DSS on the foreign relations and international security aspects of 
FOCI, including FGI, foreign disclosures of U.S. classified 
information, exports of defense articles and technical data, security 
arrangements for DoD international programs, North Atlantic Treaty 
Organization security, and international agreements.
    (d) The USD(AT&L) will, in accordance with DoD Directive 5134.01, 
``Under Secretary of Defense for Acquisition, Technology and Logistics 
(USD(AT&L))'' (available at http://www.dtic.mil/whs/directives/corres/pdf/513401p.pdf):
    (1) Advise the USD(I) on the development and implementation of NISP 
policies, in accordance with DoD Instruction 5220.22.
    (2) Ensure that DoD Components establish and maintain a record 
capturing the current and legitimate need for access to classified 
information by contractors in the Defense Industrial Base.
    (3) Ensure that acquisition elements of DoD Components comply with 
the applicable provisions of DoD 5220.22-M.
    (e) The Director, DoD SAP Central Office (SAPCO) will, in 
accordance with DoD Directive 5205.07, ``Special Access Program (SAP) 
Policy'' (available at http://www.dtic.mil/whs/directives/corres/pdf/520507p.pdf), notify DSS of the existence of SAP equities when DSS 
considers the acceptability of a contractor's FOCI action plan. In 
addition, the Director, DoD SAPCO, will develop procedures for the 
consideration of a NID when a contractor cleared under a Special 
Security Agreement (SSA) requires access to an unacknowledged Special 
Access Program (SAP).
    (f) The Heads of the Components will:
    (1) Oversee compliance by GCA personnel with applicable procedures 
identified in this subpart.
    (2) Designate in writing an individual who is authorized to make 
decisions and provide a coordinated GCA position on FOCI matters to DSS 
within timelines established in this part.
    (3) Submit proposed changes to DoD 5220.22-M, as deemed 
appropriate, to the OUSD(I) Security Directorate.


Sec.  117.56  Foreign ownership, control or influence (FOCI).

    (a) General. This section provides guidance for and establishes 
procedures concerning the initial or continued FCL eligibility of U.S. 
companies and U.S. contractors with foreign involvement; provides 
criteria for determining whether U.S. companies are under FOCI; 
prescribes responsibilities in FOCI matters; and outlines security 
measures that DSS may consider to mitigate or negate the effects of 
FOCI to an acceptable level. As stated in DoD 5220.22-M, and in 
accordance with E.O. 12829:
    (1) The Secretary of Defense serves as the Executive Agent for 
inspecting and monitoring contractors who require or will require 
access to, or who store or will store classified information.
    (2) The Components reserve the discretionary authority, and have 
the obligation, to impose any security procedure, safeguard, or 
restriction they believe necessary to ensure that unauthorized access 
to classified information is effectively precluded and that performance 
of classified contracts, as defined in DoD 5220.22-M, is not adversely 
affected by FOCI.
    (b) Procedures -- (1) Criteria. A U.S. company is considered to be 
under FOCI whenever a foreign interest has the power, direct or 
indirect (whether or not exercised, and whether or not exercisable 
through the ownership of the U.S. company's securities, by contractual 
arrangements or other means), to direct or decide matters affecting the 
management or operations of the company in a manner that may result in 
unauthorized access to classified information or may adversely affect 
the performance of classified contracts.
    (2) FOCI Analysis. Conducting an analysis of available information 
on a company to determine the existence, nature, and source of FOCI is 
a critical aspect of evaluating previously uncleared companies for FCLs 
and also in determining continued eligibility of contractors for FCLs.
    (i) A U.S. company determined to be under FOCI is ineligible for an 
FCL unless and until security measures have been put in place to 
mitigate FOCI.
    (ii) In making a determination as to whether a company is under 
FOCI, DSS will consider the information provided by the company or its 
parent entity on the Standard Form (SF) 328, ``Certificate Pertaining 
to Foreign Interests,'' (available at http://www.dtic.mil/whs/directives/infomgt/forms/eforms/sf0328.pdf) and any other relevant 
information (e.g., filings with the Securities and Exchange Commission 
(for publicly traded companies), articles of incorporation, by-laws, 
and loan and shareholder agreements, as well as other publicly 
available information about the company. Depending on specific 
circumstances (e.g., extensive minority foreign ownership at a cleared 
subsidiary in the corporate family), DSS may request one or more of the 
legal entities that make up a corporate family to submit individual SF 
328s and will determine the appropriate FOCI action plan(s) that must 
be put in place.
    (iii) When a contractor has been determined to be under FOCI, the 
primary consideration will be the safeguarding of classified 
information. DSS is responsible for taking whatever interim action is 
necessary to safeguard classified information, in coordination with 
other affected agencies as appropriate consistent with Sec.  117.54.
    (iv) When a merger, sale, or acquisition involving a foreign 
interest and a contractor is finalized prior to having an acceptable 
FOCI mitigation or negation agreement in place, DSS will invalidate any 
existing FCL until such time as DSS determines that the contractor has 
submitted an acceptable FOCI action plan (see DoD 5220.22-M) and has 
agreed to interim measures that address FOCI concerns pending formal 
execution of a FOCI mitigation or negation agreement. Invalidation 
renders the contractor ineligible to receive new classified material or 
to bid on new classified contracts. If the affected GCA determines that 
continued access to classified material is required, DSS may continue 
the FCL in an invalidated status when there is no indication that 
classified information is at risk of compromise. If classified 
information remains at risk of compromise due to the FOCI, DSS will 
take action to impose appropriate security countermeasures or terminate 
the FCL, in coordination with the affected GCA.
    (v) Changed conditions, such as a change in ownership, 
indebtedness, or a foreign intelligence threat, may justify certain 
adjustments to the security terms under which a contractor is cleared 
or, alternatively, require the use of a particular FOCI mitigation or 
negation agreement. Depending on specific circumstances, DSS may 
determine that a contractor is no longer under FOCI or, conversely, 
that a contractor is no longer eligible for an FCL.

[[Page 19473]]

    (vi) If the contractor determined to be under FOCI does not have 
possession of classified material and does not have a current or 
pending requirement for access to classified information, DSS will 
administratively terminate the FCL.
    (3) Assessing the Implications of FOCI. (i) If DSS determines that 
a company is under FOCI, DSS will assess the extent and manner to which 
the FOCI may result in unauthorized access to classified information or 
adverse impact on the performance of classified contracts and the type 
of actions, if any, that would be necessary to mitigate or negate the 
associated risks to a level deemed acceptable to DSS. An analysis of 
some of the FOCI factors may clearly identify risk; while others may 
result in circumstances that would mitigate or negate risks. Therefore, 
these factors must be considered in the aggregate with regard to the 
foreign interest that is the source of the FOCI, the country or 
countries in which the foreign interest is domiciled and has its 
principal place of business (if not in the country of domicile), and 
any other foreign country that is identified by DSS because it is a 
substantial source of the revenue for, or otherwise has significant 
ties to, the foreign interest. DSS will consider the following FOCI 
factors and any other relevant information in the context of threat, 
vulnerability, and sensitivity of the classified information required 
for current or prospective contract performance when rendering a risk 
management assessment and determination of the acceptability of a 
company's FOCI action plan:
    (A) Record of economic and government espionage against U.S. 
targets.
    (B) Record of enforcement and/or engagement in unauthorized 
technology transfer.
    (C) Record of compliance with pertinent U.S. laws, regulations, and 
contracts.
    (D) The type and sensitivity of the information that will be 
accessed.
    (E) The source, nature, and extent of FOCI, including, but not 
limited to, whether a foreign interest holds a majority or substantial 
minority position in the company, taking into consideration the 
immediate, intermediate, and ultimate parent companies of the company 
or prior relationships between the U.S. company and the foreign 
interest.
    (F) The nature of any relevant bilateral and multilateral security 
and information exchange agreements, (e.g., the political and military 
relationship between the United States Government (USG) and the 
government of the foreign interest).
    (G) Ownership or control, in whole or in part, by a foreign 
government.
    (H) Any other factor that indicates or demonstrates a capability on 
the part of foreign interests to control or influence the operations or 
management of the business organization concerned.
    (ii) As part of its FOCI assessment and evaluation of any FOCI 
action plan, DSS will also request and consider counterintelligence 
(CI) and technology transfer risk assessments and any available 
intelligence from all appropriate USG sources. DSS will request these 
assessments as soon as practicable, for the company itself and for all 
business entities in the company's ownership chain.
    (iii) If a company disputes a DSS determination that the company is 
under FOCI, or disputes the DSS determination regarding the types of 
actions necessary to mitigate or negate the FOCI, the company may 
appeal in writing those determinations to the Director, DSS, for a 
final agency decision no later than 30 days after receipt of written 
notification of the DSS decision. The company must identify the 
specific relief sought and grounds for that relief in its appeal. In 
response, the Director, DSS, may request additional information from 
the company. At a minimum, DSS will respond to appeals within 30 days, 
either with a decision or an estimate as to when a decision will be 
rendered. DSS will not release pre-decisional information to the 
company, its legal counsel, or any of its representatives without the 
express written approval of the applicable GCAs who own the data and 
any other USG entities with an interest in the company's FOCI action 
plan.
    (iv) DoD recognizes that FOCI concerns may arise in a variety of 
other circumstances, all of which cannot be listed in this subpart. In 
FOCI cases involving any foreign ownership or control, DSS will advise 
and consult with the appropriate GCAs, including those with special 
security needs, regarding the required FOCI mitigation or negation 
method and provide those GCAs with the details of the FOCI factors and 
any associated risk assessments. DSS and GCAs will meet to discuss the 
FOCI action plan, when determined necessary by either DSS or the 
applicable GCAs. When DSS determines that a company may be ineligible 
for an FCL by virtue of FOCI, or that additional action by the company 
may be necessary to mitigate the FOCI or associated risks, DSS will 
promptly notify the company and require it to submit a FOCI action plan 
to DSS within 30 calendar days of the notification. In addition, DSS 
will advise company management that failure to submit the requested 
plan within the prescribed period of time will result in termination of 
FCL processing or initiation of action to revoke an existing FCL, as 
applicable.
    (v) In instances where the identification of a foreign owner or 
voting interest of five percent or more cannot be adequately 
ascertained (e.g., the participating investors in a foreign investment 
or hedge fund, owning five percent or more of the company, cannot be 
identified), DSS may determine that the company is not eligible for an 
FCL.
    (vi) DSS will review and consider the FOCI action plan itself, the 
factors identified in paragraph (b)(3)(i) of this section, and any 
threat or risk assessments or other relevant information. If an action 
plan is determined to be unacceptable, DSS can recommend and negotiate 
an acceptable action plan including, but not limited to, the measures 
identified in paragraphs (b)(4)(ii) and (b)(4)(iii) of this section. In 
any event, DSS will provide written feedback to a company or the 
company's designated representative on the acceptability of the FOCI 
action plan within 30 calendar days of receipt.
    (4) Options To Address FOCI. (i) Under all FOCI action plans, 
management positions requiring PCLs in conjunction with the FCL must be 
filled by eligible U.S. citizens residing in the United States in 
accordance with DoD 5220.22-M.
    (ii) When factors related to foreign control or influence are 
present, but unrelated to ownership, the plan must provide positive 
measures that assure that the foreign interest can be effectively 
denied access to classified information and cannot otherwise adversely 
affect performance on classified contracts. Non-exclusive examples of 
such measures include:
    (A) Adoption of special board resolutions.
    (B) Assignment of specific oversight duties and responsibilities to 
independent board members.
    (C) Formulation of special executive-level security committees to 
consider and oversee matters that affect the performance of classified 
contracts.
    (D) The appointment of a technology control officer.
    (E) Modification or termination of loan agreements, contracts, and 
other understandings with foreign interests.
    (F) Diversification or reduction of foreign-source income.
    (G) Demonstration of financial viability independent of foreign 
interests.

[[Page 19474]]

    (H) Elimination or resolution of problem debt.
    (I) Physical or organizational separation of the contractor 
component performing on classified contracts.
    (J) Other actions that negate or mitigate foreign control or 
influence.
    (iii) FOCI concerns related to foreign ownership of a company or 
corporate family arise when a foreign interest has the ability, either 
directly or indirectly, whether exercised or exercisable, to control or 
influence the election or appointment of one or more members to the 
company's governing board (e.g., Board of Directors, Board of Managers, 
or Board of Trustees) or its equivalent, by any means. Some methods 
that may be applied to mitigate the risk of foreign ownership are 
outlined in DoD 5220.22-M and further described in this section. While 
these methods are mentioned in relation to specific ownership and 
control thresholds, these descriptions should not be construed as DoD-
sanctioned criteria mandating the selection or acceptance of a certain 
FOCI action plan. DSS retains the authority to reject or modify any 
proposed FOCI action plan in consultation with the affected GCAs.
    (A) Board Resolution. This method is often used when a foreign 
interest does not own voting interests sufficient to elect, or 
otherwise is not entitled to representation on the company's governing 
board. In such circumstances, the effects of foreign ownership will 
generally be mitigated by a resolution of the board of directors 
stating the company recognizes the elements of FOCI and acknowledges 
its continuing obligations under DD Form 441, ``DoD Security 
Agreement'' (available at http://www.dtic.mil/whs/directives/infomgt/forms/eforms/dd0441.pdf). The resolution will identify the foreign 
shareholders and their representatives (if any) and note the extent of 
foreign ownership. The resolution will also include a certification 
that the foreign shareholders and their representatives will not 
require, will not have, and can be effectively excluded from access to 
all classified information in the possession of the contractor, and 
will not be permitted to occupy positions that may enable them to 
influence the organization's policies and practices in the performance 
of classified contracts. Copies of such resolutions will be furnished 
to all board members and principal management officials.
    (B) SCA. The SCA is a tailored FOCI mitigation agreement often used 
when a foreign interest does not effectively own or control a company 
or corporate family (i.e., the company or corporate family are under 
U.S. control), but the foreign interest is entitled to representation 
on the company's board. When an SCA is implemented, a U.S. citizen 
serves as an outside director, as defined in DoD 5220.22-M. DSS may 
determine the need for more than one outside director based on the FOCI 
analysis and risk assessments.
    (C) SSA. The SSA is a tailored FOCI mitigation agreement that 
preserves the foreign owner's right to be represented on the company's 
board (inside directors) with a direct voice in the business management 
of the company while denying the foreign owner unauthorized access to 
classified information. An SSA is based on the analysis of the FOCI 
factors set forth in paragraph (b)(3) and is often used when a foreign 
interest effectively owns or controls a company or corporate family. 
DSS assesses the implications of the FOCI factors in accordance with 
paragraphs (b)(3) and (b)(4)(iii) of this section. U.S. citizens serve 
as outside directors in accordance with DoD 5220.22-M.
    (1) If a GCA requires a contractor cleared under an SSA to have 
access to proscribed information, the GCA will initiate action to 
consider a NID at the pre-contract phase to confirm that disclosure of 
such information is consistent with the national security interests of 
the United States.
    (2) Proscribed information includes TS; COMSEC material, excluding 
controlled cryptographic items when unkeyed and utilized with 
unclassified keys; RD; SAP; and SCI.
    (3) Contractor access to proscribed information will not be granted 
without the approval of the agency with control jurisdiction (i.e., 
National Security Agency (NSA) for COMSEC, whether the COMSEC is 
proscribed information or not; the Office of the Director of National 
Intelligence (ODNI) for SCI; and the Department of Energy (DOE) for RD 
in accordance with its policies).
    (4) In accordance with 32 CFR, part 2004 and the procedures in 
paragraph (b)(5) of this section, GCAs will forward a request for 
concurrence to NSA, ODNI, or DOE when a proposed NID involves access to 
COMSEC, SCI, or RD, respectively, within 30 calendar days of DSS 
advisement of the NID requirement. NSA, ODNI, and DOE, as appropriate, 
will then have 30 calendar days to render a decision.
    (D) VTA or PA. These FOCI negation agreements may be used when a 
foreign interest effectively owns or controls a company or corporate 
family. Under a VTA, PA and associated documentation, the foreign owner 
relinquishes most rights associated with ownership of the company to 
cleared U.S. citizens approved by DSS. Both FOCI agreements can 
effectively negate foreign ownership and control; therefore, neither 
agreement imposes any restrictions on the company's eligibility to have 
access to classified information or to compete for classified contracts 
including contracts with proscribed information. Both FOCI agreements 
can also effectively negate foreign government control (see paragraph 
(b)(11) of this section which provides guidance and requirements 
regarding foreign government ownership or control, including with 
respect to 10 U.S.C. 2536, ``Award of Certain Contracts to Entities 
Controlled by a Foreign Government Prohibition (available at http://www.gpo.gov/fdsys/granule/USCODE-2010-title10/USCODE-2010-title10-subtitleA-partIV-chap148-subchapV-sec2536/content-detail.html)). DSS 
retains the authority to deny a proposed VTA or PA.
    (iv) When DSS implements a FOCI mitigation or negation agreement at 
a contractor, the agreement may specify that the entire agreement, or 
that particular provisions of the agreement (e.g., the provisions 
restricting unauthorized access to classified information and 
unclassified export-controlled information and the provisions of the 
visitation policy) will apply to and will be made binding upon all 
present and future subsidiaries of the company. If a subsidiary 
requires and is eligible for an FCL at the TS level, the company 
executing the FOCI mitigation agreement and any intermediate parents 
must be formally excluded from TS access unless they have their own 
requirement and are otherwise eligible for TS access.
    (v) DSS will provide a copy of the DSS FOCI assessment, proposed 
FOCI action plan and any associated risk assessments to the GCAs with 
an interest in the company or corporate family. In the absence of 
written objections (signed at the Program Executive Office (PEO) level 
or higher) from GCAs with an interest in the company or corporate 
family, DSS may proceed with implementation of what DSS considers in 
its discretion to be an acceptable FOCI action plan based on available 
information. Unless other regulatory review processes for mergers or 
acquisitions have an earlier suspense date, DSS will provide a 30 
calendar day period for the GCAs with an interest in the company or 
corporate family to provide their PEO level or higher written 
objections.
    (vi) DSS will submit to the USD(I) for approval the DSS templates 
for those FOCI mitigation or negation agreements identified in 
paragraph (b)(4)(iii) of this

[[Page 19475]]

section as well as templates for any supplements thereto (e.g., the 
electronic communications plan (ECP) or technology control plan (TCP)). 
DSS may propose changes to the contents of these template FOCI 
mitigation or negation agreements. DSS may tailor non-substantive 
provisions of the template agreement for any particular FOCI case 
without further approval from the USD(I), provided DSS notifies the 
OUSD(I) Security Directorate of the deviation from the template. DSS 
may provide this notification through the electronic submission of an 
annotated copy of the modified agreement.
    (5) NID. The requirement for a NID to authorize access to 
proscribed information applies only to those foreign-owned U.S. 
contractors or companies in process for an FCL under an SSA which is 
used as a mechanism for FOCI mitigation. A NID does not authorize 
disclosure of classified information to a foreign government, a non-
U.S. citizen or a non-U.S. entity. Timelines for NID decisions are set 
forth in 32 CFR part 2004 and the provisions of this paragraph. NIDs 
can be program, project, or contract specific, subject to the 
concurrence of NSA for COMSEC, ODNI for SCI or DOE for RD. For program 
and project NIDs, a separate NID is not required for each contract. DSS 
will inform the DoD SAPCO of NID requirements to allow the SAPCO to 
advise of awareness of unacknowledged SAPs or any carve-out SAP 
activity.
    (i) A NID is necessary when access to proscribed information is 
required for:
    (A) Pre-contract activities in accordance with paragraph 
(b)(4)(iii)(C)(1) of this section.
    (B) New contracts to be issued to a company in process for an FCL 
that DSS has determined to be under FOCI when an SSA is anticipated, or 
a contractor already cleared under an SSA.
    (C) Existing contracts when a contractor is acquired by foreign 
interests and proposes an SSA as the FOCI action plan.
    (ii) If a contractor is proposing to use an SSA to mitigate FOCI 
and requires access to proscribed information:
    (A) DSS will:
    (1) Request the contractor to provide information on all impacted 
contracts, both prime and subcontracts, unless the contractor is 
prohibited by contract from revealing their existence to DSS. In such 
instances, DSS will request that the contractor notify the government 
contracting officer and Program Security Officer of the need for a NID.
    (2) Provide written notification to the individual designated by 
the Component, in accordance with paragraph (f) of Sec.  117.55 within 
30 calendar days of identifying the requirement for a NID.
    (3) Provide to appropriate GCAs the contractor's proposed FOCI 
action plan, any associated risk assessments, and DSS' recommendation 
for FOCI mitigation.
    (4) Ask the GCA to identify all of the GCA's contracts affected by 
the proposed SSA that require a NID decision, unless the activity is 
unacknowledged. The cognizant SAPCO will inform the DoD SAPCO of any 
unacknowledged SAPs affected by the proposed SSA and consequently the 
NID requirement.
    (5) Provide OUSD(I) Security Directorate and the OUSD(AT&L), Deputy 
Assistant Secretary of Defense for Manufacturing and Industrial Base 
Policy, a monthly report of pending NID decisions that:
    (i) Exceed 30 calendar days from the date of the DSS written notice 
to the applicable GCA.
    (ii) Have been pending for NSA, ODNI, or DOE concurrence for more 
than 30 calendar days.
    (B) OUSD(I) will intervene, as warranted, with GCAs regarding NID 
decisions pending beyond 30 calendar days from the date of the DSS 
written notice, as well as with NSA, ODNI, and DOE regarding 
concurrence decisions that remain pending beyond 30 days from the date 
of the GCA request.
    (C) OUSD(AT&L) will confer, as warranted, with the applicable DoD 
Service Acquisition Executive or component equivalent about unresolved 
NID decisions.
    (D) The GCA will, upon written notification by DSS of the need for 
a NID:
    (1) Review the FOCI action plan proposed by the uncleared company, 
in addition to any associated risk assessments and the DSS analysis of 
the appropriate FOCI mitigation based on the existing FOCI factors.
    (2) Consider the FOCI factors noted in paragraph (b)(3) of this 
section in the aggregate with any associated risk assessments and DSS' 
analysis to determine whether to issue a NID.
    (3) Provide DSS, as appropriate, one of the following within 30 
calendar days of the DSS written notification that a NID is required:
    (i) A final, documented NID with a copy provided to the contractor. 
If the NID is not specific to a single program, project, or contract 
(e.g., a blanket NID), the GCA will also forward a copy of the NID to 
the OUSD(I) Security Directorate.
    (ii) A copy of the GCA's request for NID concurrence sent to NSA, 
ODNI, or DOE, when access to COMSEC, SCI, or RD is involved. The GCA 
will request that NSA, ODNI, or DOE respond within 30 calendar days of 
the date of the GCA's written request directly to DSS with a copy to 
the GCA.
    (iii) A GCA decision that it will not issue a NID.
    (4) Contact DSS to determine an alternative method to the proposed 
SSA when the GCA chooses not to issue a NID (e.g., a contract 
modification, a contract novation, or a PA or VTA authorized by the 
Program Executive Officer).
    (5) Notify DSS in writing when NSA, ODNI, or DOE renders a decision 
on a proposed NID involving access to COMSEC, SCI, or RD, respectively. 
A GCA's NID decision is not final until NSA, ODNI, or DOE, as 
applicable, respond regarding access to COMSEC, SCI, or RD.
    (6) When denying a NID, retain documentation explaining the 
rationale for the decision.
    (6) Government Security Committee (GSC). (i) Under a VTA, PA, SSA, 
or SCA, DSS will ensure that the contractor establishes a permanent 
committee of its Board of Directors or similar body known as the GSC.
    (A) The members of the GSC are required in accordance with DoD 
5220.22-M to ensure that the contractor maintains policies and 
procedures to safeguard classified and export controlled information 
entrusted to it, and that violations of those policies and procedures 
are promptly investigated and reported to the appropriate authority 
when it has been determined that a violation has occurred.
    (B) The GSC will also take the necessary steps in accordance with 
DoD 5220.22-M to ensure that the contractor complies with U.S. export 
control laws and regulations and does not take action deemed adverse to 
performance on classified contracts. This will include the appointment 
of a Technology Control Officer and the establishment of Technology 
Control Plan (TCP).
    (ii) DSS will provide oversight, advice, and assistance to GSCs. 
These measures are intended to ensure that GSCs:
    (A) Maintain policies and procedures to safeguard classified 
information and export-controlled unclassified information in the 
possession of the contractor with no adverse impact on the performance 
of classified contracts.
    (B) Verify contractor compliance with the DD Form 441 or its 
successor form, the FOCI mitigation agreement or negation agreement and 
related documents, contract security requirements, USG export control 
laws, and the NISP.

[[Page 19476]]

    (iii) In the case of an SSA, DSS will ensure that the number of 
outside directors exceeds the number of inside directors, as defined in 
DoD 5220.22-M. DSS will determine if the outside directors should be a 
majority of the Board of Directors based on an assessment of security 
risk factors pertaining to the contractor's access to classified 
information. In the case of an SCA, DSS will require the contractor to 
have at least one outside director, but may require more than one 
outside director based on an assessment of security risk factors.
    (iv) In the case where a contractor is cleared to the SECRET level 
under an SSA, and also has a subsidiary with a TS FCL based on an 
approved NID, some or all of the outside directors of the cleared 
parent contractor may be sponsored for eligibility for access to TS 
information with their TS PCLs held by the subsidiary. Access will be 
at the level necessary for the outside directors to carry out their 
security or business responsibilities for oversight of the subsidiary 
company in accordance with DoD 5220.22-M. If the subsidiary has an 
approved NID for access to SAP or SCI, the applicable GCA may determine 
that an outside director at the parent contractor requires approved 
access at the subsidiary.
    (7) Technology Control Plans (TCPs). Under a VTA, PA, SSA, SCA, or 
Limited FCL, DSS will require the contractor to develop and implement a 
TCP as required in DoD 5220.22-M. DSS will evaluate and, if the plan is 
adequate, approve the TCP. The TCP must include a description of all 
security measures required to prevent the unauthorized disclosure of 
classified or export-controlled information. Although TCPs must be 
tailored to the specific circumstances of the contractor or corporate 
family to be effective, DSS may provide examples of TCPs to the 
contractor to assist plan creation.
    (8) Electronic Communication Plan (ECP). Under a VTA, PA, or SSA, 
DSS will require the contractor to develop and implement an ECP 
tailored to the contractor's operations. DSS will determine the extent 
of the ECP and review the plan for adequacy. The ECP must include a 
detailed network description and configuration diagram that clearly 
delineates which networks will be shared and which will be protected 
from access by the foreign parent or its affiliates. The network 
description will address firewalls, remote administration, monitoring, 
maintenance, and separate email servers, as appropriate.
    (9) Administrative Support Agreement (ASA). There may be 
circumstances when the parties to a transaction propose in the FOCI 
action plan that the U.S. contractor provides certain services to the 
foreign interest, or the foreign interest provides services to the U.S. 
contractor. The services to be provided must be such that there is no 
violation of the applicable FOCI mitigation or negation agreement. If 
approved, the extent of such support and limitations on the support 
will be fully documented in an ASA.
    (10) Annual Review and Certification--(i) Annual Meeting. DSS will 
meet at least annually with the GSCs of contractor's operating under a 
VTA, PA, SSA, or SCA to review and discuss the purpose and 
effectiveness of the FOCI mitigation or negation agreement; establish a 
common understanding of the operating requirements and their 
implementation; answer questions from the GSC members; and provide 
guidance on matters related to FOCI mitigation and industrial security. 
These meetings will also include an examination by DSS, with the 
participation of the (FSO) and the GSC members, of:
    (A) Compliance with the approved security arrangement, standard 
rules, and applicable laws and regulations.
    (B) Problems regarding the practical application or utility of the 
security arrangement.
    (C) Security controls, practices, or procedures and whether they 
warrant adjustment.
    (ii) Annual Certification. For contractors operating under a VTA, 
PA, SSA, or SCA, DSS will obtain from the Chair of the GSC an 
implementation and compliance report one year from the effective date 
of the agreement and annually thereafter. DSS will review the annual 
report; address, resolve, or refer issues identified in the report; 
document the results of this review and any follow-up actions; and keep 
a copy of the report and documentation of related DSS actions on file 
for 15 years. The GSC's annual report must include:
    (A) A detailed description stating how the contractor is carrying 
out its obligations under the agreement.
    (B) Changes to security procedures, implemented or proposed, and 
the reasons for those changes.
    (C) A detailed description of any acts of noncompliance with FOCI 
provisions and a discussion of steps taken to prevent such acts from 
recurring.
    (D) Any changes or impending changes of senior management officials 
or key board members, including the reasons for the change.
    (E) Any changes or impending changes in the organizational 
structure or ownership, including any acquisitions, mergers, or 
divestitures.
    (F) Any other issues that could have a bearing on the effectiveness 
of the applicable agreement.
    (11) Foreign Government Ownership or Control. (i) In accordance 
with 10 U.S.C. 2536, the DoD cannot award contracts involving access to 
proscribed information to a company effectively owned or controlled by 
a foreign government unless a waiver has been issued by the Secretary 
of Defense or designee.
    (ii) A waiver is not required if the company is cleared under a PA 
or VTA because both agreements effectively negate foreign government 
control.
    (iii) DSS will, after consultation with the GCA, determine if a 
waiver is needed in accordance with subpart 209.104-1 of the Defense 
Federal Acquisition Regulation Supplement ``Responsible Prospective 
Contractors, General Standards'' (available at http://www.acq.osd.mil/dpap/dars/dfars/pdf/r20090115/209_1.pdf. The GCA will request the 
waiver from the USD(I) and provide supporting information, to include a 
copy of the proposed NID.
    (iv) Upon receipt of an approved waiver, the GCA will forward the 
waiver and the NID to DSS.
    (v) If the USD(I) does not grant the waiver, the company may 
propose to DSS an appropriate PA or VTA. Otherwise, the company is not 
eligible for access to proscribed information.
    (12) Changed Conditions. (i) DSS will require contractors to submit 
timely reports of changes to FOCI by DSS-designated means in accordance 
with DoD 5220.22-M.
    (ii) Upon receipt of changes to the SF 328 from contractors, DSS 
will assess the changes to determine if they are material; if they 
require the imposition of new FOCI mitigation or modification of 
existing FOCI mitigation; or if they warrant the termination of 
existing FOCI mitigation. DSS will periodically review the definition 
of material change with regard to FOCI and publish updated guidance as 
to what constitutes a reportable material change in coordination with 
OUSD(I) Security Directorate.
    (13) Limited FCL. (i) A Limited FCL may be an option for a single, 
narrowly defined purpose when there is foreign ownership or control of 
a U.S. company. In that respect, a Limited FCL is similar to an LAA for 
a non-U.S. citizen. Consideration of a Limited FCL includes a DSS 
determination that the company is under FOCI and that the company is 
either unable or unwilling to implement FOCI negation or mitigation. A 
GCA or a foreign government may sponsor a

[[Page 19477]]

Limited FCL consistent with the provisions of paragraphs 
(b)(13)(iii)(A) through (b)(13)(iii)(D) of this section.
    (ii) DSS will:
    (A) Document the requirements of each Limited FCL, including the 
limitations of access to classified information.
    (B) Verify a Limited FCL only to the sponsoring GCA or foreign 
government.
    (C) Ensure, in accordance with paragraph (b)(7) of this section, 
that the contractor has and implements a TCP consistent with DoD 
5220.22-M.
    (D) Process a home office along with a branch or division, when the 
GCA or foreign government sponsors the branch or division for a Limited 
FCL and ensure that the limitations of the Limited FCL are applied to 
the home office as well as the branch or division.
    (E) Administratively terminate the Limited FCL when the FCL is no 
longer required.
    (iii) There are four types of Limited FCLs:
    (A) A GCA may sponsor a joint venture company established in the 
United States for the purpose of supporting a cooperative arms program 
involving DoD. An authorized GCA official, at the PEO level or higher, 
must certify in writing that the classified information to be provided 
to the company has been authorized for disclosure to the participating 
governments in compliance with U.S. National Disclosure Policy NDP-1, 
``National Policy and Procedures for the Disclosure of Classified 
Military Information to Foreign Governments and International 
Organizations,'' (available to designated disclosure authorities on a 
need-to-know basis from the Office of the Deputy Under Secretary of 
Defense for Policy Integration and Chief of Staff to the Under 
Secretary of Defense for Policy). Key management personnel (KMPs) and 
employees may be citizens of the countries of ownership, if DSS is able 
to obtain security assurances. The non-U.S. citizens retain their 
foreign government issued personnel security clearances. The company 
FSO must be a cleared U.S. citizen as set forth in DoD 5220.22-M.
    (B) A U.S. subsidiary of a foreign company may be sponsored for a 
Limited FCL by the government of the foreign parent company when the 
foreign government desires to award a contract to the U.S. subsidiary 
involving access to classified information for which the foreign 
government is the original classification authority (i.e., FGI), and 
there is no other need for the U.S, subsidiary to have an FCL. The KMPs 
must all be U.S. citizens. However, if the U.S. subsidiary is to have 
access to U.S. classified information in the performance of the 
contract, the U.S. subsidiary must be considered for one of the FOCI 
agreements set forth in paragraph (b)(4)(iii) of this section.
    (C) A foreign owned freight forwarder may be sponsored for a 
Limited FCL by a foreign government for the purpose of providing 
services only to the sponsoring government. Access to U.S. classified 
information or material will be limited to information and material 
that has been authorized for export to the sponsoring government 
consistent with an approved direct commercial sale contract or foreign 
military sales letter of offer and acceptance. KMPs and employees may 
be citizens of the sponsoring government, if DSS is able to obtain 
security assurances on the individuals. As non-U.S. citizens, these 
individuals would not be eligible for a LAA; would be assigned under an 
extended visit authorization, and would retain their foreign government 
issued personnel security clearances. The FSO must be a U.S. citizen.
    (D) A senior GCA official, consistent with paragraph (f)(3) of 
Sec.  117.55, may sponsor a U.S. company, determined to be under FOCI 
by DSS, for a Limited FCL when the other FOCI agreements described in 
paragraph (b)(4)(iii) and paragraphs (b)(13)(iii)(A) through 
(b)(13)(iii)(D) of this section do not apply, and there is a compelling 
need for the FCL. The official must fully describe the compelling need 
and certify in writing that the sponsoring GCA accepts the risk 
inherent in not negating or mitigating the FOCI. The Limited FCL 
permits performance only on a classified contract issued by the 
sponsoring GCA.
    (14) Foreign Mergers, Acquisitions, Takeovers and CFIUS. (i) CFIUS 
is a USG interagency committee chaired by the Treasury Department whose 
purpose is to review transactions that could result in the control of a 
U.S. business by a foreign person in order to determine the effect of 
such transactions on the national security of the United States. The 
regulations defining the CFIUS process are at 31 CFR part 800, 
``Regulations Pertaining to Mergers, Acquisitions, and Takeovers by 
Foreign Persons''.
    (ii) DoD is a member of CFIUS. DoD procedures for reviewing and 
monitoring transactions filed with CFIUS are provided in DoD 
Instruction 2000.25.
    (iii) The CFIUS review and the DSS industrial security review for 
FOCI are separate processes subject to independent authorities, with 
different time constraints and considerations. However, CFIUS may not 
mitigate national security risks that are adequately addressed by other 
provisions of law.
    (iv) If the NISP process has not begun or has not been completed 
prior to the submission of a CFIUS notice, DSS will review, adjudicate, 
and mitigate FOCI on a priority basis. DSS will provide all relevant 
information to the OUSD(I) Security Directorate specifically, for any 
transaction undergoing concurrent CFIUS and DSS reviews.
    (A) By the 10th calendar day after the CFIUS review period begins 
DSS will advise the OUSD (AT&L) Manufacturing and Industrial Base 
Policy (MIBP) CFIUS Team electronically, with a copy to the OUSD(I) 
Security Directorate, of the U.S. company's FCL status (e.g., no FCL, 
FCL in process, TS/S/C FCL).
    (B) For contractors or U.S. companies in process for an FCL, DSS 
will provide the following input in a signed memorandum with rationale 
included to the Director, Security, OUSD(I) Security Directorate on or 
before the suspense date established by the MIBP CFIUS Team:
    (1) Basic identification information about the contractor, to 
include name, address, and commercial and government entity code.
    (2) FCL level.
    (3) Identification of current classified contracts, to include 
identification of GCAs and any requirement for access to proscribed 
information.
    (4) The nature and status of any discussions DSS has had with the 
contractor or the foreign interest regarding proposed FOCI mitigation 
measures.
    (5) Whether DSS requires additional time beyond the established 
MIBP CFIUS team suspense date to determine and recommend to the OUSD(I) 
Security Directorate whether the proposed FOCI mitigation is sufficient 
to address risks within the scope of DSS's FOCI authorities.
    (6) Identification of any known security issues (e.g., marginal or 
unsatisfactory security rating, unresolved counterintelligence 
concerns, alleged export violations).
    (v) If it appears that an agreement cannot be reached on material 
terms of a FOCI action plan, or if the U.S. company subject to the 
proposed transaction fails to comply with the FOCI reporting 
requirements of DoD 5220.22-M, DSS may recommend additional time 
through the OUSD(I) Security Directorate to resolve any national 
security issues related to FOCI mitigation.

[[Page 19478]]

    (vi) If the proposed transaction involves access to proscribed 
information and the contractor is contemplating the use of an SSA to 
mitigate FOCI, the GCA will provide DSS with a preliminary 
determination regarding the acceptability of the proposed FOCI 
mitigation. The determination must be provided to DSS one day prior to 
the suspense date established by the MIBP CFIUS Team and must include 
whether a favorable NID will be provided. If the GCA does not notify 
DSS, DSS will not delay implementation of a FOCI action plan pending 
completion of a GCA's NID process as long as there is no indication 
that the NID will be denied.
    (vii) If DSS, under its FOCI authorities, is notified of a 
transaction with respect to which the parties thereto have not filed a 
notice with CFIUS, DSS will notify the MIBP CFIUS Team through the 
OUSD(I) Security Directorate.
    (viii) When a merger, sale, or acquisition of a contractor is 
finalized prior to having an acceptable FOCI mitigation agreement in 
place, DSS will take actions consistent with paragraph (b)(2)(iv) of 
this section.

    Dated: April 2, 2014.
Aaron Siegel,
Alternate OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2014-07826 Filed 4-8-14; 8:45 am]
BILLING CODE 5001-06-P